CSOPs: Are you (and your team) eligible?

Company share option plans – or CSOPs for short – are share option schemes that allow companies to grant employees the option to purchase company shares at a predetermined price.

They are available to organisations operating in the UK and are authorised by HRMC. But the price of the shares are set at the outset of the scheme by the company itself.

After a vesting period, employees can buy (exercise) the company's shares at the original price, regardless of their actual market value down the line.

If they do so 3-10 years after they are granted, then they do not have to pay income tax or National Insurance. They will only need to pay Capital Gains Tax when they sell them (and if the profit is more than the CGT exemption at this time).

For your business to qualify for a CSOP – and to benefit from this tax-friendly share scheme – there are some conditions which must be met by your company and the employees whom you are offering them to.

Read on to understand whether you (and your team) are eligible.

CSOP: company-specific criteria

1. Is your company based in the UK?

This is a good start!

Employee share ownership schemes exist in countries around the world, but CSOPs are one of several tax-advantaged share schemes available here in the UK (others include Share Incentive Plans (SIPs) and Enterprise Management Incentives (EMIs)). They are fully authorised by the HMRC.

Eligible companies can technically be any size. But CSOPs are suited to more established organisations, with EMIs being geared towards those with up to 249 employees.

Is your organisation the top company?

Companies will not be eligible for a CSOP if they are under the control of another company.

The scheme organiser must be the top company. But group schemes can be established for subsidiary companies.

CSOP: employee-specific criteria

1. Are your staff on formal contracts?

UK employees with formal contracts are eligible for CSOPs.

A key perk, here, is that there is no working time requirement for employees (although there is for directors, as we will see below). This is another thing that sets CSOPs apart from EMI schemes.

They are also selective plans. Meaning that it is up to the company to decide which employees the options are available to (as opposed to, for instance, SAYE option schemes, which must be available to all).

2. Do your directors work the necessary hours?

Unlike employees, directors do need to clock in at least 25 work hours per week. This does not include meal breaks.

To quote our very own Equity Consultant, Alan Clarke:

This 25-hour rule is especially pertinent for those who serve on multiple boards within a tax-advantaged group scheme.

3. Do the recipients already own a sizeable proportion of the company’s issued share capital?

This is known as material interest.

If a recipient does already own more than 30% of the company's issued share capital, they will not qualify for a CSOP.

4. Maximum value limit

Just as there is an upper limit to the proportion of a company’s issued share capital an individual can have, there is also a maximum value limit per recipient when it comes to CSOPs.

The total value of CSOP options can't exceed £60,000.

This is based on the unrestricted market value (UMV) at the time of each grant. The UMV is worked out by valuing all the shares as if they had no restrictions and could easily be bought and sold at the prevailing worth of the company at the time.

The real strength of CSOPs

CSOPs are flexible. They give employers a good degree of control as to how equity is shared among their staff, and they are available to all types of businesses.

They are also relatively tax-friendly for both employer and employee.

The gains the employee makes on exercise are deductible from the company’s taxable profits. And any costs for set-up and management of the CSOP are tax-deductible for the business too.

However, it is the long-term nature of this particular share scheme that is its real strength.

The tax advantages (no income tax or National Insurance needing to be paid) are available to recipients 3-10 years after the shares are granted (note: there are exemptions). This provides a real incentive for staff to develop their career with you for the duration of the vesting period.

This is great for employee retention.

At a time when keeping our workforce stable and happy is of utmost importance, CSOPs help foster alignment, engagement, and give staff a reason to stick with you as your company grows in the coming years.

Set up CSOPs

CSOPs are simple to set up with Vestd – sharetech specifically designed to streamline equity management for UK businesses. It all starts with a free consultation with a member of our team.

Get booked in!