HMRC SDLT: Understanding SDLT on Options and Rights of Pre-emption: Example with Mr. Smith
SDLTM01300B – Scope: What is chargeable: Options and rights of pre-emption FA03/S46: Example 2
This page explains the tax implications of an option to purchase property. Mr. Smith paid £5,000 for an option to buy Mrs. Jones’s house for £250,000. The option and subsequent purchase are treated as separate land transactions. The option is not a major interest, so no initial tax return is needed. Upon exercising the option, Mr. Smith must file two land transaction returns, with specific considerations for SDLT calculations.
- Mr. Smith paid £5,000 for an option to buy a house for £250,000.
- The option is a separate land transaction but not a major interest.
- No initial land transaction return is required for the option.
- Upon exercising the option, two land transaction returns are needed.
- SDLT on the £255,000 total is calculated at standard residential rates.
- SDLT due on completion is £2,696 for the purchase and £54 for the option fee.
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Read the original guidance here:
HMRC SDLT: Understanding SDLT on Options and Rights of Pre-emption: Example with Mr. Smith
Understanding SDLT on Options and Rights of Pre-emption
Introduction to SDLT
Stamp Duty Land Tax (SDLT) is a tax paid on property purchases in England and Northern Ireland. This guidance explains how SDLT applies when a buyer is granted an option to purchase property, as well as the responsibilities that come with this transaction.
Key Terms
– Option: A legal agreement granting the right to purchase a property at a set price within a specific timeframe.
– Consideration: The payment made for the option or the property itself.
– Linkage: When two or more transactions are connected in such a way that they must be considered together for tax purposes.
Example Scenario
Let’s walk through a practical example involving Mr. Smith and Mrs. Jones to clarify how SDLT applies in this context.
Background of the Transaction
On 1 January 2020, Mr. Smith pays £5,000 to Mrs. Jones for an option to buy her house at the price of £250,000. This option must be exercised by 31 December 2020. It’s important to note that the £5,000 is solely for the right to purchase the property and will be paid in addition to the £250,000 purchase price. Since Mr. Smith is selling his current home to buy this new one, he will not have to pay the higher rates of SDLT that generally apply to additional properties.
Exercising the Option
Mr. Smith decides to use his option and completes the purchase on 1 December 2020.
Land Transactions Explained
Two Separate Transactions
While the purchase of the option is a land transaction on its own, it does not count as acquiring a major interest in the property. Because no part of the payment exceeds 0% in SDLT terms, the acquisition of the option does not need to be reported according to FA03/S77(1)(b). Therefore, Mr. Smith does not need to complete a land transaction return at this stage.
When Mr. Smith exercises the option and finalises the purchase of the house, this action is regarded as an entirely different land transaction. However, as they are connected, both must be accounted for.
Filing Land Transaction Returns
Once Mr. Smith exercises his option and the transfer is completed, he is responsible for submitting two distinct land transaction returns:
1. Return for the Grant of the Option
2. Return for the Exercise of the Option
Details for the Return for the Grant of the Option
When Mr. Smith fills out the return for granting the option, he will need to include the following information:
– The £5,000 option fee should be noted at question 10 (this is where the consideration is captured).
– The overall linked price of £255,000 (this includes both the option fee and the purchase price) is recorded at question 13.
– The SDLT applicable appears at question 14.
The effective date for this land transaction is when the option is granted, which is 1 January 2020. However, Mr. Smith only has to report this within 14 days after the transfer of the house is complete.
At the moment, there are no specific fields in the online return that accommodates this scenario. Therefore, Mr. Smith also needs to send a covering letter to the Stamp Office, providing the Unique Transaction Reference Number (UTRN) and explaining why there is no late filing charge for the return regarding the grant of the option.
Details for the Return for the Exercise of the Option
For the return that covers the exercise of the option, Mr. Smith has to provide the following:
– The £250,000 consideration is shown at question 10.
– The total linked value of £255,000 appears again at question 13.
The effective date for this second transaction is based on when Mr. Smith finalises the sale, which is 1 December 2020, or the earlier date if he has already significantly completed the transaction.
Calculating SDLT
Initial Assessment for the Grant of the Option
– For the option granted on 1 January 2020 for £5,000, no SDLT is applicable. This is because it falls within the 0% chargeable rate category.
Assessment for the Completion of the Transfer
– When the transfer completes on 1 December 2020, SDLT does need to be paid on the £250,000 amount. This will be assessed according to the residential SDLT rates in force at that time, taking into account both the option fee and the house purchase.
– SDLT on the total linked value of £255,000 at the standard residential rates amounts to £2,750. The amount due at completion is then calculated as follows:
– £250,000 divided by £255,000, multiplied by £2,750, totals £2,696.
SDLT Due on the Option Fee
– SDLT is also due on the £5,000 option fee. This is calculated using the same residential rate:
– £5,000 divided by £255,000, multiplied by £2,750, which gives £54.
Final Thoughts on Compliance
Property buyers must be aware of their SDLT obligations when they are granted options to purchase. Each stage of the transaction requires proper reporting to ensure compliance with tax laws. In Mr. Smith’s case, he must submit returns for both the granting and exercise of the option, accompanied by any necessary explanations or letters when the forms do not fit the standard procedures.
By understanding how SDLT applies to options and the responsibilities associated with them, property buyers can navigate their purchases without incurring unnecessary complications with tax authorities.
Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: Understanding SDLT on Options and Rights of Pre-emption: Example with Mr. Smith
