RM2 > Employee Share Schemes > Unapproved Share Option Plan (USOP)

Unapproved Share Option Plan (USOP)

What is an USOP?

Unapproved Share Option Plans (USOPs) are a highly flexible alternative to approved share option plans. They are often used in situations where the company and/or the participant is not eligible for approved option awards, or in order to 'top up' schemes when award limits are reached. 

How does an USOP work?

Selected employees are offered the right to purchase shares in the future at a price agreed at date of grant. The plan is entirely discretionary meaning that option exercise, to whom share options are offered, and what condition/restrictions, if any, are attached can all be determined at board discretion and can vary between plan participants.

What are the benefits of an USOP?

The USOP offers an alternative approach to the approved share option plans such as the Enterprise Management Incentive (EMI) and the Company Share Option Plan (CSOP).  Unlike EMI and CSOP, there are no eligibility or award limit restrictions for a USOP, and it is much cheaper to implement in terms of drafting fees.

In situations where the awards offered cannot all be accomodated within an approved share plan (for example, the £30,000 CSOP limit), the USOP can be used as a top-up scheme to provide the excess equity rewards.

A USOP can be used to provide equity to employees and non-employees and can be operated in a subsidiary or parent company.

Performance conditions for USOP share schemes

Time and/or performance based conditions can be attached to both the grant of USOP options and their exercise. Conditions can be set on an individual basis.

Any vesting conditions should be achievable, and based on an objective measure. 

Does my company qualify for a USOP?

Yes! There are no restrictions surrounding which companies, or indiviudals, are eligible for an USOP.

What are the disadvantages of an USOP?

Participants taking part in an USOP will not be subject to any beneficial tax treatment. 

Any share-based benefit passing from an employer to an employee will normally be subject to income tax at the employee’s highest rate and possibly also to National Insurance Contributions (NICs). These can total up to 60.8%. For this reason, companies will normally seek to make use of one or more of the approved option schemes, under which gains are normally taxed at the more favourable capital gains tax rates of 28% if a higher rate tax payer or 18% for a basic rate taxpayer or less if additional reliefs apply.

Where unapproved options are granted to employees, all gains are subject to Income Tax (and NICs if applicable) on the exercise of the option. In certain limited cases, gains on unapproved options awarded to non-employees may be treated as Capital Gains, not Income.

This tax inefficiency means that a USOP is the plan of last resort; to be used when circumstances or your budget prohibit the use of more efficient arrangements

How long does an USOP take to set up?

Usually just a few weeks.

How much does an USOP cost?

Typically USOP fees start from £2,500 + VAT. However, 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 USOP may operate within your business, please contact RM2 directly on 020 8949 5522, or via enquiries@rm2.co.uk.