Discretionary Share Plans

Read our guide to Discretionary Share Plans. If you would like to speak to someone about which plan(s) will suit your company and its objectives, please contact our Employee Share Plan team.

Company Share Option Plan ("CSOP"): Approved

The CSOP is a discretionary share plan which requires formal HMRC approval prior to implementation. It allows qualifying companies to grant employees, and officers working more than 25 hours a week, options to acquire shares up to a value of £30,000 (calculated at the date of grant).

The option cannot, under normal circumstances, be exercised before the third anniversary of the date of grant, and any gain on exercise is not subject to Income Tax or National Insurance Contributions (“NICs”). Gains are, instead, subject to Capital Gains Tax ("CGT”) which may be reduced by using the employee’s annual exemption. 

Company Share Option Plan: Unapproved

This form of Company Share Option Plan is commonly referred to as an unapproved share option plan. You may also hear it referred to as a Discretionary or Executive Share Option Plan ("ESOP").

This allows companies to grant options to employees outside of the HMRC approved framework, on terms and within limits set by the company. Any gains on exercise of options are liable to Income Tax and NIC, and subsequent sales may be liable to CGT after utilisation of the employee’s annual exemption. Where appropriate, employers may pass the employer NIC to the employee by agreement.

Please register to access our free employee share plan fact sheets. We will not pass your details on to any other organisations or third parties.  CSOP Factsheet

Enterprise Management Incentive ("EMI")

The EMI is a tax favoured plan aimed at younger and smaller companies who want to attract, reward, and retain skilled staff. It allows companies with gross assets of less than £30 million and fewer than 250 full time (or equivalent) employees to grant options over shares up to a value of £120,000 per employee (valued at the date of grant). The EMI does not require formal HMRC approval prior to implementation of the plan.

As long as the exercise price is set at the market value of the shares at the time the option is granted, there will be no Income Tax or NICs charge when the employee exercises the option (provided the exercise takes place within 10 years of the grant). Gains will be subject to CGT after utilisation of the employee’s annual exemption. 

Please register to access our free employee share plan fact sheets. We will not pass your details on to any other organisations or third parties.  EMI Factsheet

Long Term Incentive Plan ("LTIP")

The LTIP is a flexible plan, outside of the HMRC approved framework. Under the LTIP a participant is typically awarded a number of shares which will be transferred to him/her at a set date, subject to the satisfaction of certain company defined conditions.

The LTIP award can be in the form of a conditional share award or a nil-cost option. Where appropriate, the LTIP award can be structured to substitute phantom cash payments in place of shares.

An LTIP is usually operated in conjunction with an offshore employee benefit trust. The shares which are subject to the LTIP will be released at no or negligible cost to the participant although the value of the awards will be fully taxable.

The participant will incur an Income Tax and NICs liability when the shares are released to him/her. Where applicable, the company may be able to transfer the employer’s NIC liability to the employee with the employee’s agreement.

There will be a CGT liability if the gain on sale exceeds the participant’s annual CGT exemption.

Deferred Share Bonus Plan ("DSB")

The DSB is a flexible plan, outside of the HMRC approved framework. Participants are required or given the opportunity to invest all or part of their annual bonus (after tax) in company shares (Bonus Shares) which will be held in trust for a specified period of time. In return the company will often award the participant a conditional Matching Share award which will be released after a stated period of time.

Income Tax and employer and employee National Insurance Contributions will generally be due as follows:

• Bonus: at the date when the gross bonus is paid; and
• Matching Shares: at the date on which the shares are released.

Where applicable, the company may be able to transfer the employer’s NIC liability to the employee with the employee’s agreement.

There will be a CGT liability if the gain on sale of Bonus or Matching Shares exceeds the participant’s annual CGT exemption.

Growth Share Plan

The Growth Share Plan is a flexible plan, outside of the HMRC approved framework. Under this plan employees are able to acquire shares in a company with economic rights limited to a pro rata share of any uplift in the company’s value beyond the subscription date. As the shares have little or no value at the point of subscription there will generally be little or no Income Tax or NIC payable at the point of acquisition.  

Any gains realised on disposal of the shares should be subject to CGT after using the employee’s annual CGT exemption.

Phantom Share Plan

Phantom plans are set up to mirror the gain which might otherwise be delivered through the use of shares. Companies often use phantom share option plans where the use of shares might be impossible or impractical.

Under these plans the proceeds will be subject to Income Tax and NICs in the normal way. It is usual for them to be set up with prescribed limits imposed on the cash payouts which can be received in order for cash flow constraints to be factored in.

Nil or Partly Paid Share Plan

Unquoted companies can allow senior executives to acquire shares with the subscription amount left outstanding until a call is made for payment by the company. Voting and dividend rights then follow the provisions set out in the company’s Articles of Association.

Due to the intended incentive behind the plan, the circumstances under which a call is made may broadly replicate the circumstances under which a share option might have been exercisable. The difference is that once the subscription amount is paid, and the shares are sold, the gains should be subject to CGT, not Income Tax and NICs.

Whilst the tax consequences are more beneficial, the risk is a lot greater as the employee remains liable to pay the subscription amount even if the share price declines. Employees may also have to pay an annual Income Tax charge on the interest-free element of the loan deemed to arise for tax purposes, subject to any available relief for employees of close companies.

Joint Share Ownership Plan ("JSOP")

Known as a “joint ownership” or “split interest” plan, these incentive arrangements aim to achieve a similar result to that under a growth share plan but without the use of a separate class of share.  They are, however, fairly complicated from a tax, legal and valuation perspective and have been the subject of HMRC scrutiny concerning the appropriate methods of valuation.

In summary, the employee and the trustees of an employee benefit trust will purchase shares as joint owners, with the trustees typically being entitled to the current value of those shares plus a hurdle rate of return, and the employees being entitled to the balance.  As with the growth share plan, the employee’s beneficial interest is typically valued at a small fraction of the current market value of the shares for tax purposes, with the result that their interest in the shares can be acquired at little immediate cost, but with the possibility of enjoying all upside share growth beyond the trustees’ underlying interest.  That upside potential should be subject to capital gains tax treatment, not income tax and National Insurance Contributions.

Much like a share option, the ownership agreement can be structured so that the employee’s rights are forfeited in the event that they leave employment or else a predetermined performance condition is not reached.  In this way the alignment with shareholder interests is maintained.

These arrangements have become increasingly popular, particularly with the advent of the additional rate of tax @ 50%.