Connected Parties Transactions: Market Value SDLT Rules

Who Is a Connected Person? (s1122 CTA2010)

For SDLT purposes, the definition of "connected person" is imported from s1122 of the Corporation Tax Act 2010, applied via s1122 and s1123 CTA2010. An individual is connected to: their spouse or civil partner; the relatives of themselves or their spouse (siblings, ancestors, and lineal descendants, meaning parents, grandparents, children, and grandchildren); the spouses of those relatives; and a company that the individual controls or which is controlled by people connected to them.

A company is connected with another company if both are controlled by the same person or group of connected persons. Control for this purpose means holding more than 50% of the voting rights, issued share capital, or distributable income. Where two friends each own 50% of their respective companies and decide to trade properties between those companies, those companies are not connected in the absence of a closer relationship. But siblings who each own 50% of their respective companies would likely be connected.

Importantly, "relatives" in the SDLT context does not extend to uncles, aunts, or cousins. Step-parents and step-children are not connected persons under s1122 CTA2010, though they may be connected under the broader FA2003 definition in some contexts. The precise scope should be checked with a specialist before any inter-family property transaction.

Market Value Rule Under s53 FA 2003 (Companies Only)

Section 53 FA 2003 applies where the purchaser is a company and either: (a) the vendor is connected to the purchaser (the company), or (b) at least some of the consideration consists of the issue or transfer of shares in a company connected to the vendor. In those cases, the chargeable consideration is deemed to be not less than the market value of the property at the effective date.

Market value follows the TCGA 1992 definition: the price the property would fetch in the open market between a willing buyer and a willing seller. The rule is targeted at corporate structures where a controlling individual might try to transfer property into a company at an artificially low value.

What about individual-to-individual transactions?

For transactions between connected individuals (no company involved), SDLT is charged on the actual chargeable consideration that is paid or assumed. If a parent sells a property worth £450,000 to their child for £200,000, SDLT is calculated on £200,000, not on £450,000. If the child also assumes a £100,000 mortgage, total chargeable consideration is £300,000 (the cash paid plus the debt assumed).

A genuine no-consideration gift (no cash, no mortgage debt assumed) between connected individuals is exempt under Schedule 3 paragraph 1 FA 2003 because there is no chargeable consideration at all. A parent gifting a mortgage-free property to a child at £nil consideration pays no SDLT.

Where a mortgage is assumed, the market value of the property is NOT substituted for the debt amount. HMRC treats the assumed debt as chargeable consideration, but at its face value, not the property's market value.

When can HMRC still challenge?

Even though there is no general individual-to-individual market value rule, HMRC can still challenge under general anti-avoidance provisions (including s75A FA 2003, the SDLT-specific anti-avoidance rule) where a transaction is part of a scheme or arrangement designed to reduce SDLT. Individual transactions that form part of a wider scheme can be recharacterised.

Family Purchase Worked Example

A son purchases his mother's house at £200,000 as an act of family assistance. The property has a market value of £450,000 at the date of completion. The son does not currently own any other residential property (no additional surcharge applies).

The son pays SDLT on the actual consideration of £200,000, producing a liability of £1,500. There is NO market value substitution for individual-to-individual transactions. The common misconception that connected family members pay SDLT on market value is wrong: Section 53 FA 2003 applies only when the purchaser is a company, not when it is an individual.

Reliefs Denied for Connected Parties

Several SDLT reliefs that might otherwise be available are expressly denied where the parties are connected. Sub-sale relief under s45 FA2003, which can relieve SDLT on the first leg of an A-B-C transaction chain, is specifically excluded where A and B (or B and C) are connected. This prevents families from using sub-sale structures to pass property up or down a family chain without full SDLT on each link.

Group relief under Schedule 7 FA2003 is available for intra-group transfers, but this is a carefully defined relief (requiring 75% ownership) and does not apply simply because two companies have the same controlling individual. The relief must be positively claimed and requires conditions to be met both at completion and for three years afterwards. It does not eliminate the market value calculation; rather, it allows deferral on the basis that the transfer is at arm's length within the group.

First-time buyer relief is unaffected by the connected persons rule, so a son genuinely purchasing his first property (even from a connected party) can claim FTB relief provided all other conditions are met. However, the relief is calculated on the market value chargeable consideration under s49, not on the actual (discounted) price agreed.

Corporate Context: Common Control Companies

The connected person rules apply with full force to corporate property transactions. Where a sole trader incorporates a property business and transfers properties to the new company, the individual and the company are connected (because the individual controls the company). SDLT is therefore due on the market value of each property transferred, not on any nominal consideration.

Similarly, where an individual owns two companies and directs one to sell property to the other, both companies are connected to the individual (and therefore to each other). The s49 market value rule applies. There is no inter-company arm's length exemption based purely on the fact that both companies are separate legal entities; the test is about control and connection, not legal formality.

Partnership-to-company transfers are particularly complex, as the partnership SDLT rules in Schedule 15 FA2003 interact with the connected persons provisions. The SLP (sum of lower proportions) test in Schedule 15 determines the chargeable consideration for such transfers, and the connection between partners and the company receiving the property is highly relevant to the SLP calculation.

Common Pitfalls and HMRC Approach

The most frequent error in connected party transactions is simply failing to recognise the connection. A buyer's solicitor who is told the property is being bought at below market value from a family member, but who files the SDLT return on the agreed price without checking s49, is exposed to a professional negligence claim if HMRC raises a discovery assessment. Solicitors and conveyancers must positively check whether the parties are connected and, if so, obtain a market valuation.

Undervaluation is another common issue. Even where a solicitor obtains a valuation, if that valuation proves to be below what HMRC considers the open market value, a shortfall in SDLT arises. HMRC's Valuation Office Agency (VOA) will challenge valuations it considers too low, and the burden of proving market value is on the taxpayer. A robust, independent RICS valuation obtained at or around the effective date is the best protection.

Finally, the connected party rules apply to non-monetary consideration as well. If a property is transferred in exchange for the assumption of a mortgage or in settlement of a debt between connected parties, the market value rule still applies. The total chargeable consideration is the higher of the value of the property exchanged and the market value, not the face value of any debt or liability assumed.

Frequently Asked Questions