Introduction to Company share option plans

Company share option plans (CSOPs) enable companies to grant options, usually to senior employees, to acquire share in the company subject to the plan following certain statutory rules.

Although there are tax efficiencies within company share option plans they are less attractive than EMI option schemes therefore tends to be favoured by companies who are unable to qualify to grant EMI options.

Statutory rules direct which companies may set up a company share option plans but in brief:

  • The option shares must be issued by a company that is either listed on a recognised stock exchange or free from the control of another company.
  • The options can be granted either by the employer or a parent company (although a listed company cannot grant CSOP options in an unlisted subsidiary).
  • The shares must be ordinary share capital.

Participants of company share option plans

The company may decide on who can participate but participants must be employees or full-time directors who do not have a “material interest” in the company whose shares are used for the scheme. The company may impose performance conditions which the employee must meet before being able to exercise the option.

Some features of company share option plans

The price payable for the shares must not be less than their market value on the date on which the option was granted.

The market value must be agreed in advance with HMRC except in the case of shares listed on a recognised stock exchange.

Discounted options cannot be granted.

No more than £30,000 worth of shares can be awarded to any one employee.

The shares must be fully paid non-redeemable ordinary shares which are not subject to restrictions other than those permitted by the legislation or restrictions attaching to all shares of the same class.

When can company share option plans be exercised?

It is possible for exercise to take place at any time but, to benefit from favourable tax treatment for the option holder, options must generally not be exercised before the third anniversary of the grant of the option.

It is possible for company share option holders to benefit from favourable tax treatment by exercising their options within three years from grant in certain circumstances, for example, upon the option holders leaving employment due to redundancy or illness, a TUPE transfer or other circumstances.

Tax

Usually there is no income tax liability for the option holder on the grant of the option and, assuming that the option continues to qualify as a CSOP option, there is no income tax liability on the exercise of the option. On the sale of the option shares capital gains tax may be payable on any gain over the amount paid for the shares.

The company itself is likely to qualify for statutory corporation tax relief when the options are exercised.

For any questions you may have concerning company share option plans contact our solicitor Suzy Giele.