Selling a property to a family member at a reduced price is a common arrangement — whether to help a child get on the property ladder, keep a family home in the family, or simply settle an estate without a formal sale. The problem is that HMRC does not accept the reduced price as the CGT proceeds. The law requires market value to be used in most below-market transactions, and the resulting CGT can come as a shock.
The market value substitution rule
For CGT, the general rule is that the disposal proceeds are the actual sale price. But there is an important exception: where a disposal is not at arm's length (i.e., where the parties are connected or the transaction is not conducted at a commercial level), HMRC substitutes the open market value as the disposal proceeds.
The open market value is what the property would sell for between a willing buyer and a willing seller on the open market, with both parties having full information and acting without compulsion.
Who counts as a connected person?
HMRC's definition of connected persons for CGT includes:
- Spouse or civil partner
- Children, parents, grandchildren, grandparents, siblings (but not aunts, uncles, or cousins)
- The spouse or civil partner of any of the above
- Business partners and their spouses
- Companies controlled by the seller (and fellow shareholders in close companies)
If you sell to any of these people at below market value, the connected persons rule applies and CGT is calculated on market value — not the price paid.
An example
You sell your buy-to-let flat to your son for £150,000. The flat is worth £220,000 on the open market. Your base cost (purchase price plus improvements plus costs) is £100,000.
Your CGT proceeds are not £150,000 — they are £220,000. The gain is £120,000 (£220,000 less £100,000). After the Annual Exempt Amount (£3,000), you pay CGT on £117,000.
The fact that you only received £150,000 is irrelevant for your CGT calculation. You have effectively made a gift of £70,000 to your son, and separately paid CGT as if you received the full value.
What about your son's base cost?
This is where the rules can be particularly harsh. Your son's base cost for his future CGT calculation is the market value of £220,000. When he sells the flat in the future, he calculates his gain from £220,000.
The exception: spouse and civil partner transfers
The connected persons and market value rules do not apply to disposals between spouses and civil partners who are living together. Transfers between spouses are treated as no-gain, no-loss transactions. The recipient takes on the transferor's original base cost. See our guide on transferring property to a spouse for the detail.
Selling at arm's length but below value: unconnected parties
If you sell to an unconnected person (not a family member or business associate) at below market value — for example, a distressed sale to a property investor — HMRC generally accepts the actual sale price as proceeds. The market value substitution rule does not automatically apply to arm's length transactions. However, if HMRC believes the sale was not genuinely at arm's length, they can still challenge the proceeds used.
Does gifting avoid CGT?
No. Gifting a property (transferring ownership for no consideration) is treated as a disposal at market value under exactly the same rules. Making the gift free is not better than selling cheaply — both produce CGT on the full open market value.
What about the Inheritance Tax angle?
Selling at undervalue to a family member has Inheritance Tax implications too. If the seller dies within seven years of the transaction, the gifted portion (the difference between market value and the price paid) may be treated as a potentially exempt transfer for IHT purposes. This is a separate consideration from CGT but worth factoring in if the amounts are significant.
If you are planning to sell or transfer a property to a family member at a reduced price, get advice from a Chartered Accountant/Chartered Tax Advisor before the transaction. The CGT calculation will use market value regardless of the agreed price, and professional advice can help you understand the full tax cost before you commit.