ERSM301100 - Company Share Option Plans: Overview
- These are discretionary schemes - the company can select the employees and directors it wishes to reward.
- The company grants eligible employees or directors an option to purchase the company’s shares in the future at a price set on the date of grant.
- For example, a company may grant an option over 1000 shares at £2.50 per share. In 3 years time the market value of each share may be £6. The participant will be able to exercise the option by paying the company £2500 and the participant acquires shares that are worth (at the time of exercise) £6000.
- The company can operate a scheme only if HMRC (ESSU) has approved it. HMRC approval does not have retrospective effect. Approved options can only be granted after HMRC approval has been given to the scheme.
- No participant can be granted approved options with a value of more than £30,000 calculated at the date of grant. (Special transitional arrangements applied for options granted under approved schemes before 17 July 1995).
- Participation in the scheme is not open to people who own more than 25% of the company (material interest).
Tax Relief
- Income tax is not chargeable when an option is granted.
- Income tax is not normally chargeable on the increase in value of the shares between grant of the option and the exercise of the option if the following conditions are satisfied;
- It is at least 3 and no more than 10 years between grant and exercise and
- the scheme retains HMRC approval at the time the option is exercised
and
- the option is exercised in accordance with the rules.
- If the options fulfil all the above criteria then they will be income tax free at the time of exercise.
- If the option is exercised within 3 years of grant, tax relief is given if the exercise is by a “good leaver” (see below).
- Subsequent disposal of the shares acquired by the option will be chargeable to CGT. The base cost would be the price paid (the exercise price) for the shares plus the amount chargeable to income tax. The date of acquisition will normally be the date of exercise of the option. The normal annual exemption rules apply.
- If an option is exercised before the three-year period has elapsed and the option holder is not a “good leaver”, an income tax charge (and NICs) may be due on the difference between the acquisition cost and the market value (the chargeable gain) of the shares acquired on the date of exercise. If the shares acquired are Readily Convertible Assets (RCAs) (see ERSM170030) then the chargeable gain will be subject to PAYE (and NICs). For shares that are not RCAs or acquired before 9t h April 2003 income tax would be accounted for by Self Assessment and no NICs would be due.
Good Leavers
If the rules of the scheme allow for early exercise (before 3 years from grant) for injury, disability, redundancy or retirement (at an age specified in the scheme which must not be less than 55) and exercise occurs within 6 months of ceasing employment, then full tax relief is available. Schemes also normally allow for exercise within 12 months of death and again full tax relief is available in these circumstances. These cessations are commonly referred to as “good leavers.”
Options exercised more than 3 years from grant in non-approved circumstances
If an option is exercised more than 3 years from the date of grant and the exercise occurs after a disqualifying event (see ESSUM46500) then tax relief will not be available. In these particular circumstances tax will be accounted for by Self Assessment rather than PAYE. This is because Section 701 (2) (c) (ia) of ITEPA 2003 determines that such shares are excluded from the definition of an “asset” as condition A of Section 524 (1) is met (options exercised more than 3 years from date of grant).
Options exercised within 3 years of grant in non-approved circumstances
Where CSOP options are exercised in circumstances that do not attract tax relief then the charging provisions of Chapter 5 apply (ERSM110510).
Annual reporting requirements
On the first working day after the end of the tax year (usually 6 April) a notice to file is issued to all scheme organisers of approved CSOP schemes. The notice sets out the legal obligations for a return to be filed and provides details of where to obtain a return for completion. ESSU does not automatically issue a blank return to scheme organisers. A pdf version of Form 35 is available for download from the shareschemes web page or from the useful forms section of the Employer CD-Rom issued annually to employers. From 6t h April 2006 it has also been possible to file annual returns online.
- Section 1 of the return requires summary details of all options granted to eligible employees on any day during the tax year; there is no requirement to provide individual details of option grants.
- Section 2 of the return requires details of all options exercised in prescribed circumstances
