Our tenants have expressed an interest in buying a property from us. I am considering the best approach to it. Having spoken to their mortgage broker, there's an option of gifting them 5% equity for a deposit and no down cash required from them to buy. Another option is for them to provide 5% deposit, then use my 5% discount to achieve a 10% equity deposit. The purchase price would be £130,000, which is in line with local valuations. 

My questions are: (1) If I declare the sale price at £130,000, then gift the tenants 5% equity (£6,500), leaving them with a £123,500 mortgage, will I be liable to pay 18% or 24% capital gains tax (CGT) on the £6,500 I am giving away to them? Or is there a way of doing it without exposing myself to yet another tax? (2) Would another option to avoid any CGT on the gifted equity be to discount the sale price to £123,500, then for the tenants to provide 5% deposit, leaving them with a £117,325 mortgage?  

Arthur Weller replies:  

(1) If you declare a sale price of £130,000, you are liable to CGT based on the figure of £130,000. The fact that you are gifting them £6,500 cash, for them to pay you the deposit, is not relevant. (2) The second option of discounting the price to £123,500 would side-step the CGT on the £6,500. It is true that the market value rule (see HMRC’s Capital Gains Manual at CG14530) states that when a transaction is otherwise than by a bargain made at arm's length, HMRC can substitute the market price for the actual consideration given (see CG14540), but as we are only talking about 5%, it is possibly within the boundaries of market value.