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HMRC internal manual

VAT Land and Property

Options and rights of pre-emption (Item 1n)

Grants of options and rights of pre-emption

A person who is granted an option to purchase property acquires the right to buy it at a future date for a specified price. That right is an interest in land.

The grant of an option is an exempt supply if the purchase of the property would itself be exempt, if it were made at that time. On the other hand, if the purchase itself would be taxable at the time the option is granted, then the grant of the option is taxable.

The same principle applies to options to acquire leases or rights over, or licences to occupy, land. The liability of the grant of the option is whatever the liability of the grant, let, etc to be acquired, would be at that time.

For example an option granted today, to purchase the freehold interest in a new commercial building for £10 million in 5 years time, would be standard rated. That is because the supply of the freehold interest in the building today would be standard rated, even though the actual supply of the freehold interest in 5 years time, when the option is exercised, might well be exempt.

Rights of pre-emption are treated similarly. These are created when a person is given the right to ‘first refusal’; that is, when the owner of the property decides to dispose of it, he must first offer it to the holder of the right. The main difference between an option to purchase and a right of pre-emption is that the holder of the option can require the property owner to sell the property to him on the due date. The holder of pre-emptive rights can only assert his rights if the owner decides to sell.