In property transactions, an option agreement will sometimes be made between an individual property seller and a prospective buyer.
You have the Option…
An option is broadly a legal agreement for an offer to be kept open for a specified period. For example, an individual might agree to keep an option open for the buyer to purchase a property. During the specified period, the buyer can decide whether to proceed with the property purchase. If they choose not to, the offer lapses; but if they exercise the option, the contract becomes binding.
For tax purposes, an option is an asset for capital gains tax (CGT) purposes. For options over property, the grant of an option to acquire the property is generally treated as the disposal of a separate asset (i.e., the option) by the individual selling the property. Thus, a chargeable gain can arise. This treatment as a separate asset broadly applies unless the option is exercised, such that the whole proceeds are chargeable as a gain (TCGA 1992, s 144). Thus, if the property option is exercised, the grant of the option and the sale of the property are treated as a single transaction. The individual’s disposal proceeds are the amount received for the grant of the option and the sale proceeds for the property. Consequently, the grant of the option ceases to be a chargeable occasion, and any tax charged on the grant should be offset or reclaimed.
An Option…Or is it?
As the grant of an option can trigger a CGT charge, it is important that any documentation dealing with the property transaction is crystal clear about whether a transaction constitutes an option, or is something else (e.g., a loan agreement). For example, in Krishnamohan & Anor v Revenue and Customs [2024] UKFTT 346 (TC), the first taxpayer (MK) identified a property (CSF) costing £5.8m. A deposit of £600,000 was required. However, the high street banks would not lend. In November 2013, the taxpayers entered into an ‘option agreement’ with a company (SD) that provided short-term loans. A dispute arose between the taxpayers and HM Revenue and Customs (HMRC) over whether the effect was that the taxpayers granted an option to SD (such that the grant of the option was an asset disposal, and a chargeable gain would arise). The taxpayers argued that the documentation was for a loan, with the taxpayers giving security. HMRC took an opposing view.
In allowing the taxpayers’ appeal, the First-tier Tribunal concluded there was no grant of an option by the taxpayers. This accorded with a ‘common sense’ view of the matter. The taxpayers received £600,000 in return for binding themselves either to pay £708,000 within a year, or grant an option that SD could buy properties owned by the taxpayers with equity of approximately £1.9m for £600,000 plus the amounts outstanding on the mortgages. The taxpayers would not conventionally have ‘gained’ anything either way. The best-case scenario for the taxpayers was that the price to them of having £600,000 available in November 2013 would be £708,000 in November 2014, a loss of £108,000.
Practical Tip
An option is only binding (under English law) if acquired under a contract for consideration, or if granted in a deed. Whether the agreement is an option or something else, make sure that the documentation properly reflects the parties’ intentions.