Stamp duty on an option to buy commercial property: HMRC’s example
Options can create two SDLT events
HMRC’s 2020 example shows that tax can arise when you buy an option and again when you buy the property.
- The option and the later purchase are separate transactions.
- They may be linked, so their values are combined for calculation.
- A later purchase may require a further return and extra tax for the option.
Scroll down for the full analysis.
Read the original guidance here:
Stamp duty on an option to buy commercial property: HMRC’s example
Stamp duty on an option to buy commercial property: HMRC’s example
Buying an option to buy a building can trigger stamp duty before you own the building. If you later use the option, the option fee and sale price may be linked. That can mean more SDLT on the earlier fee as well as tax on the purchase.
What this rule is about
An option gives you a right to buy land later. For this example, a company pays £250,000 for a right that permits it to buy an office block later, for a further £3,000,000.
You might think tax starts only when the office block changes hands. It does not.
Under the law, the option and the later purchase are two separate land transactions. Section 46 also says that they may be linked. That distinction matters because linked transactions use the combined amount when working out the tax.
What the official source says
HMRC’s manual gives a dated example. On 1 January 2020, P Limited receives an option from V Limited, pays £250,000 for that right alone, and can buy the office block by 31 December 2020 for another £3,000,000. That is HMRC’s arrangement.
- An option is a land transaction in its own right.
- Its effective date is 1 January 2020, when P acquires it.
- Because the land is non-residential, HMRC applies the non-residential rates to the option.
- For this 2020 example, P must make a return for the option within 14 days of that effective date, even though it has not yet bought the office block.
- P then exercises the option and completes the office-block purchase on 1 December 2020.
- Although the purchase is separate from the option, HMRC treats both steps as linked once P exercises the option and completes the office-block purchase.
HMRC says that the return for the office-block transfer should show £3,000,000 as the amount paid for that transfer, rather than including the earlier option fee in that entry. That is the stated amount. It should also show a linked transaction value of £3,250,000. That total combines the option fee and the later sale price.
According to the manual, the date for the purchase is completion, unless substantial performance happened earlier. Broadly, substantial performance can arise where the buyer takes possession or pays almost all the price before completion.
What this means in practice
There are two tax events, not one. First, there is the option fee. Later, there is the property purchase. As a result, the second event can alter the final SDLT due on the first.
This is the part people can miss: paying SDLT on the option fee does not necessarily settle the tax on that fee forever. When a linked purchase occurs, combining its value with the option fee can move part of that fee into a higher tax band for SDLT purposes. That can matter.
- Keep the option fee separate from the price paid for the building.
- Record the date you receive the option, not just its exercise date.
- Check whether the fee is truly payment for the option only.
- Tell the person completing the SDLT return about both payments.
- Use the combined figure when checking linked-transaction calculations.
- Keep the reference for the return made for the option.
Section 81A deals with the next step. Where the later linked purchase means extra tax is due on the earlier option, a further return for that option is required. Using the effective date of the earlier option, the extra tax is worked out.
HMRC’s manual says that this further return should be made by letter to the Stamp Office and should, where possible, quote the original return number. That is HMRC’s administrative guidance rather than a rule set by section 81A.
How to analyse it
Start with the documents and dates. Do not begin with the final purchase price alone. The answer may turn on the fee, the agreement’s wording and when each step happened.
- Is there an option that binds the grantor to enter the proposed land deal?
- When did the buyer acquire that option?
- What did the buyer pay for it?
- Was that payment additional to the later property price?
- Did the buyer later exercise the option and buy the property?
- Do the option and purchase form one scheme, arrangement or series between the relevant parties?
- What was the effective date of each step?
- Did possession or payment bring the purchase date forward through substantial performance?
- Is extra tax now due on the earlier option?
Then calculate each part. For linked transactions, section 55 uses the total amount paid across the linked steps. It then allocates the resulting tax between them by reference to each step’s share of that total.
Example
Here is HMRC’s 2020 illustration. P Limited pays £250,000 on 1 January 2020 for an option over an office block. It later pays £3,000,000 and completes the purchase on 1 December 2020. The total is £3,250,000.
At the rates used in HMRC’s example, SDLT on the £250,000 option fee is initially £2,000. SDLT on the combined £3,250,000 is £152,000. The £3,000,000 purchase share is £3,000,000 divided by £3,250,000, multiplied by £152,000: £140,308.
The option-fee share is £250,000 divided by £3,250,000, multiplied by £152,000: £11,692. Since £2,000 was already paid on the option, the further amount due for it is £9,692.
Those figures are historic. They show the method, not today’s rates.
Why this can be difficult in practice
Labels do not decide the issue. Calling a payment a deposit, reservation fee or option fee does not settle what it pays for. The agreements and the commercial facts matter.
Nor does a later sale automatically link every earlier agreement. To apply the legal test, ask whether the steps form one scheme, arrangement or series involving the same parties, or connected parties, in light of the whole arrangement. That can need a close look at the documents.
- An option fee may be refundable, credited against the price, or paid for more than one thing.
- The actual date of substantial performance may differ from the completion date.
- The return for the property and the further return for the option are different tasks.
- The £2,000, £140,308 and £9,692 figures are specific to HMRC’s 2020 facts and rates.
Key takeaways
- An option can trigger SDLT before you buy the land.
- Using the option can create extra SDLT on its earlier fee.
- For linked steps, check both the total paid and both effective dates.
Technical analysis
For advisers, and for anyone who wants to check the law behind this page. You do not need this section to understand the guidance above.
Legislation
- FA 2003 section 42 — the charge to stamp duty land tax
- FA 2003 section 43 — what counts as a land transaction
- FA 2003 section 44 — when a contract is substantially performed
- FA 2003 section 46 — options as separate land transactions
- FA 2003 section 50 — rules for amounts paid in a transaction
- FA 2003 Schedule 4 para 1 — payments that count for SDLT
- FA 2003 section 55 — calculating SDLT on linked transactions
- FA 2003 section 76 — deadline for a land transaction return
- FA 2003 section 77 — which land transactions must be notified
- FA 2003 section 81A — further returns after later linked transactions
- FA 2003 section 108 — when transactions are linked
- FA 2003 section 119 — the effective date of a transaction
Official guidance
The pages below are HMRC’s guidance. Guidance is not law. It sets out how HMRC reads the legislation, and it is not binding on you, on a tribunal or on a court. Where guidance and the legislation differ, the legislation wins. HMRC can also change or withdraw guidance, and it may not cover your facts.
Where this is not settled
- Whether an agreement is an option within section 46 can depend on its precise wording and what it requires the grantor to do.
- Whether separate steps are linked depends on the full arrangement and the parties involved.
- HMRC’s manual says that the further return should be sent by letter to the Stamp Office. That is an administrative instruction in the manual, so the current submission method should be checked.
Evidence you would need
This kind of case is decided on the facts of the individual property. These are the records that usually settle it, and the ones an adviser would ask you for.
- The signed option agreement and any variations
- Evidence of the option fee and whether it is refundable
- The sale contract and completion statement
- Dates of grant, exercise, substantial performance and completion
- Details of the parties and any connection between them
- The original SDLT return reference and payment record
Explore this with an AI
Readers often want to test their own situation. Copy the prompt below into ChatGPT, Claude or Gemini. It hands the model the actual legislation for this page rather than letting it answer from memory, and tells it to be explicit about what is uncertain. What comes back is information, not advice – check it against the links above.
I am researching UK Stamp Duty Land Tax (SDLT), which applies in England and Northern Ireland. MY QUESTION Stamp duty on an option to buy commercial property: HMRC’s example [Replace this with your own situation: what you are buying, the price, the dates, who the buyer is, and what you plan to do with the property.] THE LAW THIS TURNS ON - FA 2003 section 42 - the charge to stamp duty land tax https://www.legislation.gov.uk/ukpga/2003/14/section/42/2025-11-17 - FA 2003 section 43 - what counts as a land transaction https://www.legislation.gov.uk/ukpga/2003/14/section/43/2025-11-17 - FA 2003 section 44 - when a contract is substantially performed https://www.legislation.gov.uk/ukpga/2003/14/section/44/2025-11-17 - FA 2003 section 46 - options as separate land transactions https://www.legislation.gov.uk/ukpga/2003/14/section/46/2025-11-17 - FA 2003 section 50 - rules for amounts paid in a transaction https://www.legislation.gov.uk/ukpga/2003/14/section/50/2025-11-17 - FA 2003 Schedule 4 para 1 - payments that count for SDLT https://www.legislation.gov.uk/ukpga/2003/14/schedule/4/paragraph/1/2025-11-17 - FA 2003 section 55 - calculating SDLT on linked transactions https://www.legislation.gov.uk/ukpga/2003/14/section/55/2025-11-17 - FA 2003 section 76 - deadline for a land transaction return https://www.legislation.gov.uk/ukpga/2003/14/section/76/2025-11-17 - FA 2003 section 77 - which land transactions must be notified https://www.legislation.gov.uk/ukpga/2003/14/section/77/2025-11-17 - FA 2003 section 81A - further returns after later linked transactions https://www.legislation.gov.uk/ukpga/2003/14/section/81A/2025-11-17 - FA 2003 section 108 - when transactions are linked https://www.legislation.gov.uk/ukpga/2003/14/section/108/2025-11-17 - FA 2003 section 119 - the effective date of a transaction https://www.legislation.gov.uk/ukpga/2003/14/section/119/2025-11-17 Guidance page from HMRC on this topic (guidance, not law): https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm01300a HOW I WANT YOU TO ANSWER 1. Work from the legislation above. Read it before answering. Guidance from HMRC is its view of the law, not the law, and does not bind a tribunal or a court. 2. Tell me what the rule actually requires, in plain English. 3. Tell me which facts decide the answer, and which facts would change it. 4. Tell me what evidence I would need to support the position. 5. Be explicit about anything unsettled or fact-sensitive. Do not guess. 6. Your training data has a cutoff and SDLT rates and reliefs change at fiscal events. Say so if you are not sure the law is current. POINTS ALREADY KNOWN TO BE UNCERTAIN ON THIS TOPIC - Whether an agreement is an option within section 46 can depend on its precise wording and what it requires the grantor to do. - Whether separate steps are linked depends on the full arrangement and the parties involved. - HMRC's manual says that the further return should be sent by letter to the Stamp Office. That is an administrative instruction in the manual, so the current submission method should be checked. Do not give me a conclusion you cannot support from the provisions above.
Legislation links show Finance Act 2003 as it stood on 2025-11-17. The law may have changed since, and the rules that apply are those in force on the date of your transaction. The official guidance this page is based on is here.
This page was last updated on 1 September 2026
Useful article? You may find it helpful to read the original guidance here: Stamp duty on an option to buy commercial property: HMRC’s example
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