A HMRC approved Company Share Option Plan (CSOP) offers a tax efficient and flexible way to reward selected employees and directors.
Employees are offered the share options, meaning they have the right to purchase shares in the future at a price agreed at date of grant. Since Finance Act 2013 it is now possible to use a class of restricted shares (e.g. non-voting) for CSOP awards.
Each employee can receive options to buy company shares worth up to £30,000 at grant.
There is no income tax or National Insurance Contributions (NICs) on grant of the options. Provided options are exercised at least 3 years following the grant of options, there will not be any income tax or NICs on exercise of options.
Any gains will fall under the capital gains tax regime (currently 18% or 28% dependent on the individual's personal tax band). The 2013/14 capital gains tax exemption is £10,900.
If an employee leaves before the options can be exercised, they will normally lapse.
This scheme offers an attractive alternative if a company does not qualify for the Enterprise Management Incentive (EMI).
Through the use of performance based vesting conditions, a CSOP can help to align participants' interests with those of the main shareholders. This encourages corporate growth and a greater sense of engagement with the company.
The greater tax advantages associated with holding options for at least 3 years can aid employee retention as the benefits provide a strong incentive for employees to remain with the company.
It is possible to set time and/or performance based conditions over both the grant and exercise of CSOP options. These conditions are completely discretionary, but must be related to some objective measures.
For example, a performance based condition could stipulate that options are only exercisable when the company has achieved a certain degree of profitability, or that options are only granted following the employee being with the company for 18 months.
In order to qualify for a CSOP, the company must be a UK private, public or listed company. Options can also be granted over shares in foreign parent companies.
If the company is unlisted it must be independent (i.e. not controlled by another comany) in order to qualify. Options cannot be granted over shares in unlisted subsidiaries of listed companies.
The main limitation of a CSOP, in comparison to an alternative share option plan such as the EMI, is that the maximum value of shares that can be award to each individual is limited to £30,000 at date of grant. Nonetheless this still provides an attractive award for many people. In order to increase the value of awards offered to employees, it is possible to implement a top-up award scheme using an unapproved share plan.
To provide CSOP awards to directors, they must work at least 25 hours per week with the company. Options cannot be granted to non-executive directors. For all other employees there is no working time requirement.
Options cannot be granted to anyone deemed to have a material interest in the company.
Due to the formal two stage approval process (until April 2014 when this should change to a one stage approval) that is required to set up a CSOP, the establishment of this scheme can currently take between 4 - 5 months. These timescales, along with any key internal deadlines, should be taken into careful consideration when implmenting the scheme and when communicating it to employees.
We will work closely with you to ensure that the CSOP is set up in as timely a fashion as possible.
We will take careful consideration of your individual requirements and objectives before providing a quote. In our experience, it is necessary to scope out the complexity of work involved with each share plan in order to offer an accurate quote. The reason for this is that we typically operate on a fixed fee basis, which allows us to be up front with our clients about the total costs involved with the process from the start, instead of being a meter running arrangement.
We are proud to offer a tailored service, and do not believe in a one-size-fits-all approach.
If you would like a free consultation to discuss how a CSOP may operate within your business, please contact RM2 directly on 0208 949 5522, or via firstname.lastname@example.org.