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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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HM Revenue & Customs
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Schedule 4 Company Share Option Plan (CSOP): Introduction

  • These are discretionary schemes – the company can select the employees and directors it wishes to participate in the plan,
  • 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,
  • There is no charge to income tax if the option is exercised in accordance with the provisions of the scheme at a time when the scheme is a Schedule 4 CSOP (see ETASSUM41130),
  • The company can only grant tax advantaged options if the company has self certified to confirm the CSOP meets the requirements of Schedule 4 ITEPA 2003, (prior to 6 April 2014 a CSOP had to be approved by HMRC) (refer to ETASSUM41130),
  • No participant can be granted tax advantaged options over shares with a value of more than £30,000 calculated at the date of grant (ETASSUM41180), 
  • Participation in the scheme is not open to people who own more than 30% of the company (material interest – refer to ETASSUM42300).

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 its tax advantaged status until 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 any 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 neither a ‘good leaver’ nor exercising because of a takeover in accordance with Section 524(2E) ITEPA, 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 9 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, retirement, a TUPE transfer, takeovers under certain circumstances or on the transfer out of the group of the employing company and exercise occurs within 6 months of ceasing or transferring employment, as applicable, then full tax relief is available (Sections 524(2A)-(2E) ITEPA). 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-tax advantaged circumstances

If an option is exercised more than 3 years from the date of grant and the exercise occurs after a disqualifying event 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-tax advantaged circumstances

Where CSOP options are exercised in circumstances that do not attract tax relief then the charging provisions of Chapter 5 apply (ERSM110510).