Background

A Company share option plan (CSOP), is a self-certified share option scheme which must meet the requirements of Schedule 4 ITEPA 2003.

Such schemes are particularly suitable for family or owner-managed companies because only selected employees need be included.

These schemes operate by granting the participants options to purchase shares in the company at a later date, but with the price fixed at the outset, which is usually the market value of the shares at the date the options are granted.

The granting of options can be contingent upon specific performance targets. The total market value of shares subject to options held by a participant at the date of grant cannot exceed £30,000.The shares must be fully paid up, non-redeemable, ordinary shares ideally from a single class of shares. Careful consideration must be given if the company has more than one share class.

Options can be exercised tax-efficiently at any time between three and ten years after they have been granted

Qualifying Individual

An employee will be eligible to participate in an approved share option scheme if they work for at least 25 hours per week, and do not own more than 30% of the ordinary share capital either currently or in the previous 12 months

Tax Treatment

There is no tax or national insurance charge on the grant of the share option or on its subsequent exercise, providing the conditions are met

On the disposal of the shares, the capital gain is calculated by comparing the disposal proceeds, to the price paid for the shares when the options were exercised.

On exercise, the company will obtain a corporation tax deduction for the difference between the market value of the shares at that time less any amount paid by the employee for the shares.

The main difference between the approved and unapproved schemes is that with an approved scheme there are no tax implications for the employee when the options are exercised – the tax charge is deferred until the shares are disposed of at which point the employee should have the cash to meet the tax liability.

A CSOP must be registered with HMRC via a self-certification process prior to 6 July following the tax year in which the options are granted.

Implementation

This requires a valuation of the company’s shares, careful measurement to ensure the legislative criteria are met and self-certification notification to HMRC, all of which Ross Brooke’s tax team is experienced in doing. If you have any further questions about the above or any other reward planning matters then please do not hesitate to contact Phil Kinzett-Evans.