Transfer at Undervalue: Insolvency Act Rules for Conveyancing
A conveyancing transfer at undervalue occurs when a property is gifted or sold for significantly less than its true market value. While often done for legitimate reasons, such as between family members, these transactions trigger specific risks under the Insolvency Act 1986.
If you gift property, and you become insolvent within a specific timeframe (often up to five years), the trustee in bankruptcy, the person who handles reclaiming assets to pay off your debts, can apply to the court to set aside the transfer to recover assets for creditors (see the Insolvency Act 1986, s. 339). For the buyer of the property and their mortgage lender (now or in the future), this creates a significant risk that their interest in the property could be challenged or voided.
Most mortgage lenders require you to get Insolvency Indemnity Insurance before agreeing to give you the mortgage. Even if there is no mortgage, some solicitors will require the seller to take out the indemnity to protect the buyer. The mortgage lender or the buyer may also require the seller to sign a Declaration of Solvency in the presence of a solicitor.
What is the law?
The Insolvency Act is the law that sets out what happens if you become insolvent/bankrupt.
Section 339
(1)Subject as follows in this section and sections 341 and 342, where an individual is adjudged bankrupt, and he has at a relevant time (defined in section 341) entered into a transaction with any person at an undervalue, the trustee of the bankrupt’s estate may apply to the court for an order under this section.
(2)The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not entered into that transaction.
By "restoring the position", the property is put back into the gifter's name/s, and then can be sold to pay off their debts. This would leave the buyer homeless and out of pocket.
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What happens if the transferor is adjudged bankrupt?
After the property has been gifted, if any of the transferors (the parties who gave the property) are adjudged bankrupt, under section 239 of the Insolvency Act 1986, the trustee of the bankrupt's estate can make an application to the court to void the transaction.
If the court awards in favour of the trustee, then the trustee will look to sell the property to settle the debts of the bankrupt party.
The impact of a "set-aside" order: a case study
If Mum and Dad sell a £500,000 house to their child for £250,000 and Mum enters bankruptcy within the subsequent five years, the following consequences apply:
- The transaction is voidable: Under Section 339 of the Insolvency Act 1986, the Trustee in Bankruptcy can apply to the court to set aside the transfer. This effectively treats the property as though the gift never happened, allowing the Trustee to claim the equity to pay off Mum’s creditors.
- The mortgage position: If the child took out a mortgage to pay the £250,000, the lender’s security is at risk. In this scenario, Insolvency Act Indemnity Insurance is triggered. The policy will typically repay the outstanding mortgage balance to the lender, as the court order would otherwise leave the lender without a valid charge over the property.
- The Child becomes an Unsecured Creditor: This is the most significant risk for the family. The £250,000 paid by the child is not automatically returned. Instead, the child must prove for that amount as an unsecured creditor in the bankruptcy estate. They will only receive a payout after the Trustee’s costs, preferential creditors, and any prescribed part are settled, often resulting in a loss of most, if not all, of their initial investment.
- The Presumption of Knowledge: Because the transfer was between "associates" (parent and child), the law presumes the child was aware of the parents' financial state. This makes it almost impossible to use the good-faith defence to prevent the property from being sold.
Summary table: who loses what?
Party | Risk Exposure | Protection |
The Child | Loss of ownership of property and the £250,000 paid. | Very little (unless they have a specific Buyer indemnity, which isn't easy to obtain). |
The Lender | Loss of the legal charge (security) for the loan. | Insolvency Act Indemnity Insurance. |
The Creditors | Non-payment of debts due to "hidden" assets. | "hidden" assets. Section 339 Court Order to recover the property value. |
What is the Relevant Time for challenging a transfer?
Under the Insolvency Act, the court can look back at gifted transactions within what is called a relevant time before the commencement of insolvency. For transfers at undervalue involving family and business partners (called Associates"), this look-back period is typically five years (Insolvency Act 1986, s. 341). If the transferor was insolvent at the time of the transfer or became insolvent as a result of it, the transaction is highly vulnerable to being reversed.
Section 341: The Relevant Time for challenging a transfer is 5 years
(1)Subject as follows, the time at which an individual enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into or the preference given...
(a)in the case of a transaction at an undervalue, at a time in the period of 5 years ending with the day of the presentation of the bankruptcy petition on which the individual is adjudged bankrupt,
By "restoring the position", the property is put back into the gifter's name/s, and then can be sold to pay off their debts. This would leave the buyer homeless and out of pocket.
Expert Tip - Have evidence of the market value of the property
For any transfer you make for under a property's market value, you must have evidence to confirm what the property was worth if sold in an arm's length transaction (on the open market). Don't rely on an agent's opinion, because to determine the gift amount, HMR and a bankruptcy trustee will rely on a RICS current market valuation.
Andrew Boast FMAAT
CEO of SAM Conveyancing
How can you protect your under-value transfer?
As you can see, it is the buyer who takes on the largest amount of risk when receiving the gift because they could lose the property and their own money. To mitigate the risk of a future set-aside order, conveyancers often require the person transferring the property to provide a Statutory Declaration of Solvency. This is a formal legal statement confirming that the individual is able to pay their debts in full and that the transfer is not being made to defraud or hide assets from creditors.
In the example above, if Mum made a Statutory Declaration to a solicitor that she is insolvent and it turns out to be a lie, then Mum has committed a criminal offence. Under Section 5 of the Perjury Act 1911, if someone knowingly and willfully made a false statutory declaration, then they could be imprisoned for up to 2 years, fined an unlimited amount, or both.
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Summary: How to safely transfer at undervaluation between family members
There is a lot at risk, and with transfers often being between family, here is a checklist on how to mitigate anything bad happening in the future.
- Speak to an accountant: Mum and Dad should speak to an accountant to ensure they are solvent, and can afford to gift the property to their child.
- Statutory Declaration: Mum and Dad give a statutory declaration to a solicitor and provide this to their child's solicitor.
- Insolvency Indemnity Insurance: The child's solicitor should obtain Insolvency Indemnity Insurance for the mortgage lender.
- Independent Legal Advice: Mum and Dad should obtain Independent legal Advice regarding the risks and implications of a gifted transfer.
Frequently Asked Questions About a Property Transfer at Undervalue
Andrew Boast FMAAT is a qualified accountant, conveyancing specialist and author with over 25 years of experience in the UK property sector. Since beginning his career in 2000 within established SRA and CLC-regulated conveyancing solicitor firms, Andrew has overseen the legal journeys of more than 75,000 clients.
He is the author of the property guide 'How to Buy a House Without Killing Anyone' and a frequent contributor to mainstream UK media on legislative updates, property law, first-time buyer guides, conveyancing best practices, and stamp duty changes. Andrew specialises in resolving complex title issues, property conflict disputes, and property tax options, streamlining the enquiry process to reduce transaction times and maintaining a client-friendly focus.
Caragh Bailey is a Lead Property Content Specialist at SAM Conveyancing, having joined the firm in 2020. With a portfolio of over 150 technical conveyancing, house survey and mortgage guides, she has become a primary authority on the end-to-end sale and purchase process.
Caragh specialises in complex legal workflows, including Help to Buy redemptions, equity transfers, shared ownership structures, trust deeds for tax planning, and joint ownership disputes. Her expertise extends to leasehold reform and RICS home surveys, where she provides clear, factual guidance on independent legal advice for specialist mortgage products and intricate ownership structures.
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