SOME QUESTIONS ABOUT THE PURCHASE OPTION.

It is quite common to hear me say when faced with any request for advice, that the best thing to do in writing is to adjust to reality, because "lies" in writing always have a future cost in the form of capital gains.

The two most frequent assumptions are, on the one hand, the one related to the value of the assets that is entered in the deed and, on the other hand, the constant question whether it is convenient to put the assets in the name of the children, so that they do not have to pay in the future inheritance tax.

Despite the fact that they may be questions from other times, I am still surprised by the frequency with which these questions occur. Someday we will return to them, since today I want to refer to a third issue, which is the use of legal institutions for purposes other than those for which they were intended, and that in the long run also tend to produce undesired tax consequences.

Specifically, I want to refer to an aspect of the purchase option that tends to go largely unnoticed, such as the tax consequences of the purchase option on the grantor of the option..

WHAT IS A PURCHASE OPTION?

To focus the question, we must point out that a call option It is a contract in which one of the parties, called the grantor of the option, attributes to another, called the optee or beneficiary of the option, a right that allows the latter to decide within a certain period and unilaterally, the celebration of a determined contract.

For example, the owner of a farm grants a person a purchase option for six months, so that the latter has that term to say if he buys, the price being fixed from the start.

The option contract usually fulfills a double purpose:

A.- On the one hand, it grants the beneficiary a longer term to deliberate on the convenience of concluding a contract, with the guarantee that the owner cannot contract with a third party.

B.- And on the other hand it can have a speculative purpose, so that the beneficiary can contract with other people and decide who will be the final purchaser of the property.

THE TAX COST OF THE PURCHASE OPTION

The purchase option has a tax cost, regardless of what may be manifested at the time of the completion of the final contract.

The applicant will have to pay VAT or Property Transfer Tax, as the case may be.

With regard to property transfer tax, in the case of options on real estate, the corresponding rate will be paid (for example, in Madrid 6%, in Catalonia 10%) on the tax base, which will be the price agreed by the option or if it were less than 5% of the base of the final contract, the tax base would be that 5% of the value of the final contract.

 By way of example, as is customary in this news section, we will say: I am granted an option on a premises to buy it within six months for the price of 300,000 euros. The price set for the option is 10,000 euros. As this price is less than 5% of the value of the final contract, the tax base will be 15,000 euros, and on this amount 6% will be paid (in Madrid), which amounts to 1050.14 euros.

But the option also has a tax consequence for the grantor of the option that often goes unnoticed or is not taken into consideration, specifically the treatment that this figure has received in the personal income tax, since a recent change in criteria of the bodies tax may lead, if it is endorsed by jurisprudence, which is extremely burdensome.

FROM SAVINGS INCOME TO GENERAL INCOME

Until relatively recent dates, and beyond the various legislative changes made to the personal income tax, the criterion of the administrative bodies was to understand that the consideration or "option price" received by the grantor in exchange for The granting of the right of option had, for personal income tax purposes, the character of an increase in assets derived from the transfer of an asset and which, consequently, had to be taxed according to the fixed rate established for such increases in assets. For this purpose, see the Resolution of the TEAC of January 23, 2002 and the Answers of the General Directorate of Taxes of May 14, 1998, October 26, 1999 or October 6, 2005.

However, this criterion of the tax bodies, and particularly of the DGT, has changed. And thus, two Answers from the DGT of May 21, 2008 (consultation number V1001/2008 and V1004/2008) understand, rectifying the previous doctrine of that body, that “the granting of the purchase option […] produces in the inquirer a capital gain in accordance with the provisions of article 33.1 LIRPF, which arises at the time of its granting and which, therefore, since it is not derived from a transfer, is classified as general income for the purpose of calculating the tax in accordance with the provisions of article 45 of the LIRPF” (See V1004/2008).

In accordance with this criterion, the consideration for the granting of the option must be taxed at the corresponding marginal rate. As can be well understood, in the case of granting an option in exchange for consideration and subsequent exercise of the purchase option by the opting party, this criterion creates a serious distortion with respect to the position of the seller who sold without mediating a preparatory contract: while in the latter case the seller will be taxed on the capital increase as a capital gain, the grantor of the option later exercised will see how the amount collected by way of option will be taxed at a usually much higher rate. If it is taken into account that the applicant has deducted from the total purchase price the sum of what has already been paid, it is understood the unfavorable treatment suffered by the one who carried out the alienation of an asset by first preparing it through an option contract.

THE LEASE WITH PURCHASE OPTION.

In the event that a lease with a purchase option is agreed, to the taxation indicated by the option, it will be necessary to add that resulting from the lease, which is not usually particularly onerous.

 Thus, for a tax base of 7,692.95 euros, the fee to be paid would be 30.77 euros.

AN EXAMPLE

Some time ago, we had a work order at the Notary, consisting of a purchase option deed. What the gentlemen really wanted was to guarantee a part of the price that was not delivered, and they had considered that the best option was a purchase option, configured in a delivery of 30,000 euros on a final price of 40,000 euros.

When talking to them, we exposed everything that we have raised in the previous sections and it turned out that this contract had the following cost, which they did not count on because they thought it was a simple sale carried out in two acts, and that it was the following, in the moment it was raised.

for the applicant the 8% of 30,000 euros, that is to say 2,400 euros; In addition, when the option is verified, the 8% or 10% of the final price is 3,200 or 4,000 euros. So the actual tax paid would be 14% or 16%.

For the grantor of the option, the operation involved an ordinary income amounting to 30,000 euros, for which more than 50% could be paid, that is, 15,000 euros. And then, at the time of exercising the option, he would have to pay the municipal capital gains and the payment of the corresponding increase in assets in personal income tax.

Obviously, the operation was signed in completely different terms from what the parties had proposed and in much more advantageous and less fiscally onerous terms, all of which is covered by professional secrecy.

THE CORRECT ADVICE.

To finish, and as usual, I want to insist on the need for correct advice before signing any operation, which must be done days before, since at the time of signing is when everything must already be completed. And also that in order to achieve this advice in an impartial and free manner, it is essential that the notary be freely chosen, before whom the deed is granted, leaving my notary available to whoever may need it.