Selling a property to family at an undervalue

When you sell a property to a relative for less than it is worth, three taxes look at the same deal in different ways. Capital gains tax treats you as selling at full market value, inheritance tax treats the shortfall as a gift from you, and Stamp Duty Land Tax charges the buyer on the price actually paid, including any mortgage they take over.

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A typical case is a parent who sells a buy to let flat or a former home to a child at a family price. The seller often expects to be taxed on the money received, and is surprised by a capital gains tax bill worked out on a value they never received. This page follows one undervalue sale through each tax. For outright gifts, see gifts and market value for capital gains.

Who counts as family for these rules?

For capital gains tax the test is whether the buyer is a connected person. Section 286 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) says you are connected with your spouse or civil partner, your relatives, the spouses or civil partners of your relatives, and the relatives of your spouse or civil partner. A relative means a brother, sister, ancestor or lineal descendant, so parents, grandparents, children and grandchildren are all included. Aunts, uncles, nephews, nieces and cousins are not on that list, but a sale deliberately priced low to help someone is still not a bargain at arm’s length, so the market value rule can apply anyway. More detail is in our guide to connected persons and tax.

Spouses and civil partners who are living together are outside this page: section 58 treats transfers between them as giving neither a gain nor a loss.

How is the seller’s capital gain worked out?

Section 18 TCGA 1992 treats a transaction between connected persons as one not made at arm’s length, and section 17 then deems the disposal to be for market value. The gain is market value less your cost and allowable expenses, not the price less cost. HMRC’s helpsheet HS295 uses the example of a shop worth £100,000 sold to a brother for £40,000: without a relief, the seller is taxed on the basis of £100,000.

The same rule works in the buyer’s favour later. Because section 17 applies to both sides, the relative’s base cost is the market value, not the price they paid. If the sale produces a loss, section 18(3) restricts it so it can only be set against gains on other disposals to the same person while you are still connected.

For 2026 to 2027 individuals pay 18% on gains within the basic rate band and 24% above it, after the £3,000 annual exempt amount. If the property was your only or main residence throughout, private residence relief may remove the gain (see private residence relief). A gain on UK residential property must be reported and the tax paid within 60 days of completion, as explained in our guide to the 60 day property return.

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Can holdover relief reduce the gain?

Only if the property is a business asset. Gift holdover relief under section 165 TCGA 1992 covers assets used in a trade carried on by the seller or their personal company, and certain shares. A let house or flat is an investment, not a trading asset, so it does not qualify.

Where the asset does qualify, an undervalue sale gives partial relief. GOV.UK’s example is a shop worth £81,000, which cost £23,000, sold to a brother for £40,000. The seller is taxed now on £17,000 (the £40,000 received less the £23,000 cost) and the rest of the gain is held over, reducing the brother’s base cost. The claim is made jointly by seller and buyer. See gift holdover relief.

What is the inheritance tax position?

GOV.UK states that a gift includes any money you lose when you sell something for less than it is worth; if you sell your house to your child below market value, the difference counts as a gift. Under section 3 Inheritance Tax Act 1984 (IHTA 1984) the value transferred is the fall in value of your estate.

A transfer to another individual is normally a potentially exempt transfer. GOV.UK confirms no tax is due if you live for seven years after the gift. If you die within seven years and the gifts in that period exceed the £325,000 threshold, taper relief reduces the rate for gifts made three to seven years before death. Your annual exemption of £3,000, plus any unused amount from the previous tax year, can reduce the value of the gift. See the seven year rule for gifts.

Section 10 IHTA 1984 says a disposition is not a transfer of value if it was not intended to confer a gratuitous benefit and was on terms that might be expected between unconnected persons at arm’s length. A deliberate family discount fails that test by design.

If you keep living in or using the property after the sale, it may be a gift with reservation of benefit, which GOV.UK says still counts towards your estate. See gifts with reservation of benefit.

How much Stamp Duty Land Tax does the buyer pay?

In England and Northern Ireland, Schedule 4 paragraph 1 Finance Act 2003 makes the chargeable consideration the money or money’s worth given by the buyer. There is no general market value rule for individuals, so the buyer pays SDLT on the discounted price. Two points change that:

Mortgages. Under Schedule 4 paragraph 8, debt that the buyer assumes counts as consideration, so taking over the seller’s mortgage adds to the SDLT price.
Company buyers. Section 53 Finance Act 2003 deems the consideration to be at least market value where the buyer is a company connected with the seller.

For 2026 to 2027, GOV.UK gives the residential rates for a buyer with no other residential property as nil up to £125,000, 2% on the next £125,000, 5% from £250,001 to £925,000, 10% to £1.5 million and 12% above. A buyer who already owns another residential property usually pays 5% on top (see SDLT higher rates). Scotland and Wales have their own taxes.

How does it look with numbers?

Illustration only. A mother sells a let flat worth £300,000 to her daughter for £200,000. She bought it for £120,000, it was never her home, and costs are ignored. She is a higher rate taxpayer and has made no other gifts.

Tax	Working	Result
Capital gains tax (mother)	£300,000 market value less £120,000 cost = £180,000; less £3,000 annual exempt amount = £177,000 at 24%	£42,480, due within 60 days
Inheritance tax (mother)	£300,000 less £200,000 = £100,000; less £3,000 annual exemption for this year and £3,000 brought forward	£94,000 potentially exempt transfer
SDLT (daughter, owns no other home, not a first time buyer)	Nil on £125,000 plus 2% on £75,000	£1,500
Daughter’s future base cost	Market value at acquisition	£300,000

The mother receives £200,000 but pays capital gains tax as if she had received £300,000. If the daughter already owned a home, the 5% surcharge would add £10,000 to her SDLT.

What mistakes come up most often?

Working out capital gains tax on the price received rather than market value.
Not obtaining a professional valuation at the date of sale. HMRC can challenge the market value, and the same figure drives both the gain and the gift.
Missing the 60 day reporting deadline on residential property.
Expecting holdover relief on a let property.
Overlooking the mortgage when calculating the buyer’s SDLT.
Continuing to live in the property rent free after selling it at a discount.
Not keeping a record of the gift element, which the executors will need if the seller dies within seven years.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.