An HMRC Company Share Option Plan (CSOP) allows companies to grant share options to selected executive directors and employees

What does it do?

It is possible to grant an option with a maximum value per individual of £30,000 at the date of the grant. The benefit for employees is that the CSOP allows them to participate in share options without having to pay income tax and national insurance on their option gains.

Who is it for?

Companies must either be a listed company or, if unlisted, must be independent and not controlled by another company.

The shares issued under that option must also fulfil certain conditions, including that they must form part of the ordinary share capital of the company; be fully paid up and not redeemable; and not be subject to restrictions other than those attaching to all shares of the same class, or certain restrictions limited to the disposal of the shares following the end of the participant’s employment with the company.

A CSOP is a discretionary plan and this allows the company to select individual executive directors and employees to benefit. Whilst the CSOP may not have been designed to benefit all employees it is still possible to grant options to all employees.

To be eligible to participate executive directors must work for the company for at least 25 hours a week. There is no working time requirement for employees who aren’t directors.

Employees and/or directors are debarred from participating if they have a ‘material interest’ in the company that established the plan – basically an interest of 30% or greater in the company counting together shares held by that employee and any associates of that employee such as a spouse, parent, son, etc.

How does it work?

Employees are selected to benefit from the CSOP at the discretion of the employer.

These employees are granted an option to purchase company shares worth up to £30,000 per employee. The options must be awarded with an exercise price equal to fair market value. It is not allowable to grant discounted options under the CSOP.

Normally an employee would have to pay income tax and possibly NI on any gain made between the granting of and exercising of the option – even though it may only be a paper gain if the employee hasn’t yet sold the shares.

However with a CSOP no income tax or NICs will be payable when an employee exercises the share option so long as at least three years and no more than ten years has passed.

When shares acquired through exercise of CSOP options are eventually sold, capital gains tax (CGT) will be due on the option gains (the amount by which the sale price exceeds the exercise price). CGT is normally payable at 18% or 28%

It is possible to structure the CSOP so that it can only be exercised assuming specific performance targets are achieved.

What happens if the value of shares doesn’t increase?

There is no obligation on the employees to exercise their option

If the share price were to remain static or fall in value the employees would probably decide not to exercise their option as there would be little benefit in doing so.

Any benefits to the company?

Yes. The employer should be able to make a corporation tax deduction for any gains made when employees exercise the options.

Why should we choose it?

A CSOP can provide your key employees with a financial reward where value is directly determined by business success and which may be taxed at a significantly lower rate than a cash bonus would be.

A CSOP may be a suitable alternative for companies who do not qualify for EMI schemes.

From the employee perspective there is little risk until they exercise the option.

Does this create immediate ownership?

No. The CSOP option might not be exercised either due to no rise in the share value, or due to performance targets not being met.

How can we help?

If you are exploring employee share schemes, we can help you to identify the most appropriate scheme to suit your objectives. We have a track record of establishing schemes and explaining the benefits to employees. We are happy to meet at client’s offices, or at our London office, without charge or future obligation. Please contact us for an initial discussion.