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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): Requirements relating to options: Cessation for other reasons

Schedule 4 CSOPs are discretionary schemes, meaning that scheme organisers can choose who they wish to grant options to subject to those individuals meeting the eligibility requirements (see ETASSUM42110). This also means that scheme organisers have discretion over when an option may be exercised and the reason that allows for exercise. This application of discretion can be seen as being in conflict with the principle of “option holders having a clearly stated right to acquire shares”. As a consequence, an acceptable application of discretion over exercise rights can consist of examples such as:

  • rights to exercise must be clearly stated in the scheme rules or other scheme documents and cannot be wholly discretionary,
  • if there are no rights to exercise  in  particular  circumstances and those circumstances cause the option to lapse, again this must be clearly stated,
  • discretion cannot be applied to the exercise rights of “good leavers”,
  • discretion must not be used to the disadvantage of the option holder, and
  • discretion must be applied in a fair and reasonable manner.

It will also be acceptable for discretion to be applied on a fair and reasonable basis on the occurrence of specific events or for determining time periods when exercise must occur. If discretion is to be applied, then this must be clearly stated at grant (paragraph 21A).

Finance Act 2003

FA 2003 introduced the concept of “good leavers” into Schedule 4 CSOP schemes (see ETASSUM44310) making it ever more important that option holders had clearly stated rights, particularly in the good leaver circumstances where the right to tax relief was an issue. For tax relief to be available there must be a clear provision in the scheme rules to allow for exercise (section 524 (2A) (b) ITEPA) in the good leaver circumstances; a right subject to discretion would not be a “provision” in the scheme.

If scheme rules allow for exercise “for any other reason” and this right is subject to discretion, then it would only be acceptable providing there were clearly stated rights in respect of each of the good leaver circumstances (injury, disability, redundancy & retirement). If rights were not stated in respect of any of the good leaver provisions then it would fall within the “any other reason” category which would not be acceptable if subject to discretion.

It would be acceptable to specifically exclude one (or more) of the good leaver reasons from the “any other reason” category meaning that there would be no right to exercise in those circumstances, the important point being that a good leaver right to exercise must not be subject to discretion.