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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

HM Revenue & Customs
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Schedule 4 Company Share Option Plan (CSOP): Requirements relating to options: Price to be stated

Paragraph 22 is concerned with the acquisition price at which shares may be acquired under a Schedule 4 CSOP option. The acquisition price is also commonly referred to as the “exercise price”, “subscription price” or the “option price”.

The acquisition price must:

  • be stated at the time the option is granted, and
  • not be manifestly less than the market value of the shares (see below) at that time or an earlier time agreed by an officer of HM Revenue & Customs (see ETASSUM44180).

Paragraph 22(1)(a) requires the acquisition price to be stated “at the time when the option is granted”. Exceptionally option-holders may obtain new or different rights at the time any alterations are made to the terms of their existing options (CIR v Eurocopy plc), see ETASSUM47260. If new rights are obtained, this may have implications for the tax advantaged status of the options.

Ideally the price should be stated in absolute monetary terms (i.e. x pence per share).

It may be acceptable for schemes which provide for options to be granted with the acquisition price expressed as “x or such higher market value as is agreed with HMRC Shares & Assets Valuation (SAV)”. This enables companies to grant options over unlisted shares without waiting for SAV to agree the market value of the shares first. But as SAV are normally able to agree a market value in advance of the intended date of grant, and allow it to stand for a certain period (for example 30 days), it will not usually be necessary to do so.

It is acceptable for an option to be granted with a variable acquisition price which differs depending on when the option is exercised. For example, if the market value of a share at the date of grant is £1, the acquisition price might be expressed as:

  • £1.50 (150% market value) if exercised after 3 years;
  • £1.25 (125% market value) if exercised after 4 years;
  • £1.00 (100% market value) if exercised after 5 years. 

This states “the price at which scheme shares may be acquired by the exercise of an option”.  Care must be taken to ensure that schemes require that such variable acquisition prices must never be less than the market value of the shares at the date of grant.

It is acceptable for an option acquisition price to be stated in a currency other than sterling, although for annual reporting purposes the annual return form requires that both the foreign currency and equivalent sterling price need to be shown.

If an amount is paid as consideration for the grant of an option (whether a nominal £1 or a much greater sum) it cannot also be part of the option acquisition price. The acquisition price is to be fixed independently of any amount paid for the grant of the option. Whether a sum is consideration for the grant of the option, or is an advance payment of part of the acquisition price, is a question of fact to be determined from the documentary evidence available.