As we approach the end of the tax year — and hopefully the start of spring — a lot of people will go into frantic mode as they discover that they may need to do some last minute tax planning. It happens every year. In the next few weeks, expect your local friendly bank and other financial institutions to send you an invitation to invest in their ISA product, and even closer to the deadline, expect to see adverts telling you that you can even apply online.

The things that our respected banks and building society do to get an honest crumb! But one sort of tax planning actually depends on delaying, rather than acting early. This article can be downloaded in pdf format at Academia. Suppose we have an individual, who we shall call Mr Grumpy, and suppose that this august person has a property that he wishes to sell to Mr Needy. The sale is due to take place towards the middle or possibly the end of March.

This makes him grumpy — and he gets grumpier when his tax accountant tells him there is no way he can get out of this. But by some careful tax planning, Mr Grumpy can delay paying until the following year. In both cases, the options have a limited period during which they can be exercised.

We shall look at these in reverse order, beginning with the property sale, as this is the transaction that we — and Mr Grumpy — are most interested in.

For CGT purposes, the disposal of property, or any other capital asset, is taken to be the date of the contract 1. This is the case even if completion takes place at a later date. Note that the granting of the options does not constitute a disposal of the property. A contract of sale can only come into force upon exercise. Until that event occurs, there is no obligation on Mr Grumpy to transfer title and no obligation on Mr Needy to pay the purchase price. It is true that the options do create a contract — but both parties are not binding themselves to a property sale.

Hughes Optioneering

Instead, they are binding themselves to enter into a sale but only if the other party calls upon them to do so. If the options were to expire without being exercised at all, Mr Grumpy would remain the owner of the property and Mr Needy would keep his money — in these circumstances, there could never have been a contract of sale in the first place. However, the granting of the options does constitute a disposal for CGT purposes 2.

The options themselves constitute assets and it is these assets, rather than the property, that are being disposed of. Does this mean there is an additional tax burden? Firstly, when an option is exercised and property is sold, the CGT treatment of the option is simply subsumed under the property sale 3.

In short, the grant of the option together with the sale contract are treated as a single transaction, and the purchase price for the property will include any consideration that was paid under the option contract. Note however, that in our scenario there are two options not one.

Forbidden

It only takes one option to be exercised to bring into force the property sale. What about the other option? For example, on 7 April , Mr Needy writes to Mr Grumpy to tell him he wants to go ahead with the transaction. Technically, there is a disposal, and perversely it falls on Mr Needy who actually granted the option to Mr Grumpy — the person granting the option is the one who has made a disposal.

However, the amount is miniscule provided the options are drafted carefully. It is important to avoid any wording that suggests that each option is granted in consideration for the other. In these circumstances the CGT calculation would have to take account of the option values. This brings a double headache, one of valuation and then a possible substantive tax charge. The CGT calculation will be based on this amount, which is nominal.

The following diagram shows how the tax position is affected by the option arrangements: Hopefully Mr Grumpy will be a little less grumpy on hearing that he can defer his tax bill. On the other hand, some people are never satisfied! Enter your email address to subscribe to this blog and receive notifications of new posts by email. Tax Notes "The hardest thing in the world to understand is the income tax.

How does he do this? Mr Grumpy and Mr Needy enter into an option arrangement whereby: Mr Grumpy — who wants to sell — grants Mr Needy an option to buy the property. Mr Needy — who wants to buy — grants Mr Grumpy an option to sell him the property. CGT analysis There are in fact three CGT events: The granting of the cross options two events ; and The subsequent sale of the property.

How is the property taxed? How are the options taxed? The short answer is no, provided the options are drafted correctly.

Summing up The following diagram shows how the tax position is affected by the option arrangements: The following two tabs change content below. Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics.

Put and call options hmrc

Called to the Bar in , he is the Editor of Tax Notes. Latest posts by Satwaki Chanda see all. Subscribe to Tax Notes Enter your email address to subscribe to this blog and receive notifications of new posts by email. Sticky post Instructions on downloading articles. Related Posts Incorporating a Property Rental Business The Enterprise Investment Scheme and a small trap for Entrepreneurs Summer Budget — Tax relief restricted for residential landlords and other news Rollover Reliefs and the Replacement of Business Assets Part Three — Rolling IP into Shares Rollover Reliefs and the Replacement of Business Assets Part Two — IP Rollovers.

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