L-Day: getting CSOP and EMI options PISCES ready

Any amendment to a fundamental term of a CSOP or EMI option that creates more than a very minor improvement to the option holder’s rights is treated as cancelling the original option and granting a replacement option. For these purposes, the ‘fundamental terms’ of an option include when an option can be exercised.

Adding a PISCES trading event to any existing vesting triggers (e.g. a sale or listing), which allow existing CSOP or EMI options to be exercised, could therefore result in those options being replaced with new options that have reduced, or in practical terms no, EMI tax advantages, or a complete loss of CSOP tax advantages. This could also be the outcome if, instead of amending their terms, the Board were to use a broad discretionary power in the plan rules to allow CSOP or EMI options to be exercised on a PISCES trading event.

However, draft legislation published on L-Day will, if enacted in its current form, allow existing CSOP and EMI options to be varied such that they vest and become exercisable when the company’s shares are, or are to be, traded on a PISCES platform, provided that:

• The option was granted on or before the date of Royal Assent to Finance Bill 2025-26;
• The option is varied on or after 15 May 2025 such that it becomes exercisable in whole or in part if the shares under option are or become PISCES shares; and
• All the shares acquired on exercise of that option are immediately sold on a PISCES platform (rather than retained).

This variation to the terms of an existing CSOP or EMI option must be made by written agreement with the option holder or, alternatively, notified to the option holder in writing.

As this legislation will have retrospective effect once enacted, HMRC will use their care and management powers not to collect tax in respect of CSOP or EMI options that are amended on this basis and exercised prior to Royal Assent to Finance Bill 2025-26.

Whilst this legislation is currently in draft, and may be amended prior to being enacted, it appears unlikely that any amendments would result in less favourable tax treatment than is currently indicated. However, companies should keep in mind that these draft provisions remain subject to change.

Companies with CSOP and/or EMI plans should consider whether it would be commercially appropriate to allow the exercise of CSOP or EMI options if their shares are admitted to trading on a PISCES platform. This might be the case in relation to existing options if, for example, a full exit or listing, envisaged when the option was granted, now appears less likely, but it is considered important to let employees realise some or all of the value in their award so that the options continue to act as an effective incentive.

If so, the company should confirm the procedure for amending existing CSOP or EMI options with reference to the relevant plan rules and option agreements. Unless the plan rules and option agreements allow the grantor (e.g. the company or the trustee of an Employee Benefit Trust) to vary the relevant terms of existing options unilaterally, the time necessary to obtain written agreement to the variation from option holders should be factored into the timeline for ensuring those options are amended prior to the relevant PISCES trading event.

If companies wish any CSOP or EMI options that are granted after Royal Assent to Finance Bill 2025-26 to become exercisable on a PISCES trading event, the relevant plan rules will need to be amended as appropriate. 

Companies in the process of implementing a new CSOP or EMI plan should also consider whether the company’s shares being admitted to a PISCES trading platform should be a vesting event from the start.

More broadly, and regardless of what decision they reach on whether PISCES should impact their employee share options, companies should consider reviewing their CSOP and EMI plans to confirm whether they will deliver the expected tax advantages for employees and the company. For example, as noted above, allowing the exercise of a CSOP or EMI option using a broad Board discretion can, in certain circumstances, result in a loss of tax advantages; and certain ‘disqualifying events’ can reduce or remove EMI tax reliefs.

We have extensive experience assisting companies to design, implement and operate tax-advantaged and other employee share plans and incentives. Please contact the authors, or your usual KPMG contact, to discuss how we could support you to optimise your CSOP or EMI plan in light of these changes.

For further information please contact:

• Chris Barnes
• Jo Brien