Background Note
15.CSOP is a discretionary share scheme, which allows companies to award share options to selected employees and directors. The granting of options allows eligible employees or directors to buy the company’s shares from a date in the future at a price set on the date of grant.
16.Under CSOP, companies can award employees or directors options over shares with a market value of up to £30,000 at the time of grant. Provided the requirements of the scheme are met, there will be no charge to income tax or National Insurance contributions on the exercise of the CSOP option. However, capital gains tax may be due on a subsequent disposal of the shares.
17.Until 1980, shares in unlisted companies could not be used in approved share option schemes. However, this rule was changed to allow shares in unlisted subsidiaries of listed companies to be used in approved schemes, provided the parent company was listed on a recognised stock exchange and was not a close company (or would not be a close company if it were UK resident).
18.However, avoidance arrangements have been used recently in which CSOP options are granted over shares which are subject to “geared growth” arrangements. Under these arrangements, the shares which are subject to the option have no rights, or limited rights, over the value of the company at the time the options are granted, but have rights over all subsequent growth from that time onwards. This allows a large number of low value shares to be issued within the £30,000 limit, with potentially high growth in the future, which can thereby circumvent that limit.
19.These avoidance arrangements involve share options granted over shares in unlisted companies which are under the control of a listed company. The rules of CSOP are therefore being amended to prevent the use of options over shares in an unlisted company which is under the control of a listed company, to ensure that the effectiveness of the £30,000 limit is not weakened.
20.Where the rules of an approved CSOP scheme provide that a company may grant options over shares in an unlisted company which is under the control of a listed company, such a scheme will no longer meet the requirements of Schedule 4 to ITEPA. The new legislation provides for a transitional period of six months during which the rules of such a scheme may be amended to meet the newly amended requirements of paragraph 17. If schemes are not amended by the end of that period, HM Revenue & Customs may withdraw approval of the scheme.
21.The changes will take effect for all options granted on or after 24 March 2010, with the result that no options granted during the six month transitional period over shares in an unlisted company under the control of a listed company will qualify for the exemption from the charge to income tax in respect of the exercise of the option.
22.Options granted before 24 March 2010 are not affected by this change, and will continue to qualify for the exemption in respect of the exercise of the option, provided the other requirements of the CSOP code are met.