Selling a house at below market value is analytically a partial sale plus partial gift. The actual price paid is the sale element; the difference to market value is the gift element. Each of CGT (TCGA 1992 s.17 deemed market value), IHT (IHTA 1984 s.3A PET on the gift element), SDLT (FA 2003 Schedule 4 actual consideration, or FA 2003 s.53 deemed market value if the purchaser is a connected company), and where applicable Private Residence Relief (TCGA 1992 ss.222-225) or spouse / civil-partner exemption (TCGA 1992 s.58 plus IHTA 1984 s.18) applies separately with its own deeming rules and reliefs.

This page is the decision-grade primer for the hybrid partial-sale-partial-gift scenario. It is written for parents planning to sell to adult children, landlords planning to sell to sitting tenants, SPV-restructuring property investors, family-business succession planners, and advisers running below-market transaction analysis. For pure gifts (no actual consideration), see the existing site pages on CGT and gifting property to family and the adult-children decision tree. For the Red Book valuation evidence required to defend the position, see the companion free rental valuation page.

The four-tax stack: each tax separately

The single biggest analytical error in popular below-market-sale commentary is to treat the transaction as one event with one tax answer. There are four taxes; each applies separately; each has its own deeming rules:

  • CGT (TCGA 1992 s.17): deemed market value disposal for the seller, regardless of actual consideration. Connected-persons rules under TCGA 1992 ss.18 + 286 apply.
  • IHT (IHTA 1984 s.3A): PET on the gift element only (market value minus actual consideration paid). The s.10 "non-gratuitous" escape route is high-bar and rarely available in family transactions.
  • SDLT (FA 2003 Sch 4): chargeable consideration is the actual consideration paid, NOT the deemed market value. Exception: where the purchaser is a connected company, FA 2003 s.53 deems chargeable consideration at not less than market value.
  • PPR + spouse / civil-partner overlay (TCGA 1992 ss.222-225 + s.58 + IHTA 1984 s.18): can switch off the CGT and IHT consequences entirely in the right fact pattern.

Each tax runs independently. The seller pays CGT on the deemed market value gain. The donor's estate carries a PET for the gift element. The buyer pays SDLT on the actual consideration. PPR and spouse exemptions may reduce or eliminate the CGT and IHT positions but leave the SDLT position to its own rules.

The CGT position: deemed market value for the whole disposal

TCGA 1992 s.17 is the operative provision. Where a disposal is not at arm's length, including a gift, a disposal between connected persons, and certain other categories, the disposal is deemed to be at market value.

Consequence: in a partial-sale-partial-gift between connected persons, the WHOLE disposal is at deemed market value for CGT, not just the gift element. The seller is taxed on the deemed disposal proceeds even though they have actually received less.

Worked example. Parent's base cost in the property £150,000. Open market value £350,000. Sale to adult son £200,000. CGT computation: deemed disposal proceeds £350,000; base cost £150,000; deemed gain £200,000. CGT at the residential rate (currently 24%) applies to the deemed gain after the annual exempt amount, giving roughly £47,300 of CGT. The parent has actually received only £200,000 cash but is taxed as if they had received £350,000.

The son acquires the property at deemed market value £350,000 base cost. His future CGT calculation on any onward sale uses £350,000, not the £200,000 he actually paid. The architecture is symmetric: what the parent is taxed on at notional proceeds is what the son inherits as base cost.

Connected persons under TCGA 1992 s.286 include: individual + spouse / civil partner; individual + "relative" (defined as brother, sister, ancestor, lineal descendant); individual + relative's spouse; individual + spouse's relative; trustees + settlor and certain beneficiaries; company + person controlling it. NOTE the gap: aunts, uncles, nieces, nephews, and cousins are NOT "relatives" under s.286(8). A sale to a niece at below market value may be at the actual consideration for CGT purposes (no s.17 deeming), though HMRC may challenge if the discount is large and other facts suggest non-arm's-length.

Losses on disposals to connected persons are clogged: only allowable against future gains on disposals to the same connected person. The clogged-loss rule prevents loss-creation strategies through intra-family transfers.

The IHT position: PET on the gift element

IHTA 1984 s.3A treats lifetime gifts between individuals as Potentially Exempt Transfers (PETs). The donor survives 7 years from the date of the gift and the PET ceases to be chargeable. The donor dies within 7 years and the PET becomes a chargeable transfer at the date-of-gift value, taxed at the appropriate IHT rate with taper relief from 4 years post-gift.

In the partial-sale-partial-gift scenario, the PET is the gift element (market value minus actual consideration). Continuing the worked example: market value £350,000; actual consideration £200,000; gift element £150,000. The PET is £150,000 as at the transaction date. The 7-year clock starts on the transaction date.

The actual consideration received (£200,000) does NOT enter the donor's estate as a separate item; it has been spent, invested, or otherwise disposed of by the donor and is treated normally.

The s.10 "non-gratuitous" escape

IHTA 1984 s.10 can take a below-market disposition outside IHT entirely. The test is cumulative:

  • The disposition was not intended to confer any gratuitous benefit.
  • EITHER the disposition was made between unconnected persons OR it was such as might be expected to be made in a transaction between unconnected persons (arm's-length comparable).

The s.10 escape almost always FAILS in family transactions. Selling to a child at below market value carries a presumption of intent to confer benefit by reason of the family relationship. The presumption is rebuttable but the evidential burden is high. The escape succeeds occasionally in genuinely-distressed sale fact patterns to non-family unrelated buyers, where the contemporaneous commercial evidence (broker correspondence; multiple unsuccessful market offers; time on market) supports the position.

The SDLT position: actual consideration, with one major exception

FA 2003 Schedule 4 sets the chargeable consideration for SDLT. The general rule: chargeable consideration is the actual consideration provided by the buyer.

Continuing the worked example: parent sells £350,000 home to adult son for £200,000. The son's SDLT is calculated on £200,000 (the actual consideration), NOT on the deemed market value of £350,000. The gift element does not attract SDLT.

If the son already owns another dwelling, the SDLT on £200,000 is at the higher rates for additional dwellings (currently 5% surcharge on the standard rates). Where the property becomes the son's sole residence and he sells his previous main residence within the relevant window, the additional-dwellings surcharge may be reclaimable.

The FA 2003 s.53 connected-company trap

The single highest-stakes trap in below-market planning is FA 2003 s.53. Where the purchaser is a COMPANY AND either (a) the vendor is connected with the company or (b) the consideration consists of an issue of shares in a connected company, the SDLT chargeable consideration is deemed to be NOT LESS than the market value at the effective date.

Worked example of the trap. Landlord owns a £450,000 buy-to-let in personal name. Plans to incorporate the portfolio by selling the BTL to his own newly-formed SPV (limited company) for £350,000, intending to save SDLT on the £100,000 differential. Section 53 bites: SDLT chargeable consideration is deemed at £450,000 (the market value), not £350,000 (the actual sale price). SDLT is calculated on £450,000 inclusive of the 5% additional-dwellings surcharge. The "I'll save SDLT by undervaluing" plan fails completely.

CGT also bites at deemed market value in the same scenario under TCGA 1992 s.17 (companies and persons controlling them are connected under s.286). The deemed disposal at £450,000 produces a CGT charge on the gain to the landlord, even though only £350,000 cash has moved.

The s.53 trap is most-walked-into by incorporation planners attempting to extract value tax-efficiently from a personal landlord's portfolio. The trap is on the statute book and HMRC enforce it consistently. The correct planning is to value the property properly, use any available reliefs (incorporation relief under TCGA 1992 s.162 where the conditions are met; multiple-dwellings or claim-based SDLT routes where available), and not attempt to undervalue the sale.

PPR: when the main residence carve-out switches off CGT

TCGA 1992 ss.222-225 (Private Residence Relief) exempts gains on the disposal of a dwelling that has been the seller's only or main residence throughout the period of ownership, with certain final-period exemptions and ancillary periods of absence.

The PPR exemption applies to the deemed market value disposal under s.17. So a parent selling their fully-PPR-exempt main residence to a child at below market value: the deemed market value disposal generates a deemed gain but the PPR exemption removes the gain from CGT. CGT consequence: zero. The IHT PET position is unaffected; the gift element remains a PET. The SDLT position on the child's purchase is on the actual consideration as normal.

This is the cleanest scenario for an intergenerational transfer of the family home: PPR-exempt seller; below-market sale or pure gift to child; CGT zero by PPR; IHT PET starts the 7-year clock; SDLT on actual consideration. The arrangement still needs careful planning around occupation, the Gifts with Reservation of Benefit rules under FA 1986 s.102 (the parent moving out of the home is the standard discipline), and the wider succession picture.

The spouse and civil-partner exemption: no-gain-no-loss plus IHT exemption

TCGA 1992 s.58 treats disposals between spouses or civil partners living together as at no-gain-no-loss. The transferee inherits the transferor's base cost; no chargeable gain arises on the transfer itself. The s.58 rule applies BEFORE the s.17 deemed-market-value rule.

IHT spouse exemption under IHTA 1984 s.18 applies to inter-spouse transfers within the qualifying conditions, taking the transfer outside IHT entirely. Post-FA 2025, the spouse exemption operates within the residence-based architecture; the historic domicile-based limitation on the spouse exemption was reworked.

SDLT on inter-spouse transfers: FA 2003 Schedule 3 paragraph 3 exempts certain transfers on divorce or separation under court order. Outside the court-order context, the SDLT chargeable consideration is the actual consideration provided, which is often nominal in inter-spouse transfers.

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The valuation evidence required

The valuation question runs through the whole analysis:

  • For CGT s.17: the "market value" used to compute the deemed disposal proceeds and the donee's base cost.
  • For IHT s.3A: the "market value" used to size the PET (market value minus actual consideration).
  • For SDLT s.53 (where applicable to connected-company purchasers): the "market value" used as the deemed chargeable consideration.
  • For s.10 IHT escape claims: the contemporaneous commercial-evidence file supporting that the sale was at arm's-length-equivalent terms.

The standard evidence is a RICS Red Book valuation (Market Value, signed by an MRICS or FRICS chartered surveyor under the Red Book methodology) at the transaction date. Estate-agent free appraisals and online AVMs are NOT acceptable to HMRC's District Valuer in any contested fact pattern. For the Red Book versus appraisal distinction and how to commission a Red Book valuation, see the companion free rental valuation page.

For s.10 escape claims, the additional evidence file should include: the marketing history of the property (estate-agent listings, time on market), offers received from third-party buyers and the reasons they did not proceed, the seller's commercial circumstances (need for quick completion; relocation timing; specific buyer requirements), and any broker or surveyor correspondence supporting the below-market price. The file is built contemporaneously, not retrospectively.

HMRC challenge and the dispute route

HMRC's District Valuer reviews significant valuation positions. In a parent-to-child below-market sale of a £350,000 property, the DV may accept the taxpayer's Red Book valuation, may propose an alternative valuation (typically based on the DV's own comparables and methodology), or may open an enquiry covering both the valuation and the wider transactional facts.

Where the parties cannot agree, the dispute moves to the Lands Tribunal (now Upper Tribunal Lands Chamber for property valuations) or the Upper Tribunal Tax and Chancery Chamber, depending on the specific issue. The cost of contested proceedings can exceed the tax at stake; the prevention strategy is a defensible Red Book valuation at the transaction date plus a clear evidence file.

Worked examples across the architecture

  1. Parent sells £350,000 flat to adult son for £200,000. CGT: deemed disposal at £350,000; if parent's base cost £150,000, deemed gain £200,000; CGT at 24% (less AEA) approximately £47,300. IHT: gift element £150,000 = PET; 7-year clock from transaction date. SDLT: son pays SDLT on £200,000 actual consideration plus the 5% additional-dwellings surcharge if he owns another dwelling (~£21,000). Son's CGT base cost is £350,000 for any future sale.
  2. Landlord sells £450,000 BTL to own SPV for £350,000. CGT: deemed disposal at £450,000 under TCGA 1992 s.17 (companies + controlling persons are connected under s.286). SDLT: FA 2003 s.53 deems chargeable consideration at not less than £450,000 (market value), so SDLT on £450,000 inc 5% additional-dwellings surcharge. The undervalue does not save SDLT; the trap bites.
  3. Husband transfers £400,000 jointly-owned PPR to wife at no consideration. CGT: s.58 no-gain-no-loss; wife inherits husband's base cost. IHT: s.18 spouse exemption; wholly exempt. SDLT: Schedule 3 paragraph 3 exemption if the transfer is on divorce or separation under court order; otherwise SDLT on nominal actual consideration.
  4. Mother sells fully-PPR-exempt main home to son at below market value, moves into rented accommodation. CGT: deemed market value disposal under s.17; PPR exemption under ss.222-225 removes the gain from CGT. IHT: gift element is a PET; 7-year clock. SDLT: son pays SDLT on actual consideration. GROB consideration: mother must NOT continue to occupy the home or benefit from it, or the GROB rules under FA 1986 s.102 keep the asset in her estate for IHT.

What to do

For any planned below-market sale, the right discipline is:

  1. Commission a Red Book valuation at the transaction date. Use an MRICS or FRICS qualified surveyor under the Red Book methodology. Specify the tax purpose in the brief.
  2. Run the four-tax computation. CGT under s.17 deemed market value; IHT PET on the gift element; SDLT on actual consideration (or s.53 deemed market value if a connected-company purchaser); PPR and spouse-exemption overlays where applicable.
  3. Build the contemporaneous evidence file. For s.10 IHT-escape claims and for any subsequent HMRC enquiry, the file should sit alongside the Red Book valuation and document the commercial circumstances.
  4. Avoid the SDLT s.53 trap. If the planned purchaser is a connected company, the SDLT will be on market value regardless of the actual price paid. Plan around the trap; do not attempt to undervalue.
  5. Document the position. CGT base cost for the donee; PET start-date for IHT; SDLT return discipline; GROB consideration where the seller continues to occupy or benefit.

For pure gifts (no actual consideration at all), see the existing pages on CGT and gifting property to family, adult-children decision tree, 7-year rule and taper, and Gifts with Reservation of Benefit. For the Red Book valuation evidence framework, see the companion free rental valuation page.

If you are planning an intergenerational transfer of property, an incorporation of a portfolio into a connected SPV, or a sale to a sitting tenant at below market value, the form at the foot of the page is the route to a structured assessment of the four-tax stack and the valuation evidence required.