We used Gannons to draft a UK share scheme. They were extremely detailed and sharp and made sure the scheme offered the most tax efficient solution.
A CSOP, or a company share option plan, offers employees and directors share options. Employees can exercise these options free of tax, if they hold the options for usually, three years. CSOPs are the choice if the business is too large for EMI options. Many foreign parents expanding into the UK adopt CSOPs.
Are you eligible to benefit from CSOP options?
Statistics show that the number of employers implementing CSOP options is increasing in the UK. Usually, larger, private and public companies operate CSOPs. UK subsidiaries of foreign parent companies can implement CSOP options over the foreign parent’s share plan.
CSOP permits participation at the employer’s discretion
Employers can choose the employee pool and offer different terms to different employees and directors. This makes CSOP flexible.
- The SAYE and SIP share plans are not discretionary. All employees must be invited to participate. There is no ability to pick and chose participants as is offered under the CSOP option regime.
- EMI options are discretionary but larger businesses and groups will not qualify.
- The gift of shares is discretionary but there are issues which frequently arise over matters such as authority to gift, dilution, what to do with good and bad leavers and fluctuating share values.
- Unapproved options are discretionary but not tax efficient.
Employees have no obligation to exercise CSOP if they will not make profit
After the CSOP option has been granted employees do not have to exercise the option if they do not see any financial benefit. There is no upfront cost to the employee until exercise.
Taxable value of the shares under CSOP option
The shares will qualify for the CSOP tax advantages if they are exercised at the actual tax market value of the shares at the date of grant. There are no overall limits on the taxable value of shares which can be put under CSOP option provided no employee receives more than £30,000 worth of shares.
For unquoted companies
The taxable value for the purposes of the £30,000 limit is measured on a fiscal basis. Generally, fiscal valuations are lower than commercial values. In practice, sizeable discounts can be negotiated to the commercial value and agreed with HMRC. We undertake this process for employers as it means more shares can be delivered within the £30,000 limit and there is certainty as to what the taxable value is.
For quoted companies
The taxable value for the purposes of the £30,000 limit is taken from the traded price on the relevant stock exchange.
Corporate structure requirement for CSOP schemes
- The company needs to be listed on a recognised stock exchange or not controlled by another company. The company can be based overseas. CSOP options cannot be granted over a subsidiary undertaking.
- The shares must be ordinary shares. The shares under option must be over the parent company even if it is not the employer company.
- There is limited ability to grant an option over a separate class of shares with special restrictions.
There are no statutory limits on how many shares can be put under the CSOP option. However, shareholders will have to consent to the size of the employee share pool as exercised options will dilute their shareholding. We protect shareholders from future dilution and prepare share capital tables showing changes in share ownership.
The company can be quoted or unquoted. It cannot be an unquoted subsidiary of a quoted parent company. There is no requirement that the company trades in the UK and no trade is excluded from qualifying from the scheme.
CSOP and partnerships
There are limited circumstances under which a company controlled by a limited partnership can grant CSOP. Usually, partnerships are not eligible for CSOP.
CSOP and a foreign parent company
Foreign parent companies can implement CSOP for UK based employees if the shares under option will be the parent company shares.
Conditions the employees must meet for CSOP tax relief
A ‘qualifying employee’ can receive up to £30,000 worth of CSOP options when:
- The employee and his associates do not have a material interest in the company.
- Employees will qualify. Directors need to work full time (at least 25 hours a week) to qualify.
- The employee can participate in an EMI scheme and a CSOP in the same company at the same time provided the EMI limits are not exceeded. The employee can participate in two or more CSOP schemes running concurrently in different companies.
- The shares under option are non-redeemable, fully paid up and ordinary.
- The options are exercised with 10 years from the date of grant.
- The employee does not leave the company and does not exercise the option before the third anniversary of the grant date.
Taxation benefits for CSOP options
CSOP options are tax efficient for employees and employers.
The set up and administration costs reduce the taxable profits for corporation purposes. Usually, the biggest benefit for employers in terms of tax is that there is tax relief on exercise for the employer. The employer’s claim to corporation tax is equal to the income tax that would have been payable by the employee if the CSOP option had not qualified for tax relief.
There is no income tax or national insurance payable upon exercise of a qualifying CSOP option. One of the qualifying conditions is that the CSOP option has been held for at least three years. There are exceptions for good leavers – death, disability, redundancy.
Taxation of CSOP options on disposal
When the CSOP option is sold following exercise all profits received by the employee is subject to capital gains tax. The rates of tax for capital gains are considerably lower than the rates of income tax and national insurance in the UK.
With unapproved options it is only the gain arising from exercise which can be brought within the capital gains tax regime. The gain arising up to the point of exercise will have been assessed to income tax and usually national insurance.
Unlike EMI, the CSOP scheme does not offer a better position in relation to Business Assets Disposal Relief (entrepreneurs’ relief) than those of ordinary shareholders. There is no legislative prohibition but in practice the reasons for failing to secure Business Assets Disposal Relief (entrepreneurs’ relief) include:
- A CSOP option holder must control at least 5% of ordinary shares. Many CSOP option holders are not given 5% or more.
- The shares acquired on exercise of the CSOP must be held for over a year. Many CSOP option holders exercise immediately after exercise so fail this requirement.
Valuing shares for tax purposes used in a CSOP scheme
Putting shares under a CSOP option scheme requires valuation of shares. The valuation affects the tax position, making it is an integral part of a CSOP option. We undertake share valuations for tax purposes.
Successfully implementing a CSOP plan
Design and implementation requires planning which we undertake for you. A poorly designed and implemented CSOP scheme will cause problems to your company, such as:
- Resentful and demotivated staff who will have a surprise tax bill to face and will feel deceived by the company’s conduct;
- Crossed shareholders who have been diluted above what they agreed for and lost a share of dividend and capital entitlement;
- Shareholders who exercised CSOP options and block company decision making and refuse to be dragged into the sale of the company.
Requirements for the CSOP option agreement
Every CSOP option grant must follow statutory criteria. There will be a written contract between the company and the employee to cover the CSOP grant which will contain:
- The date of grant
- Number of shares under options and the source of shares on exercise
- The exercise price
- How and when the option can be exercised
- Whether the exercise price is the actual market value of the shares at grant
- Restrictions on the shares
- Optional performance conditions
Benefits of good employee communication about the CSOP option
We explain the mechanics of CSOP to the employees and explain how their personal tax affairs will be affected. The CSOP scheme should be communicated to the employees in terms they will understand. If employees do not know how much value they are getting the CSOP options will not achieve their objective.
Implementing CSOP scheme and unapproved share options
There are many reasons why a company may want to adopt a CSOP scheme and an unapproved option scheme. For example, the company has consultants or part-time directors who do not qualify under CSOP but who the company wants to incentivise.
We draft share plans which include CSOP options and unapproved share options.
Popularity of CSOP options for foreign companies
International companies looking to extend their operations into the UK implement CSOPs for their UK employees as a part of an international share plan. The terms of the plan usually mirror those of their foreign counterparts but we adapt the foreign plans to suit UK tax law. We draft sub plans for CSOP plans implemented by overseas parent companies.
Helen is a partner and heads up the corporate team, advising start-ups, SME companies, partnerships, entrepreneurs, investors and shareholders. Dual-qualified in the UK and USA and a qualified solicitor since 1998 you couldn't ask for more experience.