Income Tax (Earnings and Pensions) Act 2003 section 485

Application of this Chapter where share option exchanged for another

Section 485 deals with what happens for tax purposes when an employee exchanges one share option for a replacement share option, providing a form of rollover relief so that the swap itself does not trigger an immediate tax charge.

• When an employee swaps a share option for a new one, the exchange is disregarded for tax purposes and the tax rules apply instead to the replacement option — a form of rollover treatment.
• Any cash or other consideration received on the exchange that is not represented by the new option is brought into the gain calculation in the normal way when the replacement option is eventually exercised.
• The section specifies how to work out the consideration for the grant of the new option and extends the rollover treatment to indirect swaps carried out under arrangements, not just straightforward direct exchanges.
• The provision also serves an anti-avoidance purpose by preventing arrangements where a valuable option could be exchanged for one of apparently lower value to generate a small immediate charge, while the replacement option escapes future tax because it was not granted by reason of employment.