SDLTM01300B - Scope: What is chargeable: Options and rights of pre-emption FA03/S46: Example 2

On 1 January 2020, Mr. Smith is granted an option by Mrs. Jones for consideration for £5,000 to buy her house for £250,000 on or before 31 December 2020. The £5,000 is consideration for the right to purchase only and would be in addition to the purchase price of £250,000. Mr. Smith is replacing his main residence and so the higher rates of SDLT for additional properties will not be due.

Mr. Smith subsequently exercises the option and completes the purchase on 1 December 2020.

Although the purchase of the option by Mr. Smith is a land transaction in its own right, it is not regarded to be the acquisition of a major interest in the land. As no part of the consideration is chargeable at a rate of more than 0%, the acquisition of the option is not a notifiable transaction as per FA03/S77(1)(b). A land transaction return is therefore not required at this time. Since the underlying land is residential property, the rates applicable to the option consideration are the rates applicable to residential property and the option is liable to tax under Table A.

The transfer pursuant to the exercise of the option by Mr. Smith on 1 December 2020 constitutes a separate land transaction from the grant of the option. But the two are linked transactions.

Once the option is exercised and the transfer is completed Mr. Smith must lodge two land transaction returns, one for the grant of the option under FA03/S81A and one for the exercise of the option under FA03/S76. Both are for residential property.

The return for the grant of the option will show

  • the £5,000 option fee at question 10 (1.10 online)
  • the £255,000 linked value at question 13 (1.13 online)
  • tax at question 14 (1.14 online)
  • the effective date of this land transaction is the date of grant of the option, however it only requires notification within 14 days of the completion of sale of the house to Mr. Smith. The return should be filed online, but currently there are no fields on the return which suit this scenario. Hence an accompanying letter should be sent to the Stamp Office, providing the relevant UTRN and explaining why there is no late filing charge for the return for the grant of the option.

The return for the transfer pursuant to the exercise of the option will show

  • the £250,000 consideration at question 10 (1.10 online)
  • the £255,000 linked value at question 13 (1.13 online)

The effective date of this second land transaction is the date of completion of the sale of the house to Mr. Smith or, if earlier, the date of substantial performance.

The calculations of SDLT are as follows:

  1. On the grant of the option of 1 January 2020 for £5,000 there is no SDLT.
  2. On completion of the transfer on 1 December 2020 SDLT is due on the further £250,000 paid at the rates applicable on 1 December 2020 calculated as a proportion of the aggregate consideration. SDLT on £255,000 at standard residential rates would be £2,750. The amount due on completion is £250,000/£255,000 x £2,750. This comes to £2,696.
  3. On completion of the transfer SDLT is due on the option fee of £5,000. This is worked out on standard residential rates as £5,000/£255,000 x £2,750. This comes to £54.