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Company share option plans

Company share options plans are tax efficient, HM Revenue & Customs tax favoured options which offer a useful alternative where more flexible and tax efficient Enterprise Management Incentive (“EMI”) options are not available.

Under a company share option plan, employees are awarded (or “granted”) rights to acquire shares in the company they work for (or its parent company)

The “exercise” of those rights (and the actual acquisition of the underlying shares) is deferred until certain conditions are met. There is some flexibility in the design of those conditions with the potential for time based vesting, performance and/or an exit event (i.e. a sale/listing) operating as exercise triggers.

The option price (i.e. the amount the employee pays for the shares) must be set at the market value when the company share option plans are initially granted. Unlike EMI and unapproved options, the option price may not be set at a discount to that market value.

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Outline

The incentive is therefore for the employee to work to generate future growth in value of the underlying shares and thus his or her upside on those shares.

Once the relevant conditions are met, employees will often be given a choice as to when they wish to exercise their options and become shareholders by paying the option price for their shares.

After exercise employees will then become shareholders. There is some scope as to the rights and restrictions that apply to those shares. In particular, specific leaver and transfer provisions can apply and there is also scope for variations in terms of economic (i.e. capital and dividend rights).

Benefits

Unlike EMI, there are no trades that are excluded from operating a company share option plans.

Company share option plans can provide significant savings for the employee. No tax will arise on the grant of the option and no price is payable for the grant of the option itself. Employees can therefore be given their potential interest “for free” at that stage. 

Provided that the company share option plans are exercised in certain circumstances, no income tax or National Insurance contributions (“NIC”) will arise exercise of the options. In broad terms these circumstances cover exercises after three years from grant and certain other corporate/good leaver circumstances (either before, on or after three years from grant).

Importantly, employees can also benefit from capital gains tax treatment (“CGT”) on the disposal of the shares at the lower rates that apply (somewhere between 0%-20%).

In terms of the employer company, it also benefits from NIC savings. There is no employer’s NIC due on the grant of company share option plans or exercise of the options in a qualifying circumstances.

Provided certain conditions have been satisfied the employer will be able to claim corporation tax deductions for the gain on the shares (i.e. the growth in value between grant of the option and exercise).

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Disadvantages

Company share option plans are far more limited than EMI in terms of the value of shares that can be put under option. Compared with the £250,000 EMI limit, company share option plans may not be granted to any one individual over in excess of £30,000 worth of shares (valued when they are granted).

The flexibility afforded to EMI in terms of exercise and share rights is also reduced for company share option plans due to certain statutory criteria. 

How we can help

We support companies on the structuring and implementation of company share option plans.

We also support other firms of professional advisers on appropriate elements of the design and implementation of company share option plans.

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