ERSM30506 | Restricted securities: exchange of restricted securities on or after 17 July 2014 - application of the chapter 2 charging provisions

See ERSM30400 for the general rules on the calculation of the Chapter 2 charge and explanations of the terms used below.

Old securities exchanged for new securities only

If restricted securities (the old securities) are disposed of for consideration which consists wholly of other restricted securities (the new securities) and the unrestricted market value of the new securities is not more than the unrestricted market value of the old securities, then

• neither the disposal of the old securities nor the acquisition of the new securities gives rise to any liability to income tax;

• the disposal is not a chargeable event for Chapter 2 purposes; and

• Chapter 2 applies to the new securities as it applies to the old securities, subject to various conditions set out below.

This is widely referred to as qualifying for ‘rollover relief’.

Old securities exchanged for new securities and other consideration

If restricted securities (the old securities) are disposed of for consideration which consists of other restricted securities (the new securities) and other consideration (such as cash) and the unrestricted market value of the new securities plus the value of the other consideration is not more than the unrestricted market value of the old securities, then the disposal is treated for Chapter 2 purposes as two separate disposals, being

• a disposal for Chapter 2 purposes (so a chargeable event within ITEPA03/S427(3)(c)) of the appropriate number of the old securities for the part of the consideration that is not the new securities; and

• a disposal of the remaining old securities for consideration which consists wholly of the new securities. (The disposal of the remaining old securities will therefore qualify for the treatment outlined in the preceding paragraph, relating to old securities exchanged for new securities only.)

The appropriate number of the old securities is

OS x (OC/TC)

Where OS is the total number of old securities, OC is the value of the consideration which is not the new securities and TC is the value of the total consideration (i.e. the securities and other consideration), taking the value of the new securities as their unrestricted market value.

Where the unrestricted market value of the new securities plus the value of any other consideration is more than the unrestricted market value of the old securities, then the provisions of ITEPA03/S430A do not apply.

Application of the Chapter 2 charging provisions to the new securities

Sections 425 and 431 do not apply to the new securities: they are subject to the elections made in respect of the original securities, if any. Elections under those sections cannot therefore be made in respect of the new securities.

If at the time of the disposal of the old securities, sections 426 to 429 do not apply to them, because of an election under section 430(1), section 431(1) or by virtue of s430A(7), then sections 426 to 430 do not apply to the new securities. Sections 426 to 429 will not apply to the old securities by virtue of ITEPA03/S430A(7) in the case of a second or subsequent exchange of securities which is within section 430A.

If there is a chargeable event in relation to the new securities:

IUP is equal to what IUP was in relation to chargeable events relating to the old securities before the disposal, or what IUP would have been if there had been any such chargeable events.

PCP is as determined by ITEPA03/S428(4) plus what PCP would have been in relation to the old securities if there had been a chargeable event immediately before the exchange but after any actual chargeable events.