An outline of the tax benefits and requirements for a CSOP.
What is a CSOP?
A Company Share Option Plan (CSOP) is a tax-advantaged option scheme under which a company may grant options to any employee or full-time director to acquire shares at an exercise price that must not be less than the market value* of the shares on the grant date.
What are the eligibility requirements for a CSOP?
Options cannot be granted by a company that is controlled by another company, unless they are listed on a recognised stock exchange.
Otherwise, the eligibility requirements for companies are very straightforward. Unlike EMI, there is no limit on the number of employees a company can have, and the 'qualifying trade' requirement is dropped. This means that multinational companies can use CSOPs as part of their UK team's employee compensation package.
Options are granted on a discretionary basis to any employee or full-time director of the granting company.
Although, CSOPs are not available to individuals with a material interest in said company (over 30%).
The maximum value of shares over which a participant may hold CSOP options is £60,000. The limit is calculated using the market value of the shares on the grant date.
From April 6 2023, the maximum value of CSOPs a person may hold increased to £60,000 from £30,000. However, it's worth knowing that this limit increases to £60,000 in respect of options granted on or after 6 April 2023.
Options can only be granted over fully paid, non-redeemable ordinary shares.
Options must be granted at an exercise price that is higher than the market value of the shares on the grant date.
When the valuation acceptance letter is received from HMRC, it will include both the actual market value (AMV) and unrestricted market value (UMV) of the shares.
For CSOPs, the UMV is the market value that the exercise price should be set at or above.
If the shares are listed on the London or New York Stock Exchange, HMRC accepts that the market value will be the mid-market closing price on the grant date. If the shares are not listed on either of these exchanges, the market value must be agreed with HMRC before the options are granted.
What is the tax treatment for a CSOP?
The recipient is exempt from Income Tax and National Insurance, provided they do not exercise their option for at least three years — but within 10 years — of the grant date. Their only tax liability is Capital Gains Tax (CGT) which will be charged at the point when they sell their shares.
If the recipient exercises within three years of the grant, they’ll still benefit from this Income Tax and National Insurance exemption provided:
- They’re exercised within 6 months of cessation of employment for certain ‘good leaver’ reasons (injury, disability, redundancy, retirement, or the transfer of the company that employs the participant out of the group or a transfer of employment on the sale of a business out of the group).
- They’re exercised by the recipient’s personal representatives within 12 months of death.
- They’re exercised within 6 months of certain cash takeovers.
The granting company is also likely to qualify for a Corporation Tax deduction when CSOPs are exercised. Tax relief is given as a deduction from company profits of an amount equivalent to the benefit received by the option holder.
What are the filing requirements for a CSOP?
Your CSOP needs to be registered with HMRC on or before 6 July following the tax year in which the options are first granted via HMRC’s ERS online service. When the plan is first registered the company must declare the CSOP meets the conditions of Schedule 4 ITEPA 2003.
Once the scheme is registered, the company must submit an annual notification on or before 6 July each year. Unless no activity has taken place (i.e. no CSOPs were granted, exercised, cancelled or lapsed in the previous tax year), then a nil return is required.
Can I administer a CSOP on the Vestd platform?
Yes, absolutely. We can provide a CSOP agreement template for you to use and digitise existing CSOP agreements so you can manage them through the platform.
Please contact email@example.com if this is something you’d like to do. Alternatively, our standard unapproved options agreements can be tweaked by your lawyers to fit CSOP requirements.
*Market value is defined in paragraph 36(1) as having the same meaning as in Part VIII Taxation of Chargeable Gains Act (TCGA) 1992. In short, this means the price assets might reasonably be expected to fetch on a sale in the open market.
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