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Tax Implications of Selling Property Below Market Value (BMV)

Published by Susan Basnet
Posted Date: June 25, 2024 , Modified Date: June 25, 2024

Selling an asset, whether a property or otherwise, attracts capital gains tax if the disposal is made at a gain. Hoping to reduce this gain by making the disposal at a lower price, one can be tempted to sell it at a price below the market value. Such a scheme would be considered a tax avoidance by HMRC and could impose serious consequences.

Selling a house below its market value has several tax implications on both the seller and the recipient, especially if the two parties are related to each other. When such a transaction takes place between connected persons, the seller is deemed to have received the market value, irrespective of the actual price paid by the buyer. 

The Connected Persons – Who is Included?

The connected persons rule applies to transactions between parties who are related or linked. As per the HMRC’s guidance, a person is connected with an individual if that person is:

  • The individual’s spouse or civil partner
  • A relative of the individual
  • The spouse or civil partner of a relative of the individual
  • A relative of the individual’s spouse or civil partner
  • The spouse or civil partner of a relative of the individual’s spouse or civil partner

In this context, “relative” specifically refers to brothers, sisters, ancestors, or lineal descendants. It’s important to note that family relations like nephews, nieces, uncles, and aunts do not fall under the definition.

Stamp Duty Land Tax (SDLT)

Where there is a purchase of land or property involved, a tax impossible to avoid, at any cost, is the stamp duty land tax (SDLT). SDLT is paid by the party acquiring the property. SDLT is calculated by multiplying the chargeable consideration with the relevant SDLT rates. The chargeable consideration on transfers between spouses is the proportion of mortgage.

In transactions between connected persons (other than spouses), SDLT is triggered by the chargeable consideration provided, which may include the assumption of debt, unless the transaction involves a partnership. If there is no chargeable consideration for the disposal, the transaction falls outside the scope of SDLT.

Tax Implications of Selling Property below market value

However, when a property is transferred to a connected company at a price below its market value, the SDLT charge will be based on the market value of the property, not the amount actually paid.

Detailed analysis of Stamp Duty Land Tax (SDLT) can be found in our article " A Complete Guide on Stamp Duty Land Tax".

Capital Gains Tax (CGT)

Unlike SDLT, which is paid by the property buyer, Capital Gains Tax (CGT) is triggered on the seller’s side of the transaction. CGT is payable on the difference between the sales proceeds and the original purchase price of the property. The sales proceeds is typically the money received from the transaction. After determining the gain, it is subjected to applicable rates, typically 18% for basic rate taxpayers and 24% for those in higher or additional tax bands. However, for commercial property disposals, the rates adjust slightly to 10% and 20% respectively.

However, when the property is transferred between spouses, the transaction is deemed to be a ‘no gain, no loss’ transaction. Under this rule, the deemed sales proceeds and the original cost are the same, i.e. the price originally paid to acquire the property, resulting neither in a gain nor a loss.

Clearly, the ‘no gain no loss’ has huge tax benefits. So, do all transactions between connected persons fall under this rule? The answer is No! The ‘no gain no loss’ transaction is restricted to transactions between spouses.

In contrast, when a property is sold to a connected person, the transaction is deemed to take place at market value, and not the amount actually paid, aimed at preventing CGT reduction by selling at lower price.

As a part of this, HMRC generally checks the deemed market valuation of properties. Therefore, a ‘post-transaction valuation check’ form or the CG34 form must be completed and submitted to HMRC, in the following address:

For Individuals, Partnerships or Trust 

For Companies

PAYE and Self Assessment

HM Revenue and Customs

BX9 1AS

Corporation Tax Services

HM Revenue and Customs

BX9 1AX

Inheritance Tax (IHT)

Another tax that might come into play when selling a property for less than its market value is the Inheritance Tax (IHT). IHT is the responsibility of the person receiving the property as a gift.

If the property is given away or sold between spouses or civil partners, it would be considered outside the scope of IHT and no IHT would arise. However, when such a transaction occurs between parents and children, the difference between the transaction price and the market value is considered a gift for inheritance tax purposes.

Tax Implications of Selling Property below market value

Inheritance Tax is generally not payable on a gift if:

  • The value for gift is below the nil rate band (NRB) threshold of £325,000, or
  • The person giving the gift does not die within 7 years of making the gift.

The NRB of £325,000 could be lower if other gifts have been made in the last 7 years.

For Example, 

Mr. K sells a property to his son for £500,000 when the market value of the property is £800,000. Mr. K has never made any prior gifts.

In this scenario, the difference between the market value and the price actually paid, which is £300,000, will constitute a ‘gift’ and inheritance tax will be triggered. As Mr. K has made no prior gifts, his inheritance tax liability can be calculated as follows:


Amount (£)

Value of gift

300,000

Less: Annual Exemption for the current year

3,000

Less: Annual Exemption for the prior year

(3,000)

Chargeable value

294,000

Less: Unused Nil Rate Band (£325,000)

(294,000)

Taxable value

0

In this case, there will be no Inheritance payable as the taxable value is nil. However, if Mr wishes makes another gift within 7 years, the nil rate band available will be restricted to £31,000 (£325,000-£294,000)

Conclusion

In conclusion, selling a house below its market value can have significant tax implications, particularly when transactions involve connected persons. Despite the temptation to minimise capital gains tax, such actions are deemed as tax avoidance by HMRC and can lead to serious consequences.

Therefore, while selling a property below market value may seem advantageous initially, it's crucial to understand and comply with tax regulations to avoid penalties and ensure financial transparency.

Need expert advice on Selling Property below market value?

Contact us today for efficient and hassle-free assistance.

Susan Basnet
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