Qualifying conditions for company share option plans ― employees

By Tolley in association with Ken Moody
Employment_tax_img7

The following Employment Tax guidance note by Tolley in association with Ken Moody provides comprehensive and up to date tax information covering:

  • Qualifying conditions for company share option plans ― employees
  • Employees or full-time directors
  • Holding period
  • Non-transferability
  • Cessation of employment
  • Material interest
  • Individual limit

Generally, the qualifying conditions that permit employees to benefit from company share option plans (CSOPs) are not difficult to satisfy within the financial limit of £30,000 for the total market value of shares under option (see below). ITEPA 2003, Sch 4, para 8 establishes the employment requirement for individuals to participate in a Sch 4 CSOP scheme.

Employees or full-time directors

Anyone wishing to benefit from a CSOP must actually work for either the company over whose shares options are granted or one of its subsidiary companies.

The rules require that an individual is either a qualifying employee of the relevant company or, alternatively, a full-time director.

Full-time is not specifically defined in the legislation but HMRC guidance states that it means working for not less than 25 hours per week excluding meal breaks.

ETASSUM42130
Holding period

Under the terms of CSOP, options cannot be exercised either within three years from the date of grant or more than 10 years after that date without losing the tax reliefs. This is then relaxed in very limited circumstances.

Death

Following an employee’s death, CSOP options can be exercised by the executors at any time in the 12 months following the date of termination of employment while protecting the tax reliefs. See ITEPA 2003, Sch 4, para 25.

‘Good leavers’

An option may be exercised less than three years from the date of grant, with no income tax charge, provided that the exercise resulted from the individual ceasing to be a qualifying employee or a full-time director for specified reasons (commonly known as ‘good leaver’ circumstances, see ITEPA 2003, s 524), ie where that cessation is due to:

    More on Company share option plans: