Property Tax Guide

Selling a house below market value

Whether you are selling to a family member, a friend, or simply want a quick sale, it is important to understand the tax implications of selling a property below its market value. The rules can be complex, and getting it wrong can result in an unexpected tax bill.

Capital gains tax when selling below market value

The most important tax to understand is capital gains tax (CGT). When you sell a property below market value to a connected person (such as a family member), HMRC does not use the actual sale price to calculate your CGT liability. Instead, it substitutes the market value of the property at the time of the transaction.

This means you could end up with a CGT liability even though the amount you actually receive is less than what you paid for the property. For example, if you bought a property for 200,000 pounds, it is now worth 350,000 pounds, and you sell it to your child for 250,000 pounds, CGT is calculated on the gain from 200,000 to 350,000 pounds (a gain of 150,000 pounds), not on the 50,000 pounds you actually received above your purchase price.

For inherited properties, the base cost is the market value at the date of death (the probate value). If you sell an inherited property below market value to a connected person, CGT is calculated on the deemed disposal at market value, with the base cost being the probate value.

CGT rates for property

Capital gains tax on residential property is charged at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. The annual CGT allowance is currently 3,000 pounds per person. For inherited property, selling quickly after inheritance can help minimise CGT as there has been less time for the value to increase above the probate value.

Inheritance tax implications

When you sell a property below market value, the difference between the sale price and the market value is treated as a gift for inheritance tax (IHT) purposes. This gift is classified as a potentially exempt transfer (PET).

If you survive for 7 years after the gift, it becomes fully exempt from IHT. If you die within 7 years, the value of the gift is added to your estate for IHT purposes. Taper relief may reduce the amount of tax due on gifts made between 3 and 7 years before death.

For example, if you sell a property worth 400,000 pounds to your child for 200,000 pounds, the 200,000 pound difference is treated as a PET. If you die within 7 years, that 200,000 pounds is added to your estate when calculating the IHT liability.

Stamp duty on below market value purchases

Stamp duty land tax (SDLT) is normally calculated on the actual price paid for a property. However, the rules are different when the transaction involves connected persons or is not at arm's length.

In general, if the buyer and seller are connected (as defined by HMRC) and the sale is below market value, HMRC may assess stamp duty on the market value rather than the price paid. However, the specific rules depend on whether there is any consideration (money paid) and the nature of the relationship.

If the property is an additional property for the buyer (they already own another home), the 5% additional dwelling surcharge will also apply, calculated on either the price paid or the market value as appropriate.

Selling at market value to a cash buyer

If your main reason for considering a below market value sale is speed and convenience, it is worth knowing that a cash buyer can offer many of the same benefits while avoiding the complex tax implications of a connected persons transaction.

At HouseBought4Cash, we make fair cash offers on inherited and probate properties. While our offers reflect the speed and certainty we provide, the sale is a genuine arm's length transaction, which means CGT is calculated on the actual sale price and there are no gift or IHT implications.

For many families, selling to a cash buyer is simpler and more tax-efficient than selling below market value to a family member. We complete in as little as 7 days, buy in any condition, and there are no fees.

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Frequently asked questions about selling below market value

Common questions about the tax implications of selling a property below market value.

Yes, you are legally free to sell a property for any price you choose. However, HMRC may treat the difference between the sale price and the market value as a gift for tax purposes. This means capital gains tax is calculated on the market value (not the sale price), and the difference may be subject to inheritance tax if you die within 7 years. It is important to understand the tax implications before proceeding.

There are three main tax considerations. First, capital gains tax (CGT) is calculated based on the market value of the property, not the price you actually receive. Second, the difference between the sale price and market value is treated as a gift for inheritance tax purposes, subject to the 7 year rule. Third, the buyer may pay stamp duty land tax (SDLT) based on either the price paid or the market value, depending on the relationship between buyer and seller.

Yes, but HMRC treats this as a connected persons transaction. CGT will be calculated on the market value, not the amount your child pays. The difference is treated as a potentially exempt transfer (PET) for inheritance tax purposes. Your child will pay stamp duty based on the actual price paid (or the market value if they are also a connected person and the transaction is deemed not at arm's length). Always seek professional tax advice before proceeding.

Yes. When you sell to a connected person (such as a family member) below market value, HMRC treats the disposal as taking place at market value for CGT purposes. This means you may have a CGT liability even if the actual cash you receive is less than what you originally paid for the property. The rules for connected persons are set out in the Taxation of Chargeable Gains Act 1992.

Connected persons include your spouse or civil partner, siblings, parents, children, grandparents, grandchildren, and their spouses or civil partners. Business partners and their families are also connected persons. The rules also extend to companies you control and trusts where you or a connected person is a beneficiary. When dealing with connected persons, HMRC always substitutes market value for the actual transaction price.

If the buyer is not connected to the seller and the transaction is genuinely at arm's length, stamp duty is calculated on the price actually paid. However, if the transaction is between connected persons or is not at arm's length, HMRC may assess stamp duty on the market value of the property. In practice, most family transactions where property is sold below market value will have stamp duty calculated on the actual consideration paid, but this depends on the specific circumstances.

If you have inherited a property, your CGT base cost is the market value at the date of death (the probate value). If you sell below the current market value to a connected person, CGT is calculated on the current market value, not your sale price. If the current market value is lower than the probate value, you may have an allowable loss. The difference between the sale price and the current market value is treated as a gift for IHT purposes.