Are you considering selling your property to a family member? Are you aware of the tax complications? Find out everything you need to know by continuing to read below.

What do I need to know?

If you are thinking about giving a large gift to your family member then you should be aware that it is not as easy as just using the calculation of the capital gain or loss on the disposal of an asset. This is usually calculated by working out the difference between the amount received for the sale of the asset and the cost of acquiring and disposing of it.

What is the ‘market rule’?

The market value of an asset is the value that an asset is expected to gain if it was on sale in an open market.

What if I donate an asset to my spouse or civil partner?

If you decide to transfer an asset to your partner, then it needs to be taken into consideration as to whether it is a gain or a loss.

Therefore, this rule of no gain/no loss for transfers between spouses and civil partners is extremely useful from a tax perspective.

The market rule states that the transferee assumes that the transferors base cost has no capital gain to worry about.

Other connected persons

The market value rule states that for transfers between connected persons, the market value of the asset at the time when the transfer is made can be used to work out any capital gains or loss.

Who are connected persons?

A person is connected with an individual if the person is:

  • A relative of the individual
  • The person’s spouse or civil partner
  • The spouse or civil partner of a relative of the individual’s spouse or civil partner
  • The spouse of a civil partner of a relative of the individual
  • The relative of the individual’s spouse or civil partner

You should be aware that there are only certain family members, which can be classed as relatives in this context.  For example, a relative is a brother, sister, lineal descendent or ancestor. 

What are the exemptions?

Therefore, your niece, nephew, aunts, uncles and cousins are not a connected person.

The market value rule does not apply to transfers between spouses and civil partners as the no gain/no loss rules applies, but it applies to transfers made to children, parents, grandchildren, siblings and also to their spouses and civil partners.

Example:

Trevor had a small bungalow that he rented out for many years, whilst living in his family home.  His granddaughter Claire has been looking to get on the property ladder but has struggled to find a property in her price range.

Trevor decided that he would sell his bungalow to Claire for £100,000 to help her. At the time of the sale it was worth £150,000. 

The market value rule states that because Trevor and Claire are connected persons, the market value of the home of £150,000 will be used to work out Trevor’s capital gain, rather than the price he sold to Claire.

Therefore, it is important to be aware of this as the gain will be higher than expected, and it may come to a surprise to Trevor and he may not have the right amount of funds to pay the tax.

If this is the case, then it may be worth looking into gifting the property to the family member.

Further actions

If you want to sell a property cheaply to a family member, you should make sure that you take into consideration that the capital gains tax payable will be assessed based upon the market value, not at the reduced price you may choose to sell the property.

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