An option is a right to buy something from someone, usually at a pre-agreed price or one linked to a formula. A pre-emption right is commonly known as a right of first refusal. Often granted to family members or the partners or other principals in a business before outsiders, it is the right to buy something before other parties but not usually at an agreed price (in which case it is an option).
On a sale with a pre-emption right included in favour of the seller, there are or may be two transactions – the actual sale and the creation of the pre-emption right in the seller’s favour.
LBTT arises on the acquisition of an option or on the acquisition of a right of pre-emption in respect of land transactions. The effective date of acquisition of an option or right of pre-emption is when the option or right is acquired. Options fall within LBTT even if the seller can discharge the obligation either by entering into a land transaction or in some other way, such as a payment of money.
Any later exercise of an option or right of pre-emption will give rise to a separate land transaction chargeable to LBTT in its own right. Although the exercise of an option or right to pre-emption is a distinct transaction, it may be linked to the earlier grant of the option or right of pre-emption, not necessarily depending on what the intentions of the buyer and seller were at the time of the transaction. If they are linked, then the consideration is aggregated. This may require two LBTT returns if the effect of the aggregation is to make the grant of an option taxable where it was not previously taxable and no initial LBTT return had been made. Options and pre-emption rights may also be linked to each other as well.
At the time of the acquisition of the option or right, LBTT is charged on the option price at the applicable rate. If and when the option or right is subsequently exercised, LBTT is charged on the consideration plus the option price at the rate applicable to the total consideration/price. At this time, the buyer is given a credit for any LBTT paid at the time of the acquisition of the option or right.
The grant of an option is not the acquisition of a major interest in land. Accordingly the grant of an option is not notifiable unless there is LBTT to pay, or there would be tax to pay but for the availability of a relief.
A worked example on options is provided separately on our website under LBTT Worked Examples.