Selling and CGT
Selling a buy-to-let to a family member
Selling a rental property to a child, parent or sibling below market value: connected persons, the market value rule for CGT, inheritance tax and SDLT for the buyer.
If you sell a buy-to-let to a child, parent or sibling, capital gains tax is worked out on market value, not on the price you agree. Selling cheaply doesn't reduce your gain. The discount is also a gift for inheritance tax, and the buyer pays SDLT on the price they actually pay.
This article explains the rules and shows what a below-value sale costs in practice.
Connected persons and market value
Two rules in the Taxation of Chargeable Gains Act 1992 combine. Under section 17, a disposal that is not a bargain at arm's length is treated as made at market value. Under section 18, a disposal to a connected person is treated as not being at arm's length.
Under section 286, you are connected with:
- your spouse or civil partner;
- your brothers and sisters, your parents and grandparents, and your children and grandchildren;
- the spouses and civil partners of those relatives.
Cousins, aunts, uncles, nieces and nephews are not on that list. A sale to them is not automatically at market value. But if the price is lower than the open market price because you are being generous, the arm's length test is still failed. So the safest approach is to assume market value applies to any family sale.
Transfers between spouses and civil partners living together are separate: they are no gain, no loss. See selling a buy-to-let: how to reduce capital gains tax.
A worked example
This is an illustration, not a client example. A parent bought a flat for £180,000, with £4,000 of buying costs. It is worth £320,000. They sell it to their son for £250,000. The parent is a higher-rate taxpayer.
| £ | |
|---|---|
| Market value (used instead of price paid) | 320,000 |
| Less purchase price | (180,000) |
| Less buying costs | (4,000) |
| Gain | 136,000 |
| Less annual exempt amount (2026/27) | (3,000) |
| Taxable gain | 133,000 |
| CGT at 24% | 31,920 |
The parent receives £250,000 and owes £31,920 within 60 days of completion, so the net cash is £218,080. The £70,000 discount did not reduce the CGT at all.
Inheritance tax. The £70,000 difference is a potentially exempt transfer. If the parent survives seven years it falls out of account, and the £3,000 annual exemption can reduce it. If they die earlier, it is added to the estate.
Son's SDLT. SDLT is charged on the price actually paid, which is £250,000. If this is his only home, the standard rates give £2,500 (2% on the £125,000 above the nil-rate band). If he owns another residential property, the 5% surcharge adds £12,500, a total of £15,000. Our SDLT calculator gives the figure for your own case.
Son's future gain. His base cost for capital gains tax is generally market value, £320,000, because the sale was not at arm's length.
Mortgage and lender points
If the buyer takes over an existing mortgage, the debt counts towards the price for SDLT and your lender must consent. If the buyer is raising a new mortgage, the lender will want a valuation and may query a price below market value. Both are commercial matters, but they affect timing and the order of steps. Speak to the broker early.
When a sale to family does make sense
- You want cash and certainty. A sale at full market value gives you funds to pay the tax and avoids the inheritance tax gift.
- The gain is small. Where growth since purchase is low, the capital gains tax cost of any transfer is modest.
- The buyer will live there. A buyer with no other home pays standard SDLT rates only.
- You want to stage the transfer. A sale or gift of a share each year uses several annual exempt amounts, though SDLT and lender consent apply to each step.
When it doesn't
- To cut your CGT. A cheap sale never does. If you want to pass on value, a gift is more transparent, and our page on passing property to your children covers the options.
- To create a loss. A loss on a connected sale can only be used against gains on later sales to the same person.
- To avoid the 60-day return. If there is tax to pay, the return and payment are due within 60 days of completion.
- While you stay living there for nothing. That could be a gift with reservation of benefit for inheritance tax.
Valuation and paperwork
Because market value drives the tax, the valuation is the document that matters most. A written valuation from a surveyor or an agent, dated close to completion, is much stronger than an informal opinion. HMRC can challenge a figure, and a valuation that is clearly too low invites a challenge.
Keep the following:
- the valuation and the reasons for the price agreed;
- the completion statement and the SDLT return;
- the 60-day return and your payment reference;
- a note of any gift element, for the inheritance tax record.
If you are selling only a share, the same rules apply to the value of that share. A part-share can be worth less than its pro rata part of the whole, but the discount needs to be justified, so take advice before you agree a figure.
Selling to a relative who is not connected
Cousins, aunts, uncles, nieces and nephews are outside the connected persons list. If you sell to one of them at a genuine arm's length price, the actual price is used for the gain. That means the price must be what an unrelated buyer would pay, agreed after real negotiation, with no side arrangements. A sale to a friend or a tenant is treated the same way. The risk is that HMRC looks at the circumstances and concludes that the price was set to benefit the buyer, in which case market value applies. Keep evidence that the price was fair.
Talk to us
Before you agree a price with a relative, we can work out the CGT, the inheritance tax and the buyer's SDLT side by side. Book a call and we will set out the options on a fixed fee agreed upfront. Our guide to capital gains tax on rental property covers the wider rules.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
