When considering property transactions within a family, a common question is whether parents can sell their house to their children for less than its market value.
The simple answer is yes, they can. However, there are several financial and legal implications to consider before proceeding with such a sale.
This guide will explore these considerations to help you make an informed decision.
Stamp Duty Land Tax (SDLT)
In the UK, Stamp Duty Land Tax is typically paid by the buyer on property transactions. When a property is sold below market value, especially in cases like selling a home to your child for less, SDLT is calculated based on the market value, not the sale price.
For instance, if your parents sell you their house worth £300,000 for £150,000, the SDLT will be calculated on £300,000. It’s important to budget for this cost when planning your purchase.
Understanding the tax effects of selling a house to a child at a lower price can help avoid unexpected expenses.
Capital Gains Tax (CGT)
If the house being sold isn’t your parents’ primary residence, they might be liable for Capital Gains Tax. CGT is charged on the profit made from selling the property. When buying parents’ house at a discount, the profit is considered the difference between the original purchase price and the market value at the time of sale.
For example, if your parents bought the house for £100,000 and its current market value is £300,000, they would be liable for CGT on the £200,000 gain, even if they sell it to you for less.
Knowing the legal implications of selling property below market value can help in planning and managing tax liabilities.
Inheritance Tax (IHT)
Inheritance Tax is another key factor. If your parents sell their house to you at a reduced price, the difference between the market value and the sale price could be considered a gift. Under UK law, if your parents pass away within seven years of making this gift, it could be subject to IHT. This is known as the seven-year rule.
For example, if they sell you the house for £150,000 less than its market value, this £150,000 could be added to their estate for IHT purposes if they die within seven years of the sale.
This is an important aspect when considering purchasing family property for less than its market value.
Deprivation of Assets
Another consideration is the potential impact on means-tested benefits or care home funding. Selling a property at less than market value can be seen as a deliberate attempt to reduce assets to qualify for state benefits. This is known as deprivation of assets.
If local authorities determine that your parents sold their house at a reduced price to avoid paying for care, they might treat them as if they still own the value of the asset they gave away, which could affect their eligibility for support.
This scenario often comes into play in cases of discounted family property transactions.
Advertising Under Market Value Properties
While navigating these complexities can feel overwhelming, OT Property Group specialises in helping you advertise properties at below market value rates.
We work with a panel of investors who are interested in purchasing such properties. This can provide a quicker and more straightforward solution for those looking to sell at a reduced price, compared to selling a house to a family member.
By leveraging our network, you can reach potential buyers who understand and are actively seeking value opportunities.
Conclusion
Selling a house at less than the market rate to a family member is possible in the UK, but it’s important to understand the implications of SDLT, CGT, IHT, and potential deprivation of assets.
If you’re considering a below market value sale, we can help you advertise your property to a dedicated panel of investors. Contact us today to learn more about how we can support you through this process and help you achieve a successful sale.
