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March 2010 Budget: no more CSOP options over shares in subsidiaries of listed companies
Practical Law UK Legal Update 5-501-8238 (Approx. 4 pages)
March 2010 Budget: no more CSOP options over shares in subsidiaries of listed companies
by PLC Share Schemes & Incentives
| Published on 24 Mar 2010 • United Kingdom |
An update about anti-avoidance measures announced in the March 2010 Budget to restrict the grant of CSOP options over shares in unlisted subsidiaries of listed companies.
Speedread
The March 2010 Budget includes anti-avoidance measures which restrict the award of tax-favoured CSOP options. Before 24 March 2010, these could be awarded over shares in an unlisted subsidiary of a company listed on a recognised stock exchange. On and after 24 March 2010, CSOP options can no longer be granted over shares of this description. CSOPs which permit the grant of CSOP options over unlisted subsidiary shares will lose their HM Revenue & Customs approval, if they are not amended to reflect these changes before 24 September 2010.
These measures are designed to block CSOPs which grant options over special growth shares in unlisted subsidiaries of listed companies, which entitle their holders to participate only in any growth in value of the company after the date of grant. As these growth shares have a lower value than ordinary shares at the time of grant, they allow a greater potential gain to be sheltered within the limits on individual CSOP participation. However, the changes will also disrupt CSOPs which use ordinary shares in subsidiaries of listed companies. (See March 2010 Budget - BN40 - Company Share Option Plans: Anti-avoidance and draft legislation.)
Background
HMRC-approved company share option plans (CSOPs) are a type of tax-favoured share option plan. They allow the grant of CSOP options to employees (and full-time directors) over shares worth up to £30,000 (at the date of grant of the option) per individual. If certain conditions are met, there will be no income tax or national insurance contributions (NICs) liabilities on exercise of a CSOP option (although the shares acquired may be subject to capital gains tax (CGT) on a disposal in the usual way). For more details of CSOPs, see Practice note, Employee share schemes: an introduction: Company share option plans (CSOPs).
CSOPs must:
- Be approved in advance of use by HM Revenue & Customs (HMRC).
- Meet the approval requirements set out in Schedule 4 to the Income Tax (Earnings and Pensions) Act 2003 (Schedule 4).
Schedule 4 sets out detailed restrictions on the types of share over which CSOP options can be granted (CSOP shares). These include a requirement that CSOP shares can only be:
- Shares of a class listed on a recognised stock exchange;
- Shares in a company which is not under the control of another company; or
- Shares in a company which is under the control of another company:
- whose shares are listed on a recognised stock exchange; and
- which is neither a close company, nor a company that would be a close company if UK resident.
(Paragraph 17, Schedule 4.)
CSOP options cannot be granted over shares in unlisted subsidiaries of listed companies
The March 2010 Budget included an announcement by HMRC (in BN40) that CSOP options can no longer be granted over shares in a company which is under the control of a company:
- Whose shares are listed on a recognised stock exchange; and
- Which is neither a close company, nor a company that would be a close company if UK resident.
HMRC has also published draft legislation to make this change (draft legislation), together with an explanatory note (explanatory note).
This change will be effective for options granted on or after the date of the March 2010 Budget (24 March 2010) (clause 41(4), draft legislation).
Schedule 4 will be amended to reflect the change with effect from 24 September 2010 (clauses 41(1) - 41(3), draft legislation).
The only exception will be if the subsidiary itself also has shares listed on recognised stock exchange, as these shares will continue to satisfy one of the alternative requirements of Schedule 4.
This is an anti-avoidance measure which targets arrangements to grant CSOP options over special shares in unlisted subsidiaries of listed companies, which entitle the holder to an interest only in the growth in value of the company after the date of grant of the option (growth shares). At the time of grant, the growth shares will have a value significantly less than shares in the same company with typical rights, so a greater number of growth shares will fall within the £30,000 per employee CSOP grant limit.
(Paragraphs 18 - 19, explanatory note.)
CSOPs which permit the award of CSOP options over shares in an unlisted subsidiary of a listed company must be amended to comply with the revised Schedule 4 requirements before 24 September 2010. Amendments of this type are expressly defined in the draft legislation as amendments to a "key feature", which will require approval in advance by HMRC. CSOPs which do not comply with the amended Schedule 4 requirements can have their approval withdrawn on or after 24 September 2004.
(Clauses 41(5) - 41(7), draft legislation.)
These amendments expressly apply to replacement options granted in exchange for CSOP options on a corporate takeover. The usual rule is that the grant date of the original CSOP option is taken to be the grant date of a replacement CSOP option in these circumstances. However, this could prevent the new restriction applying to any replacement CSOP option granted from 24 March to 23 September 2010, so for the purposes of the new restriction, a replacement CSOP option will not be deemed to be granted on the grant date of the original option.
(Clause 41(8), draft legislation.)
Comment
It is not surprising that HMRC have targeted arrangements which use growth shares to increase the potential value of CSOP tax relief.
The anti-avoidance measures adopted will affect any listed group with subsidiaries operating very distinct businesses which makes legitimate use of separate CSOPs in each subsidiary, as well as groups using the targeted avoidance arrangements. The anti-avoidance measures also do not prevent the grant of CSOP options over growth shares by independent unlisted companies (although private companies would prefer to use EMI options if they could, and may find it difficult to meet other share capital requirements of the CSOP regime).
Another significant impact of this anti-avoidance measure will be an end to CSOPs in takeover targets retaining their tax advantages following a takeover by a listed company.