Is CGT based on the mortgage paid off or the market value when a property is transferred by court order?

Introduction

People often ask this question where a property was transferred in unusual circumstances, such as under a court order, after a family dispute, or as part of a non-arm’s length arrangement. The main point of confusion is usually whether capital gains tax is worked out using the amount of debt taken on, the figure shown on the title, or some other value.

In a case like this, it is important to separate two different taxes. Stamp duty land tax may be based on the mortgage or other consideration given on the transfer. Capital gains tax is a different question. For CGT, the starting point is usually the acquisition value for the person who later sells the property, and in a non-arm’s length transaction that will often be market value at the date of acquisition.

The Question

A person was awarded a property by court order in 2021. At the time of transfer, the title recorded a value of £150,000. Before the transfer could be completed, the person had to ensure that an existing mortgage of £70,000 secured on the property was paid off. The property was then transferred mortgage-free.

The property has never been that person’s main residence, and they now want to sell it. The question is whether any future capital gain should be calculated by reference to £70,000, being the mortgage that had to be cleared, or £150,000, being the value recorded at the time of transfer.

Nick’s Explanation

Nick’s core point was that the mortgage figure and the transfer value can matter for different taxes.

In summary, he explained that:

• for stamp duty land tax purposes, where a property is transferred and the recipient must discharge an existing mortgage, the mortgage debt can count as chargeable consideration;
• for capital gains tax purposes, where a property is acquired other than by a normal arm’s length bargain, the acquisition value is usually taken to be the market value at the date of acquisition;
• on those facts, the £70,000 figure is more relevant to the SDLT analysis at the time of transfer, while the £150,000 figure is more likely to be the relevant starting point for CGT when the property is later sold.

That is broadly consistent with the structure of the legislation. The key issue for CGT is not simply what cash changed hands, but what value the law attributes to the acquisition where the transfer was not an arm’s length sale on the open market.

The Law

For SDLT, section 43 of the Finance Act 2003 defines a land transaction as an acquisition of a chargeable interest. Section 50 and Schedule 4 of the Finance Act 2003 deal with chargeable consideration. As a general rule, if the transferee takes property subject to debt or must discharge secured debt as part of the arrangement, that debt can form part of the consideration for SDLT purposes.

For CGT, the key rule is the market value rule in section 17 of the Taxation of Chargeable Gains Act 1992. Where an asset is disposed of otherwise than by way of a bargain made at arm’s length, the disposal and acquisition are treated as taking place for a consideration equal to market value.

That means that where property is transferred under a court order, or in another non-arm’s length context, the CGT base cost for the recipient will usually be the market value at the date of acquisition, not merely the amount of mortgage redeemed or other money paid.

If the asset is later sold, the gain is generally calculated by taking:

• the disposal proceeds, or market value if the later disposal is itself not at arm’s length;
• minus the acquisition cost or deemed acquisition value;
• minus any allowable incidental costs of acquisition and disposal;
• and minus any enhancement expenditure that is allowable under the legislation.

Private residence relief would not normally apply if the property was never the owner’s only or main residence.

Analysis

The first step is to identify the nature of the 2021 transfer. On these facts, it was not a standard open market purchase between unconnected parties negotiating freely. It arose from a court award and required an existing mortgage to be cleared before title could pass. That points strongly to a non-arm’s length acquisition.

The second step is to separate SDLT from CGT.

For SDLT, the relevant question at the time of acquisition was what consideration was given for the transfer. If the recipient had to clear a £70,000 mortgage as part of obtaining the property, that amount could be treated as chargeable consideration. That does not mean the same figure automatically becomes the CGT base cost.

For CGT, the relevant question is what acquisition value the recipient is treated as having paid. Because the transfer was not at arm’s length, section 17 TCGA 1992 usually substitutes market value. If the market value at the date of transfer was £150,000, that is likely to be the starting base cost for CGT.

The third step is to consider whether the £150,000 figure on the title is reliable evidence of market value. A figure entered in transfer documentation or on the register may reflect market value, but it is not conclusive by itself. In practice, the strongest position comes from evidence of actual market value at the acquisition date, such as:

• a contemporaneous valuation;
• court material referring to value;
• transfer documents showing the basis on which the figure was used;
• estate agent appraisals or surveyor evidence from that time.

If £150,000 was genuinely the market value in 2021, then the likely CGT computation on a later sale would use £150,000 as the base cost, not £70,000.

The fourth step is to deduct allowable costs. In addition to the acquisition value, the seller may be able to deduct incidental costs of acquisition and disposal, such as legal fees, valuation fees, and estate agency fees, provided they are allowable under the CGT rules. Capital improvement expenditure may also be deductible if it is reflected in the state of the asset at disposal.

The earlier gift towards the former owner’s deposit does not usually alter the recipient’s own CGT base cost on the later court-ordered transfer. It may explain the background to the dispute, but it does not normally replace the statutory market value rule.

Finally, if anyone is considering whether a property was uninhabitable or not suitable for use at the time of acquisition for tax purposes, the threshold is now relatively high following Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799. A property will not be treated as unsuitable for use as a dwelling merely because it needs repair or modernisation. That point is more commonly relevant to SDLT dwelling issues than to the CGT base cost question here, but it is an important part of the current legal landscape.

Outcome

On these facts, the practical answer is that the £150,000 figure is the more likely starting point for CGT, provided it represents the market value of the property at the date it was transferred by court order in 2021.

The £70,000 mortgage redemption figure is more relevant to the SDLT position on the transfer, not to the later CGT computation on sale.

Practical Steps

If you are in a similar position, the sensible next steps are:

• find the transfer deed, court order, and Land Registry documents from the date of acquisition;
• check whether there was a valuation or any evidence showing the property’s market value at that time;
• gather records of legal fees, valuation fees, SDLT returns, and any other acquisition or sale costs;
• collect evidence of any capital improvements made during ownership;
• work out the likely gain using the sale price less the 2021 market value and allowable costs;
• if the valuation position is uncertain, obtain advice from a tax adviser experienced in CGT on property disposals.

If there is any dispute about what the 2021 market value really was, proper valuation evidence can make a significant difference.

Conclusion

Where a property is acquired under a court order rather than by a normal open market purchase, CGT is usually based on market value at the date of acquisition. In a scenario like this, that is likely to mean using the 2021 value of £150,000 rather than the £70,000 mortgage that had to be cleared.

Legal References Used

• Finance Act 2003, section 43
• Finance Act 2003, section 50
• Finance Act 2003, Schedule 4
• Taxation of Chargeable Gains Act 1992, section 17
• Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799

This page was last updated on 22 March 2026.

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