Why go for a HMRC approved options ("CSOPs")

A CSOP, or Company Share Option Plan, offers employees and directors potential tax advantages when they acquire shares under qualifying options. To access these benefits, the employer must establish the scheme, register it and self-certify compliance with HMRC requirements. Qualifying CSOP options can allow employees to acquire shares without an Income Tax or National Insurance charge on the growth in value between grant and exercise, provided the relevant conditions are met.

CSOPs can be an option for businesses that are too large to qualify for EMI. Many international businesses expanding into the UK also use CSOPs to incentivise their UK workforce.

The government has increased the limit on the market value of shares that an employee can hold under CSOP options to £60,000 at the date of grant and relaxed restrictions on the types of share classes that can qualify. These changes benefit companies that do not qualify, or no longer qualify, for EMI.

CSOP permits participation at the employer’s discretion

Employers can choose which employees participate and offer different terms to different employees and directors, subject to the scheme rules. This makes CSOP flexible.

• The SAYE and SIP share plans are generally available to all qualifying employees on the required terms. Employers can be selective under CSOP.
• EMI options are discretionary, but larger businesses and groups may not qualify.
• Gifting shares is discretionary but can raise issues concerning authority to issue shares, dilution, good and bad leavers and fluctuating share values.
• Non-tax-advantaged options are discretionary but do not benefit from the same statutory tax advantages as qualifying CSOP, EMI or SAYE options..

Employees have no obligation to exercise the CSOP and can walk away if there is no financial gain for them.

There is no upfront cost to the employee when the option is granted, although the employee will generally need to pay the exercise price to acquire the shares.

Taxable value of the shares under CSOP option

The £60,000 limit is based on the market value of the shares at the date of grant, rather than their value when exercised. The exercise price must generally be at least equal to the market value at grant for the relevant tax advantages to apply. The value of shares can increase after grant without increasing the value counted towards the limit.

For unquoted companies

The value for the purposes of the £60,000 limit is measured at the date of grant. For unquoted shares, the relevant market value should be determined in accordance with HMRC’s valuation requirements. We can assist employers with the valuation process and liaising with HMRC Shares and Assets Valuation where appropriate.

For quoted companies

The market value is determined by reference to the relevant market price and the applicable statutory valuation rules.

Dilution

There are no statutory limits on the total number of shares that can be placed under CSOP options, but each employee remains subject to the £60,000 individual limit. Shareholders may need to approve the size of the employee share pool, as exercising options can dilute their shareholdings. We can help protect shareholders’ interests and prepare share capital tables showing the effect of potential dilution.

Trading status

The company can be quoted or unquoted. Generally, shares in an unquoted subsidiary of another company cannot qualify, although employees may be granted options over qualifying parent company shares. There is no general requirement that the company trades in the UK, but the company and shares must meet the statutory eligibility conditions.

CSOP and a foreign parent company

Foreign parent companies can implement a CSOP for UK-based employees where the parent company shares satisfy the statutory requirements.

Conditions the employees must meet for CSOP tax relief

A ‘qualifying employee’ can receive CSOP options when:

• The employee and their associates do not have a material interest in the company exceeding the statutory limit.
• Employees may qualify. Directors must generally work full time, meaning at least 25 hours a week, or, if less, 75% of their working time.
• The employee may participate in an EMI scheme and a CSOP in the same company, but the CSOP options count towards the individual EMI option limit.
• The shares under option meet the statutory requirements, including being fully paid and non-redeemable.
• The option is exercised within the period permitted by the scheme, generally between the third and tenth anniversaries of grant.
• To obtain the usual tax advantages, the option must generally be exercised at least three years after grant. Exceptions can apply in specified circumstances, including certain good-leaver events.

Taxation benefits for CSOP options

CSOP options can be tax-efficient for employees and employers, provided the relevant statutory conditions are met.

For employers

Employers may be able to deduct qualifying CSOP-related costs for corporation tax purposes. A statutory corporation tax deduction may also be available when options are exercised, calculated under the applicable rules. The availability and amount of relief depend on the circumstances.

For employees

There is generally no Income Tax or National Insurance payable on the exercise of a qualifying CSOP option where the relevant conditions are met, including the usual three-year holding period. Exceptions can apply for good leavers, including in cases involving death, disability or redundancy, subject to the statutory requirements.

Taxation of CSOP options on disposal

When shares acquired under a CSOP option are sold, Capital Gains Tax may be payable on the chargeable gain arising from the disposal. The gain is generally calculated by reference to the disposal proceeds and the relevant acquisition cost.

With non-tax-advantaged options, the gain arising up to exercise may be subject to Income Tax and, in some cases, National Insurance, with subsequent growth potentially subject to Capital Gains Tax.

A qualifying CSOP can therefore help employees benefit from growth in share value without an Income Tax or National Insurance charge on that growth at exercise. Capital Gains Tax may still apply when the shares are sold.

Avoid problems

Design and implementation require planning, which we undertake for you. A poorly designed or implemented CSOP can cause problems for your company, such as:

• Resentful and demotivated staff who face an unexpected tax bill and feel misled by the company’s conduct.
• Shareholders who experience greater dilution than they agreed to, reducing their proportionate dividend and capital entitlements.
• Shareholders who acquire shares on exercise and subsequently affect company decision-making or complicate a sale of the business.

Requirements for the CSOP option agreement

Every CSOP option grant must follow statutory criteria. here should be a written agreement between the company and the employee covering the grant, including:

• The date of grant.
• The number of shares under option and the source of shares on exercise.
• The exercise price.
• How and when the option can be exercised.
• Whether the exercise price reflects the relevant 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 how CSOP options work and their tax implications so employees can manage their personal tax affairs. The scheme should be communicated in terms employees understand. If employees do not understand the potential value, conditions and risks of their options, the scheme may not achieve its intended purpose.

Implementing CSOP scheme and non-tax-advantaged share options

There are many reasons why a company may want to adopt both a CSOP and a non-tax-advantaged option scheme. For example, the company may wish to incentivise consultants or part-time directors who do not qualify for CSOP options.

We draft share plans that include CSOP options and non-tax-advantaged share options.

Popularity of CSOP options for foreign companies

International companies expanding into the UK may implement CSOPs for UK employees as part of a wider international share plan. The terms may mirror those of overseas schemes, but the arrangements must be adapted to comply with UK tax law and CSOP requirements. We draft sub-plans for CSOPs implemented by overseas parent companies.