Selling a property is a significant financial transaction that often involves careful planning, especially when selling to a family member. In the UK, it’s entirely legal to sell a house below market value to a family member, but doing so involves a number of legal, financial, and tax considerations that need to be addressed to ensure everything is done correctly. This guide explores the ins and outs of selling a house below market value to family in the UK, covering the steps, potential issues, and ways to navigate them successfully.
1. Understanding the Basics of Selling Below Market Value
What Does “Below Market Value” Mean?
Selling a property below market value means selling it for less than its current worth. For example, if your property is valued at £300,000 and you sell it for £200,000 to a family member, you are selling it below market value by £100,000. This difference is often referred to as a “gifted amount.”
Why Would You Sell Below Market Value?
There are many reasons why people choose to sell a property below market value to family members:
- Help family financially: Parents might want to help their children get on the property ladder, especially with house prices rising rapidly in some parts of the UK.
- Inheritance planning: Selling at a reduced price can be part of an estate planning strategy, allowing parents to gift equity in the home to their children and reduce potential inheritance tax.
- Simplifying the transaction: A below-market-value sale can facilitate a quick and straightforward sale within the family, eliminating the need for marketing the property or dealing with external buyers.
However, there are important tax implications, legal processes, and financial considerations to be aware of, especially with regards to gifting, stamp duty, inheritance tax, and capital gains tax.
2. Legal Considerations of Selling to Family
1. Independent Legal Advice
When selling a property, especially to family members, it is essential that both parties seek independent legal advice. This ensures that each party understands the implications of the transaction, and it helps avoid any potential disputes later. Some of the key issues to consider include:
- Conflict of interest: Both the seller and buyer need separate solicitors to avoid a conflict of interest.
- Transparency: The legal advice ensures that the terms of the sale are clear and understood by both parties.
2. The Role of a Conveyancer
Conveyancing is the legal process involved in transferring ownership of a property. When selling below market value, it is still essential to follow the standard conveyancing process to ensure the sale is legally binding. A conveyancer or solicitor will:
- Draft contracts: These will outline the terms of the sale, including the agreed price.
- Conduct searches: These checks are performed to ensure there are no legal issues with the property, such as boundary disputes or planning restrictions.
- Register the sale: After completion, the conveyancer will register the change of ownership with HM Land Registry.
While the process is relatively straightforward, special care needs to be taken when the sale is below market value to ensure that it complies with legal requirements.
3. Gifted Equity and Declarations of Gift
If the property is being sold significantly below market value, the difference between the sale price and the market value can be considered a “gift” to the buyer. This must be properly documented. A “declaration of gift” is typically signed by the seller to confirm that the buyer is receiving this portion of the property as a gift. This is essential for tax purposes and to avoid disputes in the future.
3. Tax Implications of Selling Below Market Value
One of the most significant considerations when selling a house below market value to a family member is the tax implications. There are several taxes that could potentially come into play, including Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT), and Inheritance Tax (IHT).
1. Stamp Duty Land Tax (SDLT)
When selling property in the UK, SDLT is typically payable by the buyer. The amount of SDLT depends on the purchase price of the property and the buyer’s situation (for example, if they are a first-time buyer or if they already own another property). However, even if the property is sold below market value, SDLT may still be applicable based on the market value rather than the actual sale price.
- If the buyer is paying any amount for the property: SDLT will apply if the purchase price exceeds the SDLT threshold (currently £250,000 for most buyers). However, if the property is sold at a price lower than the threshold, SDLT may not be payable.
- Gifting the entire property: If the property is gifted and the buyer does not pay anything, no SDLT will apply unless the buyer is taking on an existing mortgage. In that case, SDLT is calculated based on the outstanding mortgage value.
2. Capital Gains Tax (CGT)
If you sell a property that is not your main residence (for example, a second home or buy-to-let property) at below market value, you could be liable for Capital Gains Tax. CGT is calculated based on the difference between the original purchase price of the property and its market value at the time of sale, regardless of the reduced sale price.
- Private Residence Relief: If the property is your primary residence, you may be exempt from CGT.
- If the property is an investment: Selling it below market value could still trigger a CGT liability, based on the full market value, not the sale price.
3. Inheritance Tax (IHT)
Selling a property below market value can also have implications for inheritance tax, particularly if it is considered part of your estate planning.
- Gifting and the 7-Year Rule: If the difference between the sale price and the market value is considered a gift, it could be subject to IHT if the seller passes away within seven years of making the gift. After seven years, the gift is no longer considered part of the estate for IHT purposes.
- Potentially Exempt Transfers (PET): Gifts of property are considered PETs. If the person making the gift survives for seven years, the gifted amount is exempt from IHT. If they die within seven years, the gift will be taxed, but the amount of tax may taper off depending on how long the person survived after making the gift.
4. Financial Considerations
1. Mortgage Implications for the Buyer
If the family member purchasing the property requires a mortgage, selling the property below market value can complicate the process. Lenders typically base their loan calculations on the market value of the property, not the sale price. This means:
- Loan-to-Value (LTV) Ratio: The buyer may be able to secure a mortgage with a lower LTV, as they are effectively receiving part of the property as a gift.
- Gifted Deposit: The lender may require documentation proving that the difference between the market value and sale price is a gifted deposit and not a loan that the buyer must repay.
It’s important to note that not all lenders will agree to a mortgage on a property being sold below market value, particularly if it involves a family member. Both the seller and buyer should seek advice from a mortgage advisor to ensure they understand the lender’s requirements.
2. The Role of a Lender
In cases where the buyer needs a mortgage, the lender may ask for a valuation of the property. If the property is valued significantly higher than the sale price, the lender might raise concerns about the transaction, as they want to ensure their loan is properly secured.
Additionally, the buyer’s mortgage lender may also need assurance that the gifted equity will not need to be repaid to the seller in the future, as this would affect the buyer’s ability to meet mortgage payments. This is where the “gifted deposit” documentation becomes crucial.
5. Other Considerations
1. Impact on Benefits
If the seller receives any means-tested benefits, selling a property below market value could impact their eligibility for those benefits. For example, if the sale is considered a “deprivation of assets,” the seller might lose certain benefits such as pension credits or housing benefits. The government could argue that the seller deliberately reduced their assets to qualify for benefits, which could lead to penalties or the withdrawal of benefits.
2. Family Dynamics and Future Disputes
Selling a house to a family member, especially below market value, can sometimes lead to misunderstandings or disputes. These can arise over:
- Expectations of repayment: If the gifted portion of the sale is not clearly defined, there might be confusion about whether it is expected to be repaid.
- Inheritance disputes: If other family members feel they have been treated unfairly, it could lead to tensions or disputes over inheritance later.
To avoid any potential family conflicts, it is advisable to document everything clearly and ensure that all parties involved understand the nature of the transaction. Legal advice is crucial in ensuring that the terms of the sale are clear and binding.
3. Shared Ownership
If you are not ready to sell the entire property, you could consider a shared ownership arrangement. In this case, you would sell a portion of the property to the family member while retaining some ownership yourself. This can be useful if you want to help the buyer financially but are not prepared to part with the entire property at a below-market rate.
6. Steps to Selling a House Below Market Value to Family
Step 1: Agree on the Terms
Discuss the terms of the sale with your family member, including the sale price, any gifts, and whether a mortgage will be required. It’s important to ensure that both parties are in agreement and understand the implications of the transaction.
Step 2: Obtain Independent Valuations
Even though you are selling to a family member at a reduced price, it’s still advisable to obtain an independent valuation of the property. This ensures that both parties are aware of the property’s market value and helps protect against any future disputes.
Step 3: Seek Legal and Financial Advice
Both the seller and the buyer should seek independent legal advice to understand the implications of the transaction. Additionally, consult with a financial advisor or tax specialist to ensure you are aware of any potential tax liabilities.
Step 4: Engage a Solicitor or Conveyancer
Hire a solicitor or licensed conveyancer to handle the legal aspects of the sale. They will ensure that the contract is drafted correctly, that all necessary searches are conducted, and that the transaction is registered with HM Land Registry.
Step 5: Finalize the Transaction
Once all legal and financial considerations have been addressed, and the contract is signed, the sale can be completed. The property will be transferred to the buyer, and any mortgage arrangements will be finalized.
Conclusion
Selling a house below market value to a family member can be a great way to help a loved one financially, especially in a high-cost housing market like the UK. However, it is not without its challenges, and careful attention must be paid to the legal, financial, and tax implications. Independent legal advice, a thorough understanding of the tax liabilities, and clear communication between all parties are essential to ensure that the transaction is carried out smoothly and without future disputes.
By following the steps outlined in this guide, you can navigate the process of selling a property below market value to a family member in the UK, while minimizing the risks and maximizing the benefits for both parties.
