What is a CSOP?
A Company Share Option Plan (CSOP) is a discretionary employee share option plan that offers certain tax advantages.
Designed to incentivise and reward employees, a CSOP gives selected employees the option to acquire shares in their employer company at a set price, known as the exercise price. Provided the statutory conditions are met, employees can exercise their CSOP options without incurring income tax or National Insurance Contributions (NICs) if the exercise is at least three years after grant or in certain specific circumstances.
This tax-advantaged status is a significant attraction for both employers and employees. When the employee eventually sells the shares acquired through the CSOP, any profit above the exercise price is subject to capital gains tax (CGT), which is generally levied at a lower rate than income tax. This structure makes CSOPs an efficient way to reward employees, as the tax burden is typically lower compared to other forms of remuneration.
CSOP options can be used to supplement other share incentive arrangements, such as non tax-advantaged options, providing flexibility in the company's overall reward strategy. Their exercise can be subject to the satisfaction of objective criteria, such as time or performance-based milestones.
Key differences between CSOP options and EMI options
CSOPs are subject to fewer eligibility criteria than Enterprise Management Incentive (EMI) option schemes. There are no restrictions on the size or type of business that can operate a CSOP.
However, there are some limitations compared to EMI option schemes. The main ones are:
- The maximum value of CSOP options that can be granted to any individual is £60,000, based on the market value of the shares at the date of grant, whereas this limit is £250,000 per person for EMI options.
- The exercise price of a CSOP share option must not be less than the market value of the share at the time of grant. A valuation of the shares at the time of grant is therefore essential for options to be able to qualify for the CSOP tax advantages.
- There is less scope for operating discretion in relation to the treatment of leavers' CSOP options compared to EMI or non tax-advantaged options.
CSOPs nonetheless are a valuable tool for companies that do not qualify for EMI option schemes, as they still offer meaningful tax advantages and can generally be tailored to suit the company's specific needs.
Who can be granted CSOP options?
Unlike all-employee share plans such as the Share Incentive Plan (SIP) or Save As You Earn (SAYE), which require all eligible employees and directors to be invited to participate, a CSOP is discretionary. This means the company can choose which employees or executive directors are granted options, allowing for targeted incentivisation of key personnel. However, a CSOP can also be offered more broadly if the company wishes to do so.
CSOP options can be granted to:
- employees of the company, or, in the case of a group, to employees of a participating subsidiary; and
- full-time executive directors, defined by HMRC as directors working least 25 hours per week, which can be spread across several group companies.
However, consultants and other non-employees are not eligible to participate in CSOPs.
An individual can hold CSOP options over shares with a total value of up to £60,000, based on the market value at the date of grant. This limit may go further than first thought, however, as:
- in relation to private companies, significant discounts may be applicable to the valuation to reflect a minority holding of illiquid shares; and
- eligible employees are now permitted to be granted CSOP options over "growth shares", which only participate in the future growth of the company above a certain threshold and as such typically have a low initial value.
Additionally, individuals who have a "material interest" in a close company — broadly meaning a 30% interest — are excluded from participation. This rule is designed to prevent those with significant control over the company from benefiting from the tax-advantaged status of CSOPs.
Which companies can grant CSOP options?
Since April 2023, the rules governing CSOPs have been updated so that more companies can now use them. Companies can now grant CSOP options over classes of shares that contain special rights or restrictions for employees. This change has brought the CSOP regime more closely in line with the EMI option scheme regime and has enabled a wider range of private companies to offer CSOPs, including those with complex share capital structures.
To be eligible to grant CSOP options, companies must ensure that the shares over which CSOP options are granted are fully paid, non-redeemable ordinary shares. In addition, the company must satisfy ONE of the following criteria:
- The company is "independent", meaning it is not controlled or potentially controlled by another company, either acting alone or together with any connected party; or
- The company is listed on a recognised stock exchange; or
- The company is under the control of an employee-ownership trust (EOT).
The independence requirement can present a challenge for some private companies, particularly those with private equity backing, as such arrangements may be deemed to confer control on another entity.
Companies are generally advised to seek professional advice when assessing their eligibility for a CSOP.
Tax treatment of CSOP options
The tax treatment of CSOP options is one of their most attractive features. No tax is due when a CSOP option is granted. No tax or NICs are due when a CSOP option is exercised either, provided it's exercised:
- between three and ten years after the date of grant;
- within six months after the employee leaves employment due to statutory "good leaver" scenarios;
- within twelve months of the employee's death; or
- within six months of certain types of company takeover.
If these conditions are met, the only tax that will arise will be Capital Gains Tax (CGT) on the profit realised on sale of the shares sold. This profit is calculated as the difference between the exercise price paid for the shares and the sale price of the shares. The CGT rate is typically lower than the income tax rate, making this a tax-efficient way for employees to realise value from their options.
The company is generally entitled to a corporation tax deduction when the options are exercised. The amount of the deduction is equivalent to the aggregate gains realised by the employee on exercise of their CSOP options.
How does a company set up a CSOP?
For eligible companies, the first step when establishing a CSOP is to determine the market value of the shares over which options will be granted, and submit this to HMRC for approval.
The company must then adopt a set of plan rules, which outline the terms and conditions for exercising the options and comply with the relevant CSOP legislation. Professional advice is strongly advised to ensure compliance with the CSOP requirements and that the plan is being structured and implemented suitably.
Once options are granted, the company must register the CSOP with HMRC on or before 6 July following the end of the tax year in which options are first granted, in order for it to qualify. For example, if options are granted in the 2025/26 tax year, the registration must be completed by 6 July 2026. When registering the plan, the company must declare that the CSOP meets the conditions set out in the CSOP legislation. This is because CSOPs now have to be self-certified by companies as being qualifying schemes.
A record of all options granted, exercised or lapsed needs to be maintained, and an annual return for the scheme is required to be submitted by 6 July each year.
Alternative options
If a CSOP is not the most suitable mechanism for achieving your desired commercial objectives, a variety of other share incentive arrangements may be available. Examples include growth share plans, nil-paid share arrangements, and other non-tax-advantaged share/option schemes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
