What is a Company Share Option Plan?
A Company Share Option Plan (CSOP) is a form of share option arrangement that qualifies for certain government approved tax benefits.
It is less attractive than an Enterprise Management Incentive (EMI) share option plan (see our EMI briefing note) in both tax and practical terms, so it is generally only considered if a company is unable to qualify for EMI.
With a CSOP arrangement an employee is granted an option to acquire shares with an exercise price that is at or above the market value of the shares at the date of grant.
No more than £30,000 of shares can be awarded as CSOP options to any one employee.
As with any share option, a CSOP option is risk-free for the employee, in that there is no initial financial commitment or future obligation to exercise the option.
Further, the company has discretion to select which employees may participate and may impose performance conditions which the employee must meet before the option can be exercised.
What are the potential tax advantages?
Provided certain HMRC requirements are met, the share plan offers potential tax advantages for both the company and its employees.
For the employee:
- there should be no tax liability on the grant of the option;
- there should be no tax or national insurance contribution (NIC) charge on the exercise of a CSOP option, provided the option has been held for three years at the date of exercise or it is exercised before then by a “good” leaver (broadly speaking an option holder is a good leaver, if the option holder leaves employment by reason of disability, injury, redundancy, retirement, a TUPE transfer or the option holder’s employer company leaving the group or where the option is exercised by the executors of his estate);
- the growth in value of the shares under option should be subject to only Capital Gains Tax when the shares acquired on exercise of the option are eventually sold;
- the applicable rate of Capital Gains Tax would generally be either 10% (for basic rate taxpayers) or 20% (for higher or additional rate taxpayers) after deduction of the employee’s annual capital gains exemption (£11,300 in the tax year 2017/18); and
- the tax treatment therefore compares favourably to non-tax advantaged options. With non-tax advantaged options the employee’s profit is subject to Income Tax at the employee’s marginal rate when the option is exercised (this can be as high as 45% and in some cases a 2% employee NIC charge will also be applicable).
For the employer:
- Corporation Tax relief should be available when the CSOP option is exercised – the relief is on the difference between the exercise price paid by the employee and the market value of the shares at that point. This can be an extremely valuable relief for companies that have grown quickly since the option was first granted;
- there should be no employer NICs on the grant or exercise of the options. Employer NIC charge is currently 13.8%, so this can represent a significant saving compared to non-tax advantaged options (or indeed cash remuneration); and
- a Corporation Tax deduction should be available for the costs of setting up a CSOP.
What sort of company might consider it?
CSOP option plans should be of interest to both private companies and listed entities.
CSOPs are less attractive in tax terms than an EMI share option plan. The maximum value of the shares under CSOP options for any one employee is £30,000, whereas for EMI the limit is £250,000. Also, shares acquired via EMI options will generally qualify for entrepreneurs’ relief as the standard qualifications for this relief are relaxed (e.g. there is no need for an employee to hold a 5% stake in the company if he acquires his shares via an EMI option). This means even higher and additional rate taxpayers should generally be eligible for a 10% tax rate on the sale of shares acquired via an EMI option (as opposed to 20% in relation to CSOP shares).
CSOPs are therefore mainly used by companies which are unable to grant EMI options.
In particular, CSOPs can be used by companies which are too large to qualify for granting EMI options (e.g. EMI options are limited to groups with less than £30m of gross assets but there is no comparable restriction for CSOP). In addition, with CSOP options there is no requirement for the company to be a trading company, or that it must not undertake certain qualifying trades such as dealing in land, receiving royalties or hotel management as there is with EMI options.
As with any tax advantaged option plan structure, however, there are still certain conditions that must be met.
The main conditions are:
- the exercise price must be set at the time of grant and must not be less than the market value of the shares at the date the option is granted (with EMI it is possible to set the option exercise price at a discount, albeit a proportion of any gain reflecting the discount will not attract the full EMI tax advantages);
- the company whose shares are put under option must be independent (that is, not controlled by another company), or be listed on a recognised stock exchange; and
- there is limited ability to grant an option over a separate class of shares created for the purposes of the CSOP. This is because any shares used with a CSOP option cannot be 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 that they apply to all shares of that class, including to shares acquired by an employee other than on exercise of a CSOP option.
How could Fladgate help?
Fladgate has experience in setting up CSOP option plans for both private and listed companies and we are well placed to assist with both the legal and taxation considerations of CSOP options.
John Forde, Partner, Fladgate LLP (firstname.lastname@example.org)