The Company Share Option Plan (CSOP)What is the CSOP? The Company Share Option Plan (CSOP) allows UK employees to participate in share options without having to pay income tax or National Insurance (NI) on their option gains. How does it work? Imagine that:
Normally Grace would have to pay income tax and possibly NI on this £20,000 benefit (even though it may only be a paper gain if she hasnt yet sold the shares). However, if the option is a CSOP, she doesnt have to do so, so long as (normally) at least three years and no more than ten years pass before she exercises her option. So is it completely tax free? No, if Grace sells the shares which she might do either immediately or after some time she will then have to pay capital gains tax (CGT) on any gain she has made up to the point of sale. But it will often be much better to pay CGT than income tax or NI:
Can we choose which of our employees participate? Yes, unlike SAYE options you can choose any employee of full time director to participate. Is it the only way to have income tax and NI free options? No, there are two other option plans providing similar benefits for UK employees, SAYE and EMI. Are there any limits? No employee may be granted CSOP options over shares worth more than £30,000. So in our example Grace could not immediately be granted any more options. However, to the extent she eventually exercises her options, more could then be granted:
What happens to leavers? When creating your CSOP you will want to think about how to treat leavers:
For employees leaving within three years of option grant, lapse will mean they never enjoy any benefit from holding their option. Normally if CSOP options are exercised within three years of grant, the employee will pay income tax and possibly NI on their option gains. However, this does not apply to employees leaving for redundancy, injury, disability or retirement. What happens if our company is taken over? You should plan ahead for this as well. Your CSOP could stipulate that:
But if any are exercised within less than three years of grant, income tax and possibly NI will be due on option gains. Can my company have a CSOP? Most independent companies will be able to meet the requirements of the CSOP legislation, but you will need to look at them carefully preferably with professional help. Granting CSOP options over shares in a company which is controlled by another is an immediate showstopper, unless either of the companies is listed. Shares must be:
And (if the company has more than one class of share) either a majority of the class of shares used must not be held by directors or employees or (very unusually) that class of shares must give employees control. What if we are a UK subsidiary of an overseas company? It will often be possible to create a CSOP for your UK employees, under which options may be granted over shares in your holding company. Some 109 of companies with a CSOP are overseas controlled. For example, a US-owned company might set up a CSOP to provide similar tax benefits for its UK employees to those enjoyed by its US employees holding Incentive Stock Options. What is the accounting impact? The Accounting Standards Board requires a company providing share-based benefits for its employees to show that as a cost in its accounts. However, this will accounting treatment will not apply to smaller companies whose accounts are prepared under FRSSE. Many companies paying UK corporation tax may now claim as a statutory deduction against corporation tax the value of any benefit provided through options. |
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