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.
Worked example
Options and rights of pre-emption
This worked example applies the LBTT rates and bands for residential transactions with an effective date prior to 15 July 2020 or after 31 March 2021 and the amount of tax shown is for illustrative purposes only.
On 2 April, A is granted an option by B to buy a house on or before 31 December. A paid B for the grant of the option.
The acquisition of the option by A is a land transaction in its own right. A may:
- have to make a LBTT return to us in relation to the option depending on what was paid for it (because the acquisition of an option is not a major interest in land, it is a notifiable transaction if the chargeable consideration of the acquisition exceeds the nil rate tax band of £145,000); and
- may be liable to pay LBTT (again, if the chargeable consideration is above the nil rate tax band).
A subsequently exercises the option on 1 December.
The exercise of the option by A constitutes a separate land transaction from the grant of the option. The effective date of that land transaction is the date of completion of the sale of the house to A or, if earlier, the date of substantial performance.
If the chargeable consideration is above £40,000, A must make a LBTT return to us in relation to the purchase of the house.
A LBTT return (or further return) is also required in respect of the option, which is linked to the purchase since the buyer and the seller, in relation to both the option and the purchase, are the same.
The final amount of tax payable by A in respect of both the grant of the option and the purchase of the house will be determined by the total consideration given for both the grant of the option and the purchase of the house.
Ref ID
LBTT1007
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