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A new dawn for CSOPs?

Posted on 3 January 2023

corporate office meeting

Changes to the Company Share Option Plan (CSOP) regime are coming into effect from 6 April 2023 and may inject new life into a once popular type of employee share plan.

What are CSOPs?

The CSOP is a share incentive arrangement under which qualifying companies can grant tax-advantaged options to their employees. To qualify under the CSOP regime, the shares to be used must be either listed on a recognised stock exchange or in a company not controlled by another company.

If certain other requirements are met, there are some significant tax benefits:

  • There are no income tax or national insurance contributions on exercising the options.
  • The employing company may be eligible to claim a statutory corporation tax deduction for any gains earned from the option once exercised.
  • The employee will only pay capital gains tax (at up to 20%) on sale of the shares.

Despite these benefits, the use of CSOPs has declined in the last decade. In part, this has been because the current rules provide that no employee can hold CSOP options over shares with a total market value of more than £30,000 on grant. Many private companies have also struggled to qualify. This is because of a requirement that, where there is more than one class of share, the majority of the class over which options are granted must either be "open market shares" or "employee-controlled shares". It is often not possible to satisfy this condition.

What is changing?

In September 2022, the Government announced key changes to CSOPs as part of their drive boost economic growth. Re-affirming these proposals in the Autumn Statement, with effect from 6 April 2023:

  • the CSOP limit will double from £30,000 to £60,000; and
  • the requirement on shares to be either "open market shares" or "employee-controlled shares" will be removed.

As a result, CSOP options are likely to become a far more attractive and relevant incentivisation tool. For private companies that do not qualify for the alternative Enterprise Management Incentive regime, there is now another tax efficient alternative that can be considered, and may be preferrable to operating a non-tax advantageous share option plan.

If you would like to discuss CSOPs or any other matter related to employee share plans, please contact our Incentives team, who have a wealth of experience advising on share plan and executive remuneration strategy and implementation.

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