There are many reasons why someone will consider selling a property to a family member at below market value – but this kind act can have a sting in the tale with a hefty tax bill if you don’t take the appropriate steps.
For example, family members may want to help younger generations onto the property ladder or sell their large home to a child and then use the cash to downsize – but there are pitfalls to consider with the main one being HMRC thinking you are trying to dodge any tax that may be due.
There are a number of issues to take into account before anyone contemplates selling their home and it’s probably best to flag up the importance of having proper legal and tax advice should you be considering this course of action from the outset.
That’s because there may be tax and other implications, usually legal, should you decide to sell or buy a house at below its market value.
Also, if you are thinking about purchasing the property with a mortgage, then you need to find a lender that is happy lending on a property where the parties are related.
Selling a property at less than its market value
It’s important to appreciate that should you sell a property at less than its market value, you are essentially ‘gifting’ the buyer a substantial sum.
As an example, if your home is worth £200,000 and you decide to sell it for 150,000, for whatever reason, means there’s a £50,000 ‘gift’ involved.
It also means there’s potentially a deliberate undervalue which could lead to implications that a legal expert can explain.
Among these will involve the seller becoming bankrupt after the sale has been completed since the Official Receiver could overturn any undervalued transactions in a range of situations which will have a huge impact on the homebuyer.
Also, if you’re looking to sell a property at less than it’s worth to avoid paying care home fees then you may find that the local authority takes a closer look at the transaction – and they may go back several years to see whether you have deliberately tried offloading assets to save on care costs.
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Some homes that have sales restrictions
On top of this, while the seller may own the property there are some homes that have sales restrictions on them, which means they cannot be gifted, for example, a retirement home. It’s important you check the title to the property before proceeding.
This also then leads to implications with inheritance tax (IHT) and also capital gains tax.
There also needs to be an appreciation of stamp duty.
So, if you buy a property from a family member that is over the current stamp duty threshold, and this property will not be your main residence, then there’s a need to pay increased stamp duty – because this home will be classed as a second or investment home.
It’s also important that regardless of your relationship with whoever is buying your property that you both have separate lawyers so there’s no conflict of interest. This will be in your best interests and ensure that you receive independent advice.
Steps to protect the seller when dealing with a family member
Other steps to protect the seller when dealing with a family member include having a survey of the property done and also conducting a search to see if there are any implications from unknown planning permissions, for example, which may affect the property’s future.
There are ways to avoid a hefty tax bill and should you own the property outright then you could gift it to a family member at any time and still remain in it.
However, you’ll need to survive for seven years after making the gift to be exempt from inheritance tax.
One of the big issues, as hinted at earlier, is to be accused of the ‘deliberate deprivation of assets’ after the property has been gifted to a family member.
Some may do this to avoid paying care fees as they grew older, but legally, the local authority can transfer the property back into your name should they decide that this original move was done to avoid care home fees.
As we mentioned earlier, this can be a legal minefield so professional advice will be a sound investment.
Selling a property at a discount to your children or other family members
It could be tempting to sell a property at a discount to your children or other family members and some people may opt to sell for as little as £1.
Should you own the property, then there’s no restriction on how much you have to sell it for, since it’s yours to put a price on.
Should there be a mortgage outstanding, then this will need to be paid off before ownership of the property can be transferred. In some cases, this may mean having to take out a separate loan to cover the mortgage cost.
There are benefits when selling a property to a family member and one of them enables the person buying the house to reduce their stamp duty bill if the property is being gifted under exception rules.
Essentially, the stamp duty tax is calculated on the purchase price and the balance is considered to be a gift.
Since stamp duty is not due for first-time buyers buying properties worth up to £300,000, this could be a big saving.
Being Gifted a property or substantial equity in the property
For those worried that they’ve been gifted a property or substantial equity in a property, and the person who gave them it has passed away within the seven-year limit, then whoever received that gift will need to pay inheritance tax – but only if the value of the property exceeds the £425,000 IHT threshold.
That’s £325,000 in the 2018/19 tax year plus the ‘main residence’ new band of £125,000.
Also, if you’re selling a property to a family member and it is not going to be their main residence, then you will be liable for paying capital gains tax (CGT) on the transaction, regardless of who buys it.
The rate of CGT relates directly to your income tax status, so if you are a basic rate taxpayer, then CGT will be levied at 18%, whereas a higher rate taxpayer will be facing a 28% charge.
Also, the amount you pay under CGT is calculated from the home’s market value and not the discounted amount that it was sold it for.
As in the example above, if your home is worth £200,000, but you sold it for £1 then, as a basic rate taxpayer, you would then be subject to CGT of £36,000 on the sale.
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Selling your home to a family member
Essentially, while selling your home to a family member may reduce the overall transaction costs such as legal fees and estate agent fees, you do leave yourself liable to other taxes and financial implications if you do so. Careful planning and advice is needed.
This article is for information purposes only and does not represent legal or financial advice and you should always seek professional advice from those qualified to do so if you are looking to sell your home to a family member.