A landowner sitting on a site with development potential rarely just sells it outright. More often a developer or promoter wants to lock in the land, take on the planning risk, and only complete once (or if) consent is granted. Two structures do that job — the option agreement and the promotion agreement — and they are taxed differently enough that picking the wrong one, or misreading the timing of the right one, can move a six-figure tax bill forward by years.
Two routes to the same outcome
Under an option agreement, the developer pays the landowner for the right — not the obligation — to buy the land at an agreed price or formula, usually exercisable once planning permission is granted. The developer runs the planning application and carries that risk; if planning fails, the option simply lapses.
Under a promotion agreement, a promoter funds and manages the planning process on the landowner's behalf, then markets the land to the open market once consent is secured, taking a percentage of the sale price — typically in the range of 15% to 25% — as its fee. The landowner keeps the upside of an open-market sale rather than being locked into selling to the promoter itself.
Both structures let a landowner realise development value without funding planning costs upfront. The tax treatment of each, though, is genuinely different, and worth understanding before either document is signed.
Option agreements: the CGT timing trap
The premium a landowner receives for granting an option is a chargeable event for Capital Gains Tax in its own right, not just a deposit against a future sale. That has a real consequence: if the option later lapses without being exercised — because planning fails, or the developer simply walks away — the premium remains taxable as a standalone gain at the point it was received, even though no land ever changed hands.
If the option is exercised and the land does sell, the grant of the option and the eventual sale are treated together as a single transaction for CGT purposes. The premium is added to the sale proceeds, allowable costs are deducted once, and the gain is computed on the combined figure rather than taxed twice. The practical planning point is timing: because the gain crystallises on completion of the sale (or on the earlier lapse), when that falls relative to the tax year end, any Business Asset Disposal Relief position, and the landowner's other gains in the year all matter, and are worth modelling before the option is granted rather than after.
SDLT: usually deferred, sometimes accelerated
For the developer, SDLT is normally triggered when the option is exercised and the land is actually conveyed, calculated on the combined total of the option premium and the purchase price paid on completion. Granting the option itself is not usually an SDLT event for the developer.
The trap sits in substantial performance. If the developer pays over a substantial part of the price, or takes possession of the site to start groundworks or demolition before legal completion, HMRC can treat the transaction as substantially performed early — bringing forward the SDLT filing and payment deadline to that point rather than the eventual completion date. Developers keen to get onto site under an option, and landowners agreeing to early access clauses, should have this flagged in the drafting rather than discovered after the event. See our guide to SDLT for property developers for how substantial performance interacts with linked transactions more generally.
Promotion agreements: a different shape entirely
Because a promotion agreement usually has no upfront premium — the promoter is paid out of the eventual sale proceeds, not before — there is typically no separate CGT event at the point the agreement is signed. The chargeable disposal happens when the land itself is sold, in the normal way, with the promoter's fee treated as a cost of the sale that reduces the proceeds brought into the gain, rather than as a disposal event of its own. For a landowner who would rather not trigger tax on an upfront payment years before the land actually sells, that is a meaningful difference from an option with a substantial premium.
Where the two structures often overlap in practice is on sites where the eventual sale price is linked to future planning uplift rather than fixed at the outset — the same territory covered by overage and clawback provisions. See our guide to overage and clawback agreements for how CGT is timed when consideration is unascertainable at the point of the original sale.
VAT: follow the land, then follow the service
An option premium takes on the VAT treatment of the underlying land. Where the landowner has opted to tax the site, the premium is standard-rated; where there is no option to tax in place, it is exempt, in the same way the eventual sale would be.
A promotion fee works differently, because it is consideration for a service — running the planning process — rather than for land itself. That fee is usually standard-rated VAT regardless of the land's own VAT status, which means a landowner without an option to tax in place, expecting the whole arrangement to be VAT-free, can still find VAT charged on the promoter's invoice even though no VAT applies to the eventual land sale itself.
Choosing between the two
An option suits a landowner who wants certainty on price and is comfortable with a single counterparty carrying planning risk, in exchange for an upfront premium that is taxable whether or not the deal ever completes. A promotion agreement suits a landowner who wants exposure to the open market once planning is secured, is willing to wait longer for any payment, and would rather not crystallise a CGT charge before there is a sale to fund it. Neither is inherently better; the right answer usually turns on how much certainty the landowner needs now versus how much upside they are willing to leave on the table for later.
Common questions
What is the difference between an option agreement and a promotion agreement?
Under an option agreement, a developer pays a landowner for the right to buy the land at an agreed price or formula, usually once planning permission is obtained, and takes on the planning risk itself. Under a promotion agreement, a promoter funds and runs the planning process on the landowner's behalf, then markets the land to developers once consent is granted, taking a percentage of the eventual sale price as its fee. An option usually gives the developer control over the land itself; a promotion agreement usually leaves the landowner selling to the open market once planning is secured.
Do I pay Capital Gains Tax when I grant an option over my land?
Yes, the premium received for granting an option is a chargeable disposal in its own right. If the option is later exercised, the grant and the eventual sale are treated together as a single transaction, so the premium is added to the sale proceeds rather than taxed twice. If the option lapses without being exercised, the premium remains taxable as a standalone gain at the point it was received.
When is SDLT due under an option agreement?
SDLT is normally triggered when the option is exercised and the land is conveyed, calculated on the total of the option premium and the purchase price together. It can be triggered earlier if the developer substantially performs the transaction before legal completion, for example by paying most of the price or taking possession of the site to start work, which brings forward the SDLT filing and payment deadline.
Is VAT charged on option fees and promotion agreement fees?
An option premium follows the VAT treatment of the underlying land: standard-rated if the landowner has opted to tax the site, exempt if not. A promotion agreement fee is different because it is payment for a service, not for land, so it is usually standard-rated VAT regardless of whether the land itself has been opted to tax.
Kieran Holsgrove is a Director and Co-Founder of Grafene Accounting, the property tax specialist firm based in Liverpool. He advises property developers, investors and landlords across Merseyside, Greater Manchester, Lancashire and Cheshire on tax structuring, developer VAT, SDLT and the long-view decisions that compound over the life of a portfolio.
This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.