Company share option plans (CSOPs) for employees

Multiple company employees equally share a cheese pizza

Company share option plans (CSOPs) can be set up by any independent company, irrespective of size, and can provide benefits to all employees, or selected employees only. In practice, they are usually for the benefit of selected, senior staff, although there are some all-employee CSOPs 

CSOPs allow up to £60,000 worth of options to be granted to each participating employee. There is no limit to the total overall value of the options that can be granted. 

However, CSOPs are often passed over, and Enterprise Management Incentive (EMI) schemes set up instead. EMI participants can be granted options to a value of £250,000 shares (although the company is subject to an overall limit of £3 million worth of options), and the tax advantages are more generous. But where a company is not eligible to introduce an EMI (for example, because it carries on a non-qualifying activity), a CSOP offers an alternative. 

The company

The company must either 'stand alone' (ie not be controlled by another company) or must be a subsidiary of a listed company. There is no requirement that it carry on a qualifying trade.

The shares

Scheme shares may be non-voting, and the company may require that employees must offer their shares back if they leave. Otherwise, they must not be subject to restrictions.

Who can participate?

Any full- or part-time employee or full-time director can participate, provided they do not own more than 25% of the company. The company can choose which employees are to be entitled - but, as stated above, in practice CSOPs are usually set up to benefit selected, senior staff. 

Approval and valuations

The plan must be approved by HM Revenue and Customs (HMRC) in advance. The value of the shares is agreed with the Shares Valuation Division at the date of the grant. It must be the fair market value - if granted at a discount, income tax will be payable on the amount of the discount, in the year of the grant of the option.

Grant and exercise of options

Performance targets can be attached to the grant and/or exercise of options, provided they are objective. The targets can be specific to one participant, or related to departmental or overall performance.

There is no qualifying period which must expire before an option can be exercised, but it is usual to provide a 'holding period' in the scheme rules, that must expire before an option can be exercised because exercise of an option before expiry of three years can affect the tax benefits to employees (see below).

A CSOP scheme can distinguish between 'good' and 'bad' leavers (eg good leavers leave because of injury, illness, redundancy, etc, whereas bad leavers leave voluntarily or are sacked with good cause), and treat each differently if they leave the scheme within the holding period.

Employees' tax

There is no tax or NIC on the grant of CSOP options.

On exercise of the option, tax and NIC are not chargeable on any increase in value between the grant and exercise of the options, provided:

  • at least three, but not more than ten, years have passed between the grant and exercise of the option
  • at least three years has passed since the date of the last tax-free exercise of a CSOP option
  • HMRC has approved the scheme at the time the option is exercised

Failure to meet any of these conditions will create a charge to income tax on exercise of the option, on the difference between the price paid for grant of the option and the market value of the shares.

There is an exception on death of a participant. Personal representatives of the participant may exercise the option free of tax, provided they do so within 12 months of death, whether or not the other conditions have been met.

When shares acquired by the exercise of an option are disposed of, there is no charge to income tax or NIC. Any capital gain is chargeable to capital gains tax in the normal way.

Employers' tax

You can deduct the costs of establishing and administering the CSOP, and the cost of providing shares under it, against your taxable profits for the purpose of calculating your corporation tax liability, provided you have obtained HMRC approval before granting options.

Employee ownership schemes

Capital gains tax relief applies to owners who sell a majority interest in their business to an employee-owned structure, such as a trust.

Model documents for an employee-owned company are available from the GOV.UK website, including articles of association for an employee-owned company; articles of association for a trustee company; and a model trust deed.

Find more information on the  Employee Ownership Association website and seek legal advice if your employees or directors express an interest in this scheme.

Always take legal advice before setting up a CSOP.

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