Purchasing option agreements can make the payment of stamp duty more confusing and it can be difficult to tell if you could be due a stamp duty land tax rebate. Here we will discuss what an option agreement is and what this means for tax purposes once an agreement has been activated.

option agreement

What Is An Option Agreement?

An option agreement is a contract between an owner of a property and a potential buyer. This agreement gives the buyer a right to serve notice to the seller to sell the property at an agreed price or the market value. Usually, the buyer will pay the seller a fee for entering into an option agreement.

Having an option agreement in place prevents the landowner from selling a property while a developer is exploring the property’s potential.The developer would usually use the option agreement period to promote the land and apply for planning permission. The option agreement can sometimes limit the circumstances in which a developer can exercise their option.

Option agreements last 3-5 years meaning that the prevention of sale can be quite lengthy and an agreement will typically include the right to extend the period of time in which the property cannot be sold.

An option agreement can also be referred to as a ‘pre-emption right’ or more commonly known as a ‘right of first refusal.’

Is Stamp Duty Payable On An Option Agreement?

An option agreement is classed as a land transaction and so a charge of stamp duty land tax will be payable. The sale or surrender of an agreement will also mean that stamp duty land tax is payable. If an option agreement is extended and the lease is granted stamp duty land tax will be considered to be payable as of that time and not before.

HMRC doesn’t consider a reservation or deposit as an option agreement and although payment of a deposit is an interest in land it  doesn’t count as a ‘major interest.’

Stamp duty land tax option agreement payments may be due on both the grant of the option and the actual acquisition of the land itself.

Linked Transactions Of Stamp Duty Land Tax Option Agreements Payment

If an option agreement is exercised at a later date this will give rise to a separate stamp duty land tax charge however, it will usually be linked to the earlier option agreements and the stamp duty payments that were made at that time.

There are few circumstances where the exercise of an option agreement is not classed as a linked transaction for example, where the option agreement has been assigned and is exercised by someone who isn’t connected to the original grant.

Option Agreement Stamp Duty Considerations

At the time the option agreement was acquired, stamp duty land tax was due on the option price at the rates of the land in question. 

If the option agreement is exercised then stamp duty land tax is due on the acquisition of the option agreement as a proportion of the stamp duty land tax due in total on the option price calculated at the time. 

At this time any stamp duty land tax paid on the acquisition of the option agreement will be taken into account when figuring out the tax due on the property or land.

How Can CapEx Tax Help?

If you have entered into an option agreement either as a land owner or a buyer then contact our tax specialists today who will be able to assess your situation and investigate whether you are due a stamp duty land tax refund. If you are then we can walk you through the process and help you to ensure that your refund application is as accurate as possible to ensure fast processing of your application via HMRC.