Selling a house below market value might seem like a straightforward transaction, but it can trigger unexpected tax consequences. HMRC may view such sales as having a “gift element,” especially if selling to family members. This can affect both capital gains tax and inheritance tax calculations. Both inheritance tax and capital gains tax calculations can be impacted by this, and knowing about any potential tax implications before proceeding with a below-market sale is necessary to avoid unwelcome surprises from the taxman.
Why would someone sell a house below market value?
Some homeowners decide to sell property below its market value to help family members get on the housing ladder, due to financial pressure or to achieve a quick sale (which can be done through cash buying companies).
While that’s all well and good, the HMRC won’t simply accept the lower price at face value. They may still calculate tax based on what they consider the property’s true worth. Such an approach might lead to some unexpected tax complications, like with Inheritance Tax, Stamp Duty Land Tax and Capital Gains Tax.
What taxes apply when selling a house below market value?
When you sell a property for less than it’s worth, a few tax considerations may come into play. HMRC doesn’t only look at the actual sale price but may assess the transaction based on the property’s market value. Here’s what you need to know about the various taxes that might affect your below-market sale.
Capital gains tax
If your property has increased in value since you bought it, you may need to pay Capital Gains Tax on the hypothetical full market value profit, even if you sell below market value. HMRC often calculates this tax based on the property’s actual market value rather than your sale price, potentially creating an unexpected tax bill on money you never received!
Stamp duty land tax
While stamp duty affects the buyer rather than the seller, it’s important to understand that HMRC may require the buyer to pay Stamp Duty based on the property’s market value, not the discounted price paid. This is particularly relevant when the transaction involves connected parties, such as family members.
Inheritance tax
Selling a property to family members below market value is typically treated as a gift for the difference between the market value and the sale price. If you die within seven years of making this gift, it could be included in your estate for inheritance tax purposes, potentially leaving your beneficiaries with a significant tax liability.
Gifted deposits and tax risks
When part of a property’s value is effectively gifted through a below-market sale, additional tax complexities can arise. The recipient may need to hold the property for a certain period to avoid tax implications, and there could be capital gains consequences for both parties depending on future property value changes.
Capital gains tax on below market value sales
Capital Gains Tax applies when you sell a property that isn’t your main home, such as a buy-to-let investment, holiday home or inherited property, and make a profit. Normally, the calculation is straightforward: you take the sale price, subtract what you paid for it and any allowable costs (like stamp duty when you bought it, legal fees, and improvement costs) and that’s your taxable gain.
When selling below market value, particularly to family members, HMRC doesn’t use the actual sale price. Instead, they use what they consider the true market value of the property. That means you could be taxed on money you never actually received.
Exemptions and allowances
You may qualify for certain CGT exemptions:
- Private Residence Relief: If the property was your main home for the entire period of ownership, you typically won’t pay any CGT
- Annual CGT allowance: For the 2025-26 tax year, the annual exempt amount is £3,000 per person
- CGT rates: Basic rate taxpayers pay 18% on property gains above the allowance, while higher rate taxpayers pay 28%
The rules differ when selling to a cash property buying company at below market value. Because this is considered an “arm’s length” transaction between unrelated parties, HMRC generally accepts the actual sale price as the market value.
Example scenario
Let’s look at a common situation:
James bought a house in 2010 for £150,000. Today, its market value is £300,000. He sells it to his daughter for £200,000 to help her get on the property ladder.
Even though James only received £200,000, HMRC will calculate CGT based on the £300,000 market value. His taxable gain would be calculated as:
£300,000 (market value) – £150,000 (original purchase price in 2010) – any allowable expenses = taxable gain
James could potentially face a substantial tax bill on £100,000 he never actually received from the sale.
Stamp duty land tax on below market value sales
Stamp duty applies to property purchases in England and Northern Ireland. While the tax is paid by the buyer, not the seller, it’s important to understand how below-market sales affect SDLT calculations.
Typically, stamp duty is based on what the buyer pays. But HMRC has special rules for transactions between ‘connected persons’. When property changes hands between family members at a reduced price, HMRC may calculate the stamp duty based on the market value, not the actual price paid.
Stamp duty rates and thresholds
From April 1, 2025, stamp duty is to be charged at these rates:
| Property price range | Stamp duty rate |
| Up to £125,000 | 0% |
| £125,001 to £250,000 | 2% |
| £250,001 to £925,000 | 5% |
| £925,001 to £1.5 million | 10% |
| Above £1.5 million | 12% |
For example, if a son buys a property worth £295,000 from their parent in April 2025, even if they sell it to him for less, his stamp duty would typically be:
| Property price range | Stamp duty amount | Rate |
| First £125,000 | £0 | 0% |
| Next £125,000 | £2,500 | 2% |
| Final £45,000 | £2,250 | 5% |
| Total | £4,750 |
What are the implications of below market value sales?
When HMRC reviews a property transaction between connected persons (like family members), they look for what they call a “chargeable consideration,” which includes not only money changing hands, but also the release of debt, transfer of other property or provision of services.
If HMRC determines the sale price was artificially low, they may assess stamp duty based on the market value to prevent people from avoiding tax by undervaluing transactions between related parties.
First-time buyer relief
First-time buyers can benefit from stamp duty relief. From April 2025:
- No stamp duty on properties up to £300,000
- 5% on the portion between £300,001 and £500,000
- No relief available for properties over £500,000
For buyers to qualify for relief, they must never have owned property before and must be buying their main domestic residence.
Additional considerations
Buyers who already own another residential property pay an extra 3% stamp duty surcharge on top of regular rates. Non-UK residents pay an additional 2% surcharge when buying residential property in England and Northern Ireland.
Given these complexities, it’s worth getting professional tax advice if you’re considering below-market property transactions.
Inheritance tax considerations
If you’re selling a property below market value, especially to other family members, inheritance tax (IHT) can become a significant concern. HMRC may view the discount as a gift, which could have tax implications.
Why below market value sales can be considered a gift
If you sell your property to a family member for less than it’s worth, HMRC typically treats the difference between the market value and the sale price as a gift, an important aspect to consider from an inheritance tax perspective.
These transactions fall under what HMRC calls “Potentially Exempt Transfers” (PETs), where the gift only becomes exempt from inheritance tax if you survive for seven years after making it.
Example scenario
Let’s say you own a house worth £500,000, but you sell it to your daughter for £300,000. The £200,000 discount is considered a gift for inheritance tax purposes.
If you continue to live for seven years after the sale, the £200,000 gift becomes completely exempt from inheritance tax. If you die within seven years, however, the gift could be subject to inheritance tax at up to 40%, potentially costing your estate £80,000.
Reducing IHT liability
The amount of inheritance tax payable on gifts reduces the longer you survive after making them and is known as “taper relief”:
- Death within 3 years: 100% of normal inheritance tax rate (40%)
- Death within 3-4 years: 80% of normal rate
- Death within 4-5 years: 60% of normal rate
- Death within 5-6 years: 40% of normal rate
- Death within 6-7 years: 20% of normal rate
- Death after 7 years: No inheritance tax due
It’s worth noting that the nil-rate band (currently £325,000) can be used against gifts made within seven years of death, which might reduce or eliminate the inheritance tax liability.
If you’re considering selling a property below market value to family members, discussing your plans with an inheritance tax specialist is highly recommended to avoid unexpected tax liabilities for your beneficiaries.
How to sell below market value without tax issues
If you’re looking to help a family member financially by selling a property below market value but are concerned about tax implications, consider an alternative approach which may help avoid the tax pitfalls previously discussed.
Alternative strategy using a trust
Instead of directly selling your property to a family member at a discount, you could:
- Sell your property to a cash buying company like Property Rescue
- Place the proceeds from the sale into a trust that you control
- The trust then loans the money to your intended beneficiary (typically a family member)
- Structure the loan with very flexible terms that effectively make repayment optional
How the loan arrangement works
The trust can loan funds to the recipient with terms such as:
- Minimal or no required repayments
- No fixed repayment deadline
- Interest that can be charged at a nominal rate or rolled up
Tax advantages of this approach
The arrangement may offer several tax benefits:
- If the property you sell was your primary residence, you should avoid Capital Gains Tax
- The property buyer (not you) handles any stamp duty
- Because the proceeds are placed in a trust that subsequently loans the money out, the inheritance tax risks may be minimised
Loan versus gift consideration
The key difference is that a loan remains an asset of the trust, not part of your estate, potentially protecting it from inheritance tax upon your death. The trust can continue holding the debt indefinitely, passing the obligation down generations if desired.
Professional advice is essential
This strategy, in particular, involves complex legal and tax considerations. You will need to consult with a qualified, specialist tax professional or solicitor before proceeding. They can help establish the appropriate structure and make sure all arrangements comply with current tax legislation. Do not attempt to do this DIY as we’ve not covered many of the finer, yet important details.
We can recommend trusted professionals who specialise in these arrangements if needed. Get in touch with our team for a free chat.
Common pitfalls and mistakes to avoid
When selling a property below market value, it’s easy to make several mistakes that can lead to unexpected tax bills and legal complications. Being aware of these common pitfalls can help you move through the process more safely.
Misunderstanding tax calculation basis
Many sellers incorrectly assume that taxes will be calculated based on the actual sale price. HMRC often uses the market value for connected person transactions, potentially creating tax liability on money you never received.
Failing to declare gifts properly
Not properly reporting the gift element of a below-market sale can lead to serious consequences. HMRC may view this as deliberate non-disclosure, potentially resulting in additional penalties on top of the tax owed.
Overlooking stamp duty implications
While stamp duty is paid by the buyer, failing to consider its impact on family members can undermine your efforts to help them financially. The buyer might face an unexpected tax bill based on the property’s market value rather than the discounted price.
Selling without understanding full implications
Some sellers proceed with below-market transactions without fully understanding the long-term tax consequences, particularly regarding inheritance tax and the seven-year rule for gifts.
Not seeking professional guidance
Property transactions, especially non-standard ones, involve complex tax rules. Attempting to navigate these without professional advice can lead to costly mistakes that might have been easily avoided.
Missing alternative solutions
Many people don’t realise there are alternative approaches, such as selling to Property Rescue, and using trusts or other legal structures to achieve their financial goals without triggering unnecessary tax liabilities.
Getting proper advice from tax professionals, solicitors or financial advisors who specialise in property transactions can help you avoid these common pitfalls and find the most tax-efficient solution for your circumstances.
Don’t let your good intentions get caught out
Selling a property below market value requires the right planning to avoid any unexpected tax liabilities. Whether you’re helping family members or seeking a quick sale, having a grasp of how HMRC views these transactions will be helpful. Consulting with tax professionals before proceeding will also give you a clearer picture of what you can and cannot do.
If you’re looking for a straightforward solution, Property Rescue offers to buy your home quickly for cash with no fees. We can exchange contracts in as little as 48 hours, providing an initial offer within 24 hours and covering all legal costs throughout the process. Get a free, no-obligation quote to see how much your home is worth.