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Income Tax (Earnings and Pensions) Act 2003

Section 485: Application of this Chapter where share option exchanged for another

1996.This section derives from what is probably the most complex part of the source legislation. Section 136(1) to (3) of ICTA are concerned with creating a form of rollover treatment which applies when a right to acquire shares is effectively swapped for another such right. The effect is to ignore the swap for section 135 purposes and apply the Chapter to the replacement option. Any consideration received which is not represented by the new option is taken into account in calculating the gain in the normal way.

1997.The prevention of the early crystallisation of the charge in the case of a straightforward exchange also has an anti-avoidance effect. In the absence of the provision it could be arranged that a valuable option is exchanged for an option with an apparently lower value (thus generating an immediate, but low tax charge), and there would be no charge on exercise because the new option would not have been issued by reason of employment, but to the employee as option-holder.

1998.Section 136(1) of ICTA is not easy to follow partly because it says that the cost of the new option excludes some things, but includes others; and partly because those rules are in the same long sentence detailing other rules not concerned with working out the allowable cost of the new option. These ideas have been separated and in order to make the provision easier to use subsection (4) specifies what is in fact the consideration for the grant of the new option. Subsections (5) and (6) extend the rollover treatment to cases where the swap is achieved indirectly under arrangements described in section 136(2) and (3) of ICTA.

1999.It may be noted that section 136(2)(b) of ICTA refers to tax “chargeable under this section”. This makes no sense because tax is not chargeable under section 136, but under section 135 of ICTA. The problem stems from consolidation. Previously section 136(2) was part of the same section as section 135. When that section (section 186 of ICTA 1970) was split in two on consolidation the relevant amendment to section 136(2)(b) was missed. This error has been corrected in section 485(5)(b). See Change 125 in Annex 1.

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