(CSOP) tax & NICs on CSOPs

• Income tax and NIC is not chargeable when an option is granted under an approved CSOP.
• Income tax and NIC is not chargeable at exercise (on the increase in value of the shares between the grant of the option and the exercise of the option) if the following conditions are satisfied:
  • The option is exercised in accordance with the scheme which is still approved at the time.
  • The option is exercised at least 3 and no more than 10 years after the date of grant.
  • If the option is exercised within 3 years of the date of grant, this is done under a provision of the scheme which allows exercise on cessation due to injury, disability, redundancy or retirement after reaching an age specified in the scheme and the exercise is within 6 months of this cessation.
• If an option is exercised and any of the above conditions are not met an income tax charge will arise. This charge is on the difference between the option price paid for each share and the market value of those shares acquired on the date of exercise. This charge is subject to PAYE and NICs if the shares acquired are Readily Convertible Assets.
• PAYE must be accounted for in relation to all cash cancellation payments made on or after 6 April 1998. A cash cancellation payment is where an option is given up in return for money or something else of value.

Additional guidance is at:

• NICs and share options
• International Considerations
• Operation of PAYE/NICs on share options

Capital Gains Tax (CGT)

Capital gains on shares after exercise of option

Shares are treated as acquired for capital gains tax purposes when the option is exercised.

Computation of gain - basic rules

When shares acquired by the exercise of an option are disposed of, any capital gain is chargeable to capital gains tax in the normal way. For these purposes the chargeable gain or loss is usually:

• the amount received from the sale of the shares, less
• the cost of the shares.

The cost of the shares includes:

• the price paid for them, and
• the amount of any gain chargeable to Income Tax on the exercise of the option (S120(4) Taxation of Chargeable Gains Act 1992).

Employee shares will be business assets and the accelerated business asset taper will be available from 6 April 2000 if the company is:

• a trading company or
• a non trading company where the employee does not own more than 10% of the company.

Shares acquired following death of original grantee

When shares acquired by the exercise of an option following the death of the person to whom the option was originally granted are disposed of, the base cost of the shares for the purpose of calculating the chargeable gain or loss arising is normally:

• the market value of the option on the date of its former holder's death, plus
• the price paid for the shares when the option was exercised.

Gain following direct acquisition of shares

When the employee disposes of the shares there may be a charge to Capital Gains Tax if the disposal proceeds exceed the cost. In calculating any gain, the cost of the shares is usually their market value at the date of acquisition. Taper relief and the annual exempt amount may be available to reduce any capital gains.

A detailed Help Sheet (IR287) (PDF 93K) is available.

Further general guidance on Capital Gains Tax is available.