Approved Company Share Option Plans

Guidance for employees

Contents

This guidance tells you about approved company share option plans (CSOPs). It cannot deal with all the questions you may have about approved schemes, but it explains briefly,

  • what a company share option plan is,
  • who can take part,
  • the most important rules, and
  • the tax advantages.

There is more detailed guidance, which is intended mainly for companies and their professional advisers. It is available here.

A copy of your company's own scheme rules should be available from your company secretary.

What is a company share option plan?

A company share option plan is a plan set up by your employer under which you may be given a right, known as a 'share option', to buy a certain number of shares at a fixed price at a particular time.

If the scheme meets certain requirements HMRC will approve it. Tax advantages are available to you for share options you receive under an approved scheme provided certain conditions are met.

What is a share option?

A share option is a right to buy

  • a set number of shares in a company,
  • at a fixed price,
  • during a set period of time.

In a company share option plan the price of the shares is fixed at the time you are given your option. The price must not be less than the market value of the shares at that time. You can then exercise the option to buy shares, at the fixed price, during the set period of time.

You do not have to exercise your option to buy shares. Whether you do or not will usually depend on the value of the shares at the time you can exercise the option.

What are the requirements for a scheme to be 'approved'?

The main requirements for approval of a scheme concern

  • who can be given options under the scheme
  • what value of shares subject to the options that can be given to those who take part in the scheme
  • the sort of shares that can be used in the scheme
  • the fixed price of the shares under an option
  • the set period of time for exercising an option to buy shares.

What are the tax advantages?

If you get your share option under a company share option plan which has been approved by HMRC, you may not have to pay income tax when

  • you are given the share option and
  • you exercise it to buy shares, if certain conditions are met.

Who can take part?

Your employer decides which of its employees can take part in its approved company share option plan. However, you can take part only if

  • at the time you receive a share option you are either
    • an employee, or
    • a full-time director, working at least 25 hours a week,

of the company which set up the plan, or, if the plan covers more than one of the companies in a group, of any one of the companies in the plan, and

  • you do not already have a material interest in the company.

What is a material interest?

For the purposes of a company share option plan, you have a material interest in a company if you already own, or hold options over, more than 25% of the company's ordinary shares.

You cannot receive options under a company share option plan, or exercise any options you already hold, if you have (or have had within the preceding 12 months of that date) a material interest in a close company

  • whose shares are used in the scheme, or
  • which has control of such a company, or
  • which is a member of a consortium that owns such a company.


A company is a close company if, broadly, it is under the control of five or fewer shareholders, or of shareholders who are directors

What sort of shares are used in the plan?

The shares must be part of the ordinary share capital of the company which has set up the plan, or the company which controls it. They must have the same rights (for example to dividends and bonus issues) as other ordinary shares. However, you will not receive dividends or be able to vote at company meetings until you have actually bought the shares.

The shares must be:

  • quoted on the Stock Exchange, or
  • in an unquoted company which is not controlled by another unquoted company.

At what price can I buy the shares?

The price of the shares is fixed at the time you get your option. It must not be less than the market value of the shares at that time.

Is there a limit on the size of options I can receive?

There is a limit on the total value of shares over which you can hold options under an approved company share option plan. The total value of the shares at the time you receive an option must not exceed £30,000 calculated at the date of grant of the options.

Example

1/6/2004

You are given an option over 10,000 shares under an approved company share option plan.

The value of one share is £1.50.
Total value of shares under option £15,000


1/12/2004

Your employer wishes to give you another option under its company share option plan

The value of the shares under any new option you are given must not be more than £15,000 (£30,000 limit less £15,000 value of shares under your earlier option).

The value of one share has risen to £3.
You are given an option over a further 5,000 shares

Value of shares under earlier option £15,000
Value of shares under new option £15,000

Total value of shares under all options £30,000

The £30,000 limit also includes the value of shares under options given to you under any other approved company share option plans set up by your employer or by a company associated with your employer.

Not included in the limit is the value of shares under options which you

  • hold under savings-related share option schemes.
  • received under approved executive share option schemes between 17 July 1995 and 28 April 1996 and which did not qualify for tax relief because they exceeded the limit.

When can I exercise my option to buy shares?

The plan rules will set out when you can exercise your option to buy shares. A company can decide which rules to include in its plan about when options can be exercised and whether other conditions, for example performance targets, must be met before the options can be exercised. These rules must be clearly set out at the time you receive your option.

What happens if I leave the company before I exercise my options?

If you have been granted options under the terms of the plan you may be able to exercise them even if you have left the company. This will depend on the plan rules.

What happens if I die before I exercise my option?

Usually the plan rules will allow whoever is legally responsible for your estate to exercise your share option within one year of the date of death.

What happens if the company is taken over?

Some plans allow you to 'roll over' your option if the shares are in a company which is taken over by another company. This has to be agreed to by the new company.

This means you can exchange an option over shares in the old company for a new option over shares in the new company. The value of the new option must remain the same as the value of the old option. After a 'roll over' the new option will continue exactly as before and will be subject to the same rules as the old option.

Will I be taxed when I receive an approved scheme option?

You will not normally be taxed when you receive an option under an approved company share option plan after 28 April 1996.

Special rules apply if you received your share option between 17 July 1995 and 28 April 1996.

Will I be taxed when I exercise my option to buy shares?

If you received your option under an approved company share option plan after 28 April 1996 you will not be taxed when you exercise it to buy shares if you exercise it

  • under an approved scheme, and
  • at least three years and no more than ten years after you received it or
  • within three years of the date of grant, if the exercise is upon leaving the company because of injury, disability, redundancy or retirement at an age specified in the plan and you exercise the option within 6 months of leaving the company.

Special rules apply if you received your share option between 17 July 1995 and 28 April 1996.

However, if your option is not within the rules of an approved plan

  • when granted or exercised, or,
  • if you exercise your option
  • within three years of the date of grant, unless the exercise is upon leaving the company because of injury, disability, redundancy or retirement and you exercise it within 6 months of leaving the company or
  • more than ten years after the date of grant
    you will have to pay income tax on the 'gain' you make by using your option to buy shares.

The amount of the 'gain' is:

  • what your shares are worth when you buy them, less
  • the price you pay for your shares, less
  • the amount (if any) you paid for the option itself when you received it.

This is usually collected through the PAYE system, and the scheme may contain provisions to enable your employer to collect the appropriate amount of income tax and National Insurance contributions from you.

Example

1/6/2003

You are given an option over 1,000 shares.
It allows you to buy shares for £2 each.
You pay £1 for the option itself.

1/5/2005

You exercise your option and buy 1,000 shares.
The value of one share has risen to £3.

The taxable amount is

Value of shares when you buy them £3,000
Less paid for shares (£2,000)
Less paid for option (£1)

2005/6 Taxable amount £ 999

Will I be taxed if I benefit from my option in any other way?

If you benefit in any other way from your share option - apart from exercising it to buy shares - you will normally have to pay income tax on the amount of the 'gain'.

For example, if you give up your option and in return receive money or something else of value, you will be taxed on

  • the amount or value of what you receive for giving up your option, less
  • the amount (if any) you paid for the option itself when you received it.

Example

1/6/2003

You are given an option over 1,000 shares.
It allows you to buy shares for £2 each.
You pay £1 for the option itself.

1/5/2005

You agree to your option being cancelled and receive
£1,500 in return.

The taxable amount is

Amount received for cancellation of option £1,500
Less amount paid for option (£1)

2005/06 Taxable amount £1,499

Will I pay tax on my option if my company is taken over by another company?

If your company is taken over by another company, some plans may allow you, if the new company agrees, to exchange your old option for a new option over shares in the new company. You will have no tax to pay at the time of the exchange if you exchange options in this way.

You will not have to pay income tax when you exercise your option to buy shares in the new company if you exercise the new option

  • under an approved scheme, and
  • at least three years and no more than ten years after you received the old option it replaced.

Will I have to pay tax when I sell my shares?

Any gain you make when you later sell any shares acquired under an approved scheme is chargeable to capital gains tax in the normal way.

For capital gains tax purposes your gain is usually,

  • the amount you receive from selling your shares, less
  • the cost of your shares

and it is subject to taper relief.

The cost of your shares for this purpose includes the fixed price you paid for your shares. It also includes any amount on which you paid income tax when you bought the shares. You calculate taper relief on the gain from the date on which you exercised your option to buy the shares.

You will not have to pay capital gains tax if your total chargeable gains (including the gains from the sale of the shares) in any tax year are less than the exempt amount for that year. For the tax year 2005/06 the exempt amount is £8,500.

Special rules for options received before 29 April 1996

From 29 April 1996 all existing approved executive share option schemes (also known as discretionary schemes) automatically became approved company share option plans, unless the company which set up the scheme told HMRC that it no longer wanted its scheme to be approved. If you received your option under an approved executive share option scheme before 29 April 1996, special tax rules may apply to it.

What are the special rules for options received between 17 July 1995 and 28 April 1996?

If your option meets all of the conditions set out below, the tax reliefs explained in this guidance apply as if you had received your option under an approved company share option plan. The conditions are that your option

  • was received between 17 July 1995 and 28 April 1996
  • was received under an approved share option scheme which is not a savings-related scheme
  • is not a 'discounted' option
  • is over shares with a value which did not exceed the company share option plan limit of £30,000 worth of shares. Take into account the value of shares under any earlier options you already hold under any approved share option scheme (except a savings-related scheme) set up by your employer or a company associated with your employer.

A discounted option is an option where the fixed price set for buying the shares is less than their value at the time you were given the option.

Can I still receive options under an approved executive share option scheme?

No. From 29 April 1996

  • we no longer approve executive share option schemes
  • all existing approved executive share option schemes automatically became approved company share option plans, unless the company which set up the scheme told us that it no longer wanted its scheme to remain approved.

Keeping records

If you hold or receive shares or share options because of your job, you will need to keep information about when you received them, what they were worth and how much you paid for them. If you do not usually get a tax return, you must tell HMRC if you receive taxable amounts which have not been taxed through the PAYE system. You must do this by the 5 October following the tax year in which you received the taxable amounts.

If you have to pay any extra tax, HMRC will tell you how it will be collected or whether you need to complete a return. You must tell HMRC about changes that could affect your tax position. If you do not, you may pay more than you should or find that you owe tax.

If HMRC sends you a tax return to complete, you must give actual figures for your income and gains. You will also need to ask HMRC to send you the share schemes pages when the return is issued after the end of the year. The notes on these pages tell you how to work out the figures of income.

Useful contacts