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Should you swap to a CSOP?

17 October 2023

The recently enacted Finance (No 2) Act 2023 makes Company Share Option Plans ("CSOPs") more attractive for companies wanting to offer tax-advantaged schemes to employees. 

What are the benefits of a CSOP? 

CSOPs are a tax-advantaged share option scheme, allowing companies to incentivise their employees with the prospect of share ownership with favourable tax treatment. The scheme is discretionary, so unlike some other schemes, it does not need to be offered to all employees. Companies typically use CSOPs with the aim of recruiting and retaining key talent, and improving business outcomes. CSOPs are commonly put in place, in part because their conditions are less onerous than other incentive arrangements.

Qualifying options must be granted at market value and are generally exercised within strict time limits to obtain the tax advantage. Provided the various requirements are met, qualifying options do not attract income tax or national insurance contributions liabilities at the time of grant or upon exercise. Broadly speaking, on the sale of the shares, employees are subject to capital gains tax on the difference between the price paid and the disposal proceeds. 

Companies may also be able to claim a corporation tax deduction (equal to any growth in value of the shares since the date of grant) when the options are exercised. 

What are the changes?

The Finance (No 2) Act 2023 made two key changes, which increases the attractiveness of the scheme with effect from 6 April 2023: 

1. The maximum value of shares (valued at the date of grant) that any one person can hold under unexercised CSOP options increased from £30,000 to £60,000. 

2. The removal of restrictions that required CSOP options to be granted over a certain class of share (known as the "worth having" condition). Where companies had more than one class of share, the CSOP rules previously required options to be granted over shares which were "worth having" – being either open market shares (held by outside investors not obtained as a result of employment) or employee-control shares (through which current or former employees or directors control the company). That restriction no longer applies. 

CSOPs as an alternative to other schemes

Increasing the financial cap on the value of options an employee can hold improves the scheme's effectiveness and widens its reach, especially for more established companies.  

Removing the restrictions relating to the class of shares makes CSOPs viable for more companies. CSOPs are also now a worthwhile alternative for those companies which have outgrown, or are about to outgrow, their existing EMI plan (for example exceeding the number of employees or gross asset tests). Companies should consider implementing a CSOP instead of non-tax advantaged schemes or growth shares as a way to continue to incentivise key personnel. CSOPs could also be used in conjunction with other schemes. 

The new rules bring increased flexibility and potential for creativity to enable companies who have not previously considered CSOPs to consider whether they could be a well suited, and made to measure, employee incentive. For example, the removal of restrictions gives companies the freedom to create a new class of shares for CSOP purposes whilst maintaining the rights of other shareholders.

If you would like to discuss which share schemes or employee incentives might be right for your business, please speak to James Cashman, Caroline Colliston or your usual DWF contact. 

Further Reading