The different good leaver scenarios and how employees can qualify for the CSOP tax benefits.
One of the main benefits of the Company Share Option Plan (CSOP) is that qualifying CSOPs are exempt from tax on exercise of the option. Only when an employee sells their shares for a taxable profit will they be subject to Capital Gain Tax.
A CSOP must be held for at least 3 years before exercising to qualify for tax relief. If a CSOP is exercised within 3 years of the grant date, then the difference between the exercise price and share price at the time of exercise will be subject to Income Tax (and possibly National Insurance). Learn more about CSOP tax.
However, there are instances – 6 to be precise – where a CSOP can be exercised within 3 years and still qualify for tax relief. And they are when an employee leaves for one of the following reasons:
- Transfer of the company that employs the option holder out of the group
- Transfer of employment on the sale of a business out of the group
The option holder has up to 6 months from leaving to exercise their CSOP and qualify for tax relief, regardless of how long they have held the CSOP.
It’s also worth adding in the event of an option holder’s death, their next of kin has up to 12 months to exercise the CSOP and retain the tax benefits.
Similarly, should an exit event occur within 3 years of the grant date, CSOP holders can exercise their options and sell their shares to complete the exit, and will only be charged on the taxable gain from the share sale.
Please note that the 6 exemption clauses aren’t statutory requirements and the granting company can choose whether or not to include them in the agreement. However, we have included them in the standard Vestd CSOP agreement.
What if an employee doesn’t qualify for one of the exemption clauses?
Their CSOP will be processed in line with the ‘good leaver’ clause in their agreement. This clause is one of the following:
- Complete discretion (the board decides what happens to the CSOP upon leaving)
- Keep vested options
- Allow vested options to be exercised
- Lose everything
If the leaver clause states that the option holder can exercise their vested options, then the same rules for qualifying tax relief apply (i.e. if the exercise happens within 3 years of the grant date or 3 years after the grant date).
Similarly, if the leaver clause is ‘keep vested options,’ then the option holder can hold their vested options past the 3-year period to qualify for the CSOP tax benefits.
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