Transfers at an undervalue
Posted on 26 July 2018 by Laura Godfrey
It is becoming more common for properties to be transferred at an undervalue i.e. for less money that they are worth or for no consideration at all, perhaps as part of a separation or as a gift from parents to children.
Such transfers can present a risk to a lender and a transferee should fully understand the situation. Also, future buyers of the property are potentially at risk too.
The risk lies in the fact that the transaction could be challenged and “set aside” by the Trustee in Bankruptcy if the original transferor is declared bankrupt (or in the case of a Limited Company it goes into liquidation) after 2 or 5 years. The timescale depends upon whether or not the original transferor is a 'connected person' to the original transferee. A 'connected person' includes a spouse, partner, relative, employer or employee. In the case of a Limited Company a 'connected person' would include a Director of the Company.
If a transaction is set aside a lender would no longer have a secured charge registered against the property which means they are at risk of not being able to recover their loan. In order to provide protection for a lender, who is either providing a loan for the original transfer at an undervalue or for a lender on a subsequent transaction taking place 2-5 years after the original transaction, a conveyancer should obtain a clear bankruptcy search against the seller (in accordance with the CML Handbook) and also consider obtaining title indemnity insurance if a clear certificate of title cannot be provided.
The Land Registry will make a note of the price paid for each transfer of a property on the register of title. A conveyancer will therefore be put on notice of the last time the property was transferred and should query if the last price was significantly below the market price of the property at the time the transfer was made. Appropriate enquiries should then be made by the conveyancer.
When acting for a transferee of a property subject to a transfer at an undervalue, either the transferee to the original undervalue transaction or a subsequent transferee to a transaction taking place 2-5 years after the original transaction, the conveyancer should obtain a declaration of bankruptcy from the transferor and request an indemnity insurance policy be put in place to cover the transferee (and/or their lender if applicable).
An indemnity insurance policy will usually protect the insured (and their lender) in the event that the transfer is set aside by the Trustee in Bankruptcy because the person/company who transferred at undervalue has become bankrupt/insolvent. The insurance provider would need to be satisfied of the solvency of the transferor, therefore a clear and up-to-date bankruptcy search against the transferor should be obtained.
Posted in: Buying & Selling Your Home