Company Share Option Plans (CSOPs)
What are Company Share Option Plans?
Subject to detailed statutory requirements, a company may establish a scheme which provides for the grant, to selected employees and full-time directors, of rights to acquire shares in the company or its holding company which, if exercised within the statutory time limits, will qualify for relief from income tax and NICs on the option gain. Instead, CGT is charged when the option shares are sold on the amount of the difference between the proceeds of sale and the exercise price paid for the shares.
The exercise price must be set at the time of grant and be not less than the market value of the shares at the time of grant. There is a limit, of (currently) £30,000, on the initial market value (as at the date(s) of grant) of shares over which unexercised options may be held by a participant.
The plan company
The company whose shares are under option (“the plan company”) must be independent or the option shares must be listed on a recognised stock exchange.
The option shares
The shares under option must be fully-paid (as to their nominal or par value) non-redeemable ordinary shares which are not subject to restrictions other than those expressly permitted by the legislation or restrictions attaching to all shares of the same class. Certain restrictions, requiring shares to be offered for sale on leaving, are permitted provided they apply to all shares of that class including to shares acquired by an employee other than on exercise of a CSOP option.
If the plan company has more than one class of ordinary shares, the option shares must be of a class the majority of which are held either (1) as “employee-controlled shares”, or (2) by persons other than directors/employees or employees’ trusts or, if the plan company is a subsidiary of a listed company, that listed company or any of its associated companies.
CSOP options may be granted as rights to subscribe for new shares or to acquire existing shares, and may be granted either by the plan company or a shareholder or an employees’ trust.
Corporation tax relief for option gains
If all relevant statutory conditions are met, the employer company should qualify for relief from corporation tax for the amount of the option gain, regardless of the fact that the economic cost of the grant and exercise of the option may have been borne by another person such as an employees’ trust.
The exercise of a CSOP option may be conditional upon the attainment of pre-set objective performance targets relating to the plan company (or group) or the optionholder.
When a CSOP option must be exercised to qualify for relief
Tax relief is available only if a CSOP option is exercised:
- in accordance with the plan rules at a time when the plan complies with the statutory requirements; and
- not later than the 10th anniversary of the date of grant; and
- after the optionholder has died; or
- except when exercised after the optionholder has died, or on a change of control of the company not before the 3rd anniversary of the date of grant; or
- if the rules so permit, within 6 months after leaving by reason of injury, disability, redundancy or retirement after a specified retirement age of not less than 55.
It follows that if, for example, the company performs well and is sold within 3 years of grant in circumstances in which options must be exercised or lapse, the benefit of the tax relief will be lost. Plan rules may, however, provide for options to be exchanged for fresh options in a new holding company in the event of a takeover (etc.) and, if detailed statutory conditions are met, the benefit of tax relief upon exercise of the new option may then be preserved.
Notification of the CSOP to HMRC
A CSOP must be notified to HMRC through the PAYE Online portal by 6 July following the end of the tax year in which the scheme is established.
How Pett Franklin can help
- Design of CSOP schemes;
- Structuring of share rights;
- Valuation analysis to reach a basis on which to operate tax;
- Tax analysis of the plans and the related reliefs;
- Financial modelling; and
- Legal documentation.
Contact us if you would like to speak to us about CSOPs and how they might be able to help you or your client.