Company Share Option Plan (CSOP)
Company Share Option Plan (CSOP)
Company Share Option Plans (CSOP) are tax-advantaged discretionary share option plans under which a company may grant options to any employee or full-time executive director. CSOP terms require that the employee must acquire shares at an exercise price that is not less than the market value of the shares on the date the CSOP option was granted.
As there are no limits on company size or number of employees, unlike with the Enterprise Management Incentive Plan (EMI), a CSOP can be used by larger companies, listed organisations and those whose trade excludes them from implementing an EMI, such as accountancy or banking businesses.
However, a CSOP is more restrictive than the EMI because:
- Options must have an exercise price no less than the market value of the underlying shares at the date of grant;
- Each employee can only be granted options over up to £60,000 of shares (up from £30,000 before 6 April 2023)
- Any gain made by the employee is only exempt from income tax if the CSOP options are held for at least three years.
What are the tax advantages of CSOPs?
The tax reliefs for CSOP options is very generous. Options can be granted and exercised without any income tax or National Insurance Contributions (NIC) liability arising, provided certain conditions are met (see below). The UK employing company will generally qualify for a corporation tax deduction equivalent to the amount of the aggregate CSOP option gains realised by the employees on the exercise of their CSOP options.
The conditions for tax relief are met if the CSOP option is exercised within 10 years of grant and:
- at least three years after the grant date; or
- within six months of cessation of employment for certain “good leaver” reasons, or
- within 12 months of death by the participant’s personal representatives, or
- within six months of certain cash takeovers.
If a CSOP option qualifies for income tax and NIC relief on exercise, a capital gain will arise on the amount by which the disposal proceeds exceed the exercise price paid to acquire them when the option shares are eventually sold. However, individuals benefit from a CGT annual exemption of £6,000 for 2023/24 tax year and £3,000 for 2024/25 tax year. Thereafter, gains are subject to CGT at 20%, or 10% if individuals qualify for Business Asset Disposal Relief and/ or if the individuals are basic rate taxpayers.
| Tax Relief summary | Grant | Exercise 1 | Sale of Shares 2 |
|---|---|---|---|
| Income Tax | None | None | None |
| NIC | None | None | None |
| CGT | None | None | Maybe |
1 If exercised between the third and tenth anniversaries of grant to obtain maximum income tax benefit or on cessation of employment in certain circumstances.
2 Capital gains tax on the amount by which the market value of the shares on sale exceeds the exercise price paid to acquire them, but the individual’s annual exemption and/or other reliefs may be available.
What are the qualifying requirements for the CSOP?
To qualify for beneficial tax treatment, a CSOP must meet specific requirements in relation to the participants, the company whose shares are to be used, the type and value of shares that will be placed under option, and self- certification.
CSOP Participants
CSOP options may be granted on a discretionary basis to any employee or any full-time executive director of the establishing company, or any constituent company in the case of a group plan.
CSOP Shares
The shares under the CSOP option must be ordinary shares, non-redeemable and fully paid up. The issuing company must not be under the control of another company (unless the company’s shares or the controlling company’s shares are listed on a recognised stock exchange).
There are no restrictions on the share class(es) that can be used for CSOP options. This means that CSOP is accessible to companies with only a single or multiple classes shares. Where there are multiple classes of shares, companies can choose which share class it considers to be most appropriate to grant CSOP options over. It is possible to introduce a new share class for the CSOP. Prior to 6 April 2023, where companies had multiple share classes, there were specific requirements relating to the share class that can be used to qualify for CSOP. These requirements no longer apply.
Limits
The maximum value of shares over which a participant may hold subsisting CSOP options is £60,000 (calculated using the market value of the shares on the grant date). The limit was £30,000 prior to 6 April 2023. We have seen CSOP attract much more interest in companies since the limit was increased to £60,000.
Many companies with CSOPs have parallel unapproved discretionary share option plans under which options with larger values can be granted.
Self-Certification
The CSOP only needs to be registered with HMRC on or before 6 July following the tax year in which CSOP options are first granted. The exercise price of an CSOP option cannot be less than the market value of the shares at the date of grant.
How can a CSOP be used?
Qualifying CSOPs offer employers considerable flexibility.
Generally, CSOP options will become exercisable on the third anniversary of the date of grant, tying the CSOP option exercise to the availability of tax relief. This should ensure that there is no tax or NIC cost on exercise. The CSOP can, however, permit earlier exercise (without tax relief) if desired or; before then for certain ‘good leaver’ events or in connection with certain cash take overs without disrupting the income tax relief.
CSOP options may be granted subject to performance conditions (ie if the condition is not met, the CSOP option will lapse). The company can include a rule in the CSOP to permit option-holders to sell some of their shares on exercise to fund the exercise price.
Expert advice on Share Plans and Incentives
If you have any questions about CSOP, or any other share plans for your business, please get in touch – our team of specialists will be happy to help you.
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