Company Share Option Plan (CSOP)

The CSOP has fewer qualifying requirements than the popular Enterprise Management Incentive scheme (EMI).  For example, there are no requirements for the company to be carrying out certain trades, or fall within certain limits relating to the number of employees or gross assets.  The CSOP is, therefore, the next best tax efficient discretionary option plan for companies that may have outgrown EMI or don’t otherwise qualify.

For your business to benefit from implementing and managing a CSOP, several conditions must be met, including:

• Only UK employees and directors can be included.
• Directors must work for a minimum of 25 hours per week to be included.
• Participants must not already own more than 30% of the company’s share capital.
• Individuals may be granted CSOP options over shares with a maximum value of £60,000. There is no limit to the value of options that can be granted by the company.
• The company over whose shares the options are granted must be independent, i.e. not under the control of another company.

If you are not sure if your business satisfies the conditions for a company share option scheme, please get in touch with one of our experienced team, who can suggest an alternative share plan arrangement, explain the difference between plans and help you identify the one best suited to your needs.

The team at RM2 is entirely focused on designing, implementing and maintaining employee ownership plans in all their guises; it’s all we do, and we believe we do it better than anyone else, particularly those who don’t specialise like RM2.

Traditionally, the Company Share Option Plan has been used for senior executives and directors.  However, there is no reason why the CSOP cannot be extended to all employees in the company or a group, provided they meet the legislative requirements.

Because the CSOP is a discretionary plan, this means that employees can be granted options on a differential basis.  For example, senior staff may receive grants up to the maximum £60,000 value, but junior or lower paid staff can be rewarded at a level considered appropriate by the board or remuneration committee.

In addition, companies may choose to set different performance targets or vesting conditions for teams or individuals.

There are numerous benefits of implementing a Company Share Option Plan, but one important reason for considering one is to align employees’ interests with those of other shareholders but with significantly reduced financial risk.  The CSOP allows your employees to benefit from future growth in the share value but there is no need to pay for the shares until the options are exercised and the shares are bought.  If the share price has fallen over time, there is no obligation to exercise the option.  This can help ensure lower paid employees  can share in the benefits of a CSOP.

A Company Share Option Plan can introduce a host of benefits, including:

• Promoting long-term retention of key employees.
• Rewarding participants on a tax-advantaged basis.
• Encouraging growth by linking awards to performance targets.
• Minimising risks for the plan participants.
• Attract talented individual to the business.

There is no income tax or NICs charge when a CSOP is granted. 

In addition, CSOP options can be exercised free of income tax and NICs provided the exercise occurs 3 years or more after the options are originally granted.  Any increase in value is subject to the more beneficial capital gains tax (CGT) regime.

CSOP options can sometimes also be exercised tax efficiently within 3 years – for example, if the participant’s is a ‘good leaver’ (see below), or if the company is bought or taken over (usually for cash). 

When an employee leaves the business, how their share options are treated will vary depending on the reason for them leaving, along with how the specific terms and conditions of the plan were drafted.  The rules of a CSOP plan will often make a distinction between ‘good leavers’ and ‘bad leavers’.

Employees leaving due to redundancy or retirement, amongst other “no-fault” reasons, are typically considered good leavers and may sometimes benefit from accelerated or partial vesting of any unvested options.  There will usually be a period after the end of employment when good leavers can exercise their options. 

However, employees who choose to leave or are dismissed for gross misconduct often lose all their options, including any that may have already vested.

There are specific rules relating to leavers under the CSOP plan which may be unfamiliar to companies that have previously used Enterprise Management Incentive options, which give more flexibility for the treatment of good and bad leavers.  How leavers are handled is one of the more important considerations for any share plan and a reason to talk to experienced specialists, such as those found here at RM2, who can advise on what to include in the terms and conditions and how they link in to your Company’s Articles of Association.