Magnetic and crystallographic properties of Gd₅Sb_0.5Ge_3.5 were investigated using dc magnetization, ac magnetic susceptibility, and heat capacity of an oriented single crystal, combined with temperature and magnetic field dependent x-ray powder diffraction. The compound undergoes an unusual magnetostructural transition at 40 K and a nonmagnetic second-order transition around 63 K. The detailed crystallographic study of Gd₅Sb_0.5Ge_3.5 shows that contrary to the R₅(Si_xGe_1−x)₄ systems (R is a rare-earth metal), the structural transition occurs without shear displacements of the _∞2[R₅T₄] slabs (T=Si, Ge, and Sb), and a substantial volume change (−0.5%) does not lead to a change in crystallographic symmetry. The first-principles electronic structure calculations show higher interslab than intraslab ferromagnetic exchange interaction indicating that Sm₅Ge₄ type of structure supports a ferromagnetic ground state in Gd₅Sb_0.5Ge_3.5.