What is a CSOP?
The Company Share Option Plan (CSOP) is a tax-advantaged employee share scheme in the UK. This plan allows companies to grant up to £30,000 of share options at a non-discounted purchase price to any employee or full-time director.
As there are no limits on company size or the number of employees (unlike the Enterprise Management Incentive Plan, EMI), a Company Share Option Plan can be used by larger companies, listed organizations, and those whose trade excludes them from implementing an EMI (such as accountancy or banking businesses).
How does a CSOP work?
On day one, you’re granted an option award under the CSOP. Typically, the market price at the grant date is your exercise price. You can purchase your award at the exercise price without paying tax at least three years after the grant date. To sell your shares, gains are subject to capital gains tax (CGT).
CSOP tax treatment
CSOPs are a tax-efficient employee share scheme. We’ll use the following scenario to explain CSOP tax treatment at different stages:
- Exercise price: £3 (i.e. the market value on the grant date)
- Market value on exercise: £10
- Sale price: £12
- No. of shares: 10,000
Grant:
No tax is charged on the grant of the share option.
Exercise:
To buy the shares, you only pay £30,000 for them (£3 x 10,000 shares) which are worth £100,000 (£10 x 10,000 shares).
Under a CSOP, no income tax or National Insurance contributions (NICs) will be charged if you meet the following conditions.
Conditions:
Share options are exercised within ten years of grant and
1. at least three years after the date of grant; or
2. within six months of termination of employment for certain “good leaver” reasons; or
3. within six months of certain cash takeovers; or
4. within 12 months of death by the participant’s personal representatives
However, if not, income tax will be due on any increase in the value of the shares between the market value at the exercise date and the exercise price.
Amount subject to income tax/NICs = Nil
(if exercised at least 3 years after the grant date)
Amount subject to Income tax = (£10 – £3) x 10,000 shares = £70,000
(if exercised within 3 years)
Sale:
When the shares under a CSOP are sold, CGT rules will apply. If exercised at least three years after the grant date, the gain will be the difference between the sales price and the exercise price. If exercised within three years, the base cost for CGT purposes will be the exercise price plus the spread (market value at exercise minus exercise price).
Capital gains = (£12 – £3) x 10,000
(if exercised at least 3 years after the grant date)
Capital gains = [£12 – £3 – (£10 – £3)] x 10,000 shares = £70,000
(if exercised within 3 years)
Individuals benefit from a CGT annual exemption of £6,000 for 2023/2024, meaning you won’t have CGT liability if your annual gains are below the exemption.
| Tax Relief Summary | Grant | Exercise^ | Sale* |
|---|---|---|---|
| Income Tax | None | None | None |
| NIC | None | None | None |
| CGT | None | None | Maybe |
^ If exercised between the third and tenth anniversaries of grant to obtain maximum income tax benefit or on cessation of employment in certain areas.
* If exercised between the third and tenth anniversaries of grant to obtain maximum income tax benefit or on cessation of employment in certain areas.
Pros and Cons of a CSOP
Although a CSOP doesn’t allow the exercise price of a share option to be discounted, it has multiple benefits:
Corporation Tax Deduction:
A UK employing company will generally qualify for a corporation tax deduction equal to the spread for the accounting period in which the option is exercised (even where participants are relieved from income tax).
Employee engagement:
A CSOP improves the sense of ownership, loyalty and accountability among employees. By committing to a CSOP, an employee is much more likely to commit themselves to the company itself, both in the length of their service and the quality of that service.
Generous tax reliefs:
No income tax and NICs are charged when exercising a share option if you exercise the shares under the conditions mentioned above. It means only CGT is charged on sale if you participate in a CSOP.
Flexibility:
Options may be granted subject to performance conditions, rather than time-based requirements. There are only a few requirements of the CSOP legislation. Check the next section.
CSOP rules
Requirements for companies:
The controlling company must either be listed on a recognized stock exchange or must be independent and not controlled by another company if unlisted. If your parent company is US-based, it is possible to have a sub-plan of the US plan so it qualifies for tax relief as a CSOP.
Requirements for employees:
Under CSOPs, options can be granted on a discretionary basis to any employee or any full-time director of the establishing company (or any constituent company in the case of a group plan).
- Executive directors who work at least 25 hours a week for the company.
- Non-executive directors cannot participate
- Regular employees: no working time required for employees who are not directors
If the establishing company is a close company, participants are ineligible if they (or their associates) have (or have had within the previous 12 months) a “material interest” (broadly 30% of the ordinary share capital or assets) in the company.
Requirements for shares:
Share options under a CSOP must be granted with an exercise price that is equal to or exceeds the market value of a share at the grant date. It means discounted options cannot be granted. The shares issued under that option must
- form part of the ordinary share capital of the company;
- be fully paid up and not redeemable.
CSOPs only allow companies to grant up to £60,000 of share options (£30,000 if granted before 6 April 2023). This limit is calculated using the market value of the shares on the grant date.
Which types of companies use CSOPs?
UK publicly-listed companies:
Rather than an all-employee plan like SIP and SAYE, some public companies may want to select particular executive directors or employees to benefit from a plan. A CSOP – which is a discretionary option plan – is suitable.
UK privately-held companies:
UK private companies that do not satisfy the conditions under an EMI (a scheme targeting small companies) may consider using a CSOP.
US companies with UK subsidiaries:
Share options are a popular award used in US companies. If a US company looks to extend its plan to the UK, it is possible to set up a UK sub-plan to qualify for tax relief as a CSOP.
What’s next?
Formal HMRC approval of CSOP was removed and replaced with a self-certification procedure. If you’re convinced that a CSOP is right for you, then you need to register your plan with HMRC on or before 6 July following the tax year in which options are first granted. (i.e. on or before 6 July 2022 for options granted in 2021/22)
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JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.
Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.
