Employee share ownership is an effective way of both rewarding employees and engaging them in the company’s performance. Whilst Enterprise Management Incentive (EMI) schemes are the most flexible tax advantaged schemes for small and medium-sized employers, not all employers and employees qualify for EMI. In these circumstances a Company Share Option Plan (CSOP) may be a suitable alternative.
What is a CSOP?
CSOP is an HM Revenue & Customs (HMRC) approved and tax efficient share option plan which may be suitable for businesses that do not meet the criteria for an EMI scheme. The employer can decide which employees participate in the CSOP, provided that the individual is an employee or full-time working director when the option is granted.
Typically, employees will be granted an option to buy shares at a certain point in the future at a fixed price, which is usually the market value of the shares at the date the option is granted. Provided the option is exercised (used to buy shares) at least three years and no more than 10 years after the option is granted (or is exercised within the first three years if the employment ceases due to injury, disability, redundancy or retirement) no income tax is payable on either the grant or exercise of the option.
- The employee benefits from advantageous income tax treatment in that there are no income tax or National Insurance charges on grant or exercise. There is no employer National Insurance charge either. Note though that any growth in value will generally be subject to capital gains tax (CGT) on ultimate disposal of the shares.
- The employing company should be able to claim a deduction against corporation tax for the full amount of the financial gain provided to employees who exercise their options.
- The employer can identify the key employees that it wishes to benefit.
- CSOP encourages long-term commitment from participating employees.
- The limit on the value of shares over which options may be granted is £30,000 per employee.
- Entrepreneurs relief is unlikely to apply where this is the employee’s only shareholding in the company as the options would need to be exercised two priors to disposal of the shares.
- The option price must be set at the market value at the time of the grant, so NIL-cost options and similar arrangements are not possible through a CSOP.
- For companies with more than one class of shares, the options need to be granted over a class of shares whereby If there is more than one class in issue, the majority of shares of the same class as plan shares must be either ‘employee-control’ shares or ‘open market’ shares.
- Shares will be employee control shares if employees and directors (and former employees and former directors) control the company by virtue of holding shares of the same class as plan shares.
- Shares will be open market shares if (broadly) the majority of shares of the same class as plan shares are not held by persons who acquired them by reason of their employment or directorships (or by trustees who hold such shares on their behalf).
- The ability to use CSOP for options over growth or flowering shares is therefore limited.
- Individuals with an interest of more than 30% in the business cannot participate.
Most suitable for
- All businesses that do not meet the criteria for EMI, for example, because the trade is not qualifying or there are more than 250 employees.
- A CSOP may be suitable for a UK subsidiary of an overseas parent, whereby the UK participants are granted options in the overseas parent.
- Part-time employees who are not directors that would not meet the full-time working employee requirements of an EMI scheme.
This factsheet is based on law and HMRC practice at 1 October 2019.