Selling a house to a family member below its fair market value can be an appealing idea for various reasons, whether it’s to help a relative, simplify estate planning, or simply offer a home at a more affordable price. However, this practice in the UK comes with several legal, financial, and tax implications that need to be carefully considered. This guide will cover these aspects in detail, providing an in-depth look at what you need to consider before proceeding with a sale below market value.
Table of Contents
- Understanding Fair Market Value
- Reasons for Selling Below Market Value
- Legal Considerations
- Tax Implications
- a. Capital Gains Tax
- b. Inheritance Tax
- c. Stamp Duty Land Tax (SDLT)
- d. Gifting Rules
- Mortgages and Lending Considerations
- Impact on Benefits and State Support
- Professional Valuation and Advice
- How to Structure the Sale
- Risks and Drawbacks
- Conclusion
1. Understanding Fair Market Value
Fair market value (FMV) is essentially the price that a property would likely sell for on the open market, given a willing buyer and seller, both of whom are reasonably informed and not under duress to buy or sell. Estate agents, surveyors, or professional appraisers typically assess FMV based on a variety of factors, including:
- Location
- Property condition
- Market trends
- Comparable recent sales in the area
When selling to a family member, it might be tempting to bypass these considerations and set a lower sale price. However, if the sale price is significantly below FMV, it can trigger several legal and tax implications that need to be managed appropriately.
2. Reasons for Selling Below Market Value
There are many reasons why someone might want to sell a property to a family member below its market value. Some of the most common include:
- Helping a relative get on the property ladder: Housing affordability is a major issue in the UK, and selling a house to a family member at a reduced price could help them afford a home in a location or size that would otherwise be unattainable.
- Estate planning: Parents may wish to sell property at a reduced value as part of estate planning, particularly if the sale can reduce the size of the estate and potentially minimise inheritance tax.
- Avoiding the hassle of an open market sale: Selling on the open market can be a long and stressful process. Selling to a family member can bypass many of the headaches involved, such as estate agent fees, viewings, and negotiations.
- Avoiding capital gains tax (CGT): If the home is not your primary residence, selling below market value can sometimes be used as a strategy to limit the capital gains tax liability on the property.
Despite the advantages, these sales need to be carefully planned to avoid unintended financial or legal consequences.
3. Legal Considerations
When selling a house to a family member, the sale must still adhere to the UK’s property laws. This includes:
- Transparency: The sale needs to be a legitimate transaction. The buyer should receive all the relevant legal documentation (title deeds, land registry updates, etc.) just as they would if they were buying from a stranger.
- Avoiding fraudulent conveyancing: Selling at a reduced price could raise questions from solicitors, mortgage lenders, or the Land Registry, especially if it’s far below market value. If HMRC suspects any tax evasion, they may scrutinise the sale further.
- Legal Documentation: The sale must be documented in a legally binding contract. Both parties must agree to the terms, and ideally, both should have independent legal advice to avoid conflicts of interest.
4. Tax Implications
a. Capital Gains Tax (CGT)
If the property is not your primary residence, you may be liable for CGT when selling below market value. The HMRC views the sale as if you sold the property at market value, even if the actual sale price is lower. Here’s how CGT could apply:
- Principal Private Residence (PPR): If the house has been your primary residence for the entire period of ownership, it will likely qualify for PPR relief, meaning no CGT is due. However, if it was rented out or used for business purposes at any point, a portion of the gain might be subject to tax.
- Deemed Market Value: HMRC uses the deemed market value of the property (not the sale price) to calculate CGT. So, even if you sell at a discount, the CGT calculation will be based on the market value.
b. Inheritance Tax (IHT)
If the sale is structured as a gift, or significantly below market value, it could be viewed as part of your estate and affect your inheritance tax position:
- Gifts: If you gift your house to a family member, the value of the gift could still be considered part of your estate for IHT purposes if you pass away within seven years. This is known as the “seven-year rule”.
- Potentially Exempt Transfers (PETs): If you live for more than seven years after the gift, it will be exempt from IHT. If you die within seven years, the gift’s value will be included in your estate for IHT purposes.
- Taper Relief: Taper relief applies if you survive between three and seven years after gifting the property, potentially reducing the amount of tax payable.
c. Stamp Duty Land Tax (SDLT)
Even if you sell at a reduced price, the buyer (your family member) may still need to pay SDLT. The tax is calculated based on the consideration (the sale price or market value, whichever is higher).
- If the sale price is below £125,000 and no other SDLT surcharges apply, no SDLT will be due.
- If the buyer is a first-time buyer, there may be reliefs available.
- If the buyer already owns a property, the higher rate of SDLT for second homes may apply.
d. Gifting Rules
Gifting a house outright (or selling it significantly below market value) can have its own set of tax consequences:
- If you sell the property for less than its market value, the difference between the market value and the sale price may be considered a gift.
- Gifts above the annual allowance (currently £3,000 per person) could be subject to inheritance tax if you die within seven years.
5. Mortgages and Lending Considerations
If the buyer is obtaining a mortgage to purchase the property, the lender will likely require a valuation of the home to ensure that it meets their lending criteria. If the sale price is significantly lower than the market value, it could raise red flags:
- Loan-to-Value Ratio (LTV): The lender will base their LTV on the property’s market value, not the agreed sale price. This may mean that the buyer needs a larger deposit to meet the lender’s requirements.
- Gifted Deposit: If you sell below market value, the discount may be treated as a “gifted deposit” by the lender. Most lenders will require a letter confirming that the discount is a gift and that there are no expectations of repayment.
6. Impact on Benefits and State Support
Selling a property below market value could affect any means-tested benefits or state support that you or the buyer receive. Some considerations include:
- Deprivation of assets: If you sell your home for less than its market value and then apply for means-tested benefits (such as housing benefits or care home support), it could be deemed that you intentionally deprived yourself of assets to increase your eligibility for support.
- Impact on buyer’s benefits: If the buyer is receiving benefits, acquiring property at a reduced price could affect their entitlement, especially for housing-related benefits.
7. Professional Valuation and Advice
It’s essential to have the property professionally valued before selling below market value. A surveyor or estate agent can provide a market valuation, which is helpful for tax calculations, mortgage applications, and protecting both parties legally.
Additionally, getting legal and tax advice from professionals experienced in property transactions is critical. Solicitors, conveyancers, and tax advisors can help navigate the complexities and ensure that the transaction is structured correctly.
8. How to Structure the Sale
There are a few ways to structure a below-market sale to a family member. Some common approaches include:
- Outright sale: Selling the property at a discounted price but following the same process as any other property transaction.
- Gifting with reservation: You could gift part of the property and retain some interest in it, such as the right to live there, which may help reduce your estate’s value for IHT purposes.
- Lease options: Some families opt to set up lease agreements, where one family member buys the property but leases it back to the seller for a nominal fee.
9. Risks and Drawbacks
There are several risks and potential drawbacks to selling property below market value to a family member:
- Family disputes: Selling to family members can sometimes lead to conflicts, especially if other family members feel that they were not treated fairly.
- Tax scrutiny: HMRC may scrutinise transactions that appear to involve gifts or sales at significantly below market value to ensure that there is no tax evasion.
- Loss of control: Once you sell the property, even to a family member, you no longer have control over it. If relationships break down, you could face difficulties.
- Mortgage complications: As discussed earlier, mortgage lenders may be wary of properties being sold for less than their market value, which could lead to complications for the buyer in securing financing.
10. Conclusion
Selling your house to a family member below its fair market value can be a viable option under certain circumstances, but it requires careful planning. The legal, tax, and financial considerations are complex, and failure to address them properly could result in unforeseen liabilities or complications.
Before proceeding, it’s crucial to seek professional advice from solicitors, tax specialists, and property experts to ensure that both parties are protected, and the sale is conducted in compliance with all applicable laws. Understanding the implications of taxes like CGT, SDLT, and IHT is key to making an informed decision that benefits both you and your family member.
While selling a house below market value can seem like a generous and straightforward way to help a family member, the implications go far beyond the immediate savings on the purchase price.
