Commentary Section 3: Special provision for roll-overs
20.Subsection (1) defines the kind of roll-over to which these special provisions apply. It is an exchange of one option (the “original right”) granted between 6 April 1999 and 19 May 2000, for another option (the “replacement right”). The roll-over can take place at any time, either before or after the enactment of this Act.
21.Subsection (2) covers roll-overs taking place on or before 7 November 2000. In these cases, the new option is treated as if it was received between 6 April 1999 and 19 May 2000 and can be subject to the special charge described in section 2.
22.Subsection (3) deals with roll-overs taking place after 7 November 2000. Here, a notice can be lodged with the Inland Revenue under section 1 in respect of the original option, even though it has been replaced before the giving of the notice.
23.Subsection (4) deals with a liability that might arise when an option is assigned or released and provides the value of the replacement option that is to be used in the test of parity provided in section 2(3).
24.Subsection (5) removes the exemption from Class 1 liability that may arise on the exercise, assignment or release of a replacement right where the original right or a replacement right is replaced by another. The relief is still available on the amount of the gain which is “capped” but this is achieved by charging Class 1 on a lesser amount i.e. only on the proportion of the replacement option that is in excess of parity. The basis of the Class 1 NIC charge on the gain on the replacement right is provided for in subsection (6).
25.Subsection (6) provides the basis of the Class 1 NIC charge on the gain on the replacement right. Class 1 is only applied to the gain on the new option to the extent that it is a right to acquire additional shares. Subsection (10) defines additional shares.
26.Subsection (7) deals with the liability on the amount of any consideration which is in a form other than an option (e.g. cash) and which is given on the assignment or release of an option which is not the original option i.e. on the event of the second or subsequent rollover. The subsection provides that the basis of the value that should be given to the old right (i.e. that being replaced) to be used in the parity tests contained within sections 2(3) and 3(4) is that assessed using the assumptions in subsection (8).
27.Subsection (8) provides that the value of the inherent gain that should be used in the parity test of the old option should be reduced by the amount of the additional shares (i.e. the proportion by value of the option being replaced). This will ensure that any Class 1 NIC taken on the event of the rollover itself (on consideration other than options) is adjusted so that the Class 1 liability on the rollover is preserved.
28.Subsection (9) provides protection against the avoidance of Class 1 NIC which may otherwise be exploited as a result of a rollover and the cap provided by this Act.
29.Subsection (10) defines additional shares as those of the shares obtainable by exercising the replacement option which are equivalent to the excess in market value of the shares obtainable by the exercise of the original option. The measure of additional shares takes account of the match in value of the old option compared to the new, measured at the time of the rollover.
30.Subsection (11) provides the definition of matching value which is referred to in subsection (10) in the definition of additional shares. The values of the options match where the inherent gain of each option is the same at the time immediately after the assignment or release of the old option.
31.Subsection (12) provides for the situation where a replacement option may be exercised bit by bit. Where this occurs that part of the new right which relates to “additional” shares for the purpose of subsection (10) shall be considered to be exercised, assigned or released before the remainder of the option.
32.Subsection (13) provides that where the number of additional shares that are produced by subsection (10) is not a whole number, an apportionment should be used.
33.Subsection (14) ensures that nothing in section 3 will affect the amount of the special contribution payable on an option which was rolled over before 7 November 2000.
34.Subsection (15) provides that where Class 1 contributions have been paid on gains arising before the passing of this Act, the secondary Class 1 contributions may be offset against the special contributions payable and the remaining balance of contributions, if any, refunded.
35.Subsection (16) defines subsequent replacement right.