SDLTM01300 - Scope: What is chargeable: Options and rights of pre-emption FA03/S46

An option to buy land is a binding right granted by a landowner in exchange for a fee giving a prospective buyer an entitlement to purchase up until a specified date.

Pre-emption rights are commonly known as rights of first refusal. In exchange for a fee, a pre-emption right might be granted by a landowner that prevents or restricts the landowner from entering into a land transaction with parties other than those to whom the right is granted.

HMRC do not consider that a reservation deposit or similar payment is an option or right of pre-emption.

Both options and pre-emption rights are interests in land, but do not count as “major interests”.

The acquisition of an option and the acquisition of a right of pre-emption are land transactions and a charge to Stamp Duty Land Tax (SDLT) can arise. The sale, variation or surrender of an option or pre-emption right constitute the acquisition of a chargeable interest so can also be chargeable to SDLT.

By virtue of FA03/S55(1) & (4) and FA03/S116(1), the nature of the option or right of pre-emption as residential, mixed or non-residential property follows the nature of the underlying property over which the option or right of pre-emption is acquired.

Any later exercise of an option or right to pre-emption will give rise to a separate land transaction chargeable to SDLT in its own right. Although the exercise is a distinct transaction it will usually be linked to the earlier grant of the option or right of pre-emption. There are examples of this at SDLTM01300A and SDLM01300B.

There will be some circumstances where the exercise of the option is not linked to the grant, for instance where the option has been assigned and is exercised by someone not party to or connected to a party to the original grant.

Options fall within the charge to SDLT even if the grantor can discharge his obligation either by entering into a land transaction or in some other way, e.g. payment of money.

At the time of the acquisition of the option or right SDLT is due on the option price at the rates applicable to the land over which the option is granted. If the option is exercised then, assuming the grant and exercise are linked transactions, SDLT is due on:

  1. the consideration for the acquisition of the option, as a proportion of the SDLT which would be due on the total consideration given for the exercise plus the option price calculated at the rates applicable at the time of grant. At this time, any SDLT paid, on the acquisition of the option or right, will be taken into account in determining the tax due.
  2. the consideration for the exercise of the option as a proportion of the SDLT which would be due on the total consideration given for the exercise plus the option price calculated at the rates applicable at the time of the exercise.

The examples on the next two pages provide clarification of the method above.

Because the grant of an option is the acquisition of a chargeable interest other than a major interest in land (FA03/S77(1)(b)), it is not notifiable unless there is stamp duty land tax to pay, or there would be tax to pay but for the availability of a relief.

However, the fact that the grant of an option is linked with its exercise will often mean that by virtue of FA03/S81A the grant becomes notifiable or the original return will need amendment when the option is exercised.