Apple - How does the iPhone Upgrade Program work?
Option 2 in your question is the correct one. In the "Getting the latest iPhone has never been easier" section of the upgrade program site you posted it says you have to pay 11 monthly payments (you might as well think of it as 12 months because the upfront payment is in essence your first month). So when you have paid the monthly installment 11 times, you have 2 options:
- Turn in the phone for an upgrade while restarting both timers (the 11 monthly payments + 1st down payment and the 20 month full contract).
- Continue paying for the phone until the 20 month contract is done and the phone is 100% yours.
The important thing here is that you are never paying for your old phone once you upgrade it.
One thing to note about whether option 1 or 2 is correct for your initial question, you can only have one iPhone Upgrade Program running at a time under your name. You could never be in the situation described in option 1. In order to not return the old device (iPhone 7), you would have to pay off the remaining balance due on it in order to start a new program (loan) for iPhone 7s/8/10th Anniversary Gold-Plated "Yeah, Sure, Now You Think Dumping the Headphone Jack is a Great Idea Since All the Android Devices Have Done It" Edition.
To answer your related question, you can sell your iPhone to Apple for "up to" £240. You are likely to get more for it elsewhere, though, and selling your current iPhone (which you did not buy under the Upgrade Program) is not required to purchase a phone with the Upgrade Program.
Once you are in the program, though, if you wish to upgrade at this time next year with a new installment plan, you will be required to return the phone you get this month or pay off the remaining balance on it (~8 months of payments) in order to do so.