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Options And SDLT

Question: I have just entered into an option agreement for the purchase of land. Do I have to pay any Stamp Duty Land Tax?

Many developers are still unsure about the rules concerning Stamp Duty Land Tax (SDLT) and option agreements. It is extremely important to be aware of these rules, as breaches could result in significant penalties and interest charges.

For SDLT purposes, and option agreement is a land transaction and so tax needs to be paid on the date of acquisition of the agreement, as well as on its exercise. When an option is exercised, the resulting land transaction is a ‘linked transaction’ – unless the option agreement’s benefits have already been assigned to an unconnected third party. If it is linked the developer may have to make a further payment of SDLT and file another return when the land is purchased.

For instance, is a developer pays £200,000 for an option to purchase land for £2m it is liable to pay SDLT of £2,000 (1% of £200,000) when the option agreement is acquired and needs to file an appropriate land transaction return.

After completing the purchase, SDLT of £80,000 is payable (4%of £2m) and a further land transaction return must be filed.

Assuming grant and exercise are linked transactions; the developer must then file an additional land transaction return and pay another SDLT for the grant of the option. Accordingly, it must pay £6,000 (4% of £200,000, minus the £2,000 already paid).

As a result, the developer will have paid the same amount of SDLT as it would have done if it had acquired the property for £2.2m (£2,000 + £80,000 + £6,000 = £88,000, which is the same as 4% of £2.2m) although it will have been subject to three separate payments and reporting obligations.

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