Transfer at Undervalue Insolvency Act Rules

6 min read
A transaction at an undervalue is very common between family members; either to help their children onto the property ladder or as part of inheritance tax planning. You can read the process on how to do this in our Concessionary Purchase article. There is however a risk that the transaction could be set aside (voided) leaving the new owners and mortgage lender exposed to considerable losses if the original owner is adjudged bankrupt.

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 buyer may also require the seller to sign a Declaration of Solvency in front of a solicitor.

We detail below what happens when an undervalue transaction is for an individual (not a company), what the time limits are, what happens if the trustees in bankruptcy make an application to court and in what situations future buyers might have their transaction voided. Our solicitors specialise in the transfer of property undervalue. Call us today on 0333 344 3234 (Local call charges apply or click to get a conveyancing quote for an undervalue transaction.

Transactions at an Undervalue Insolvency Act 1986

(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.

Sale at undervalue...What happens if the transferor is adjudged bankrupt?

Following the transfer of the property at undervalue, 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 court to void the undervalue 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.

Example of a transaction at an undervalue being voided

Heather gives her property worth £300,000 to her son James for zero consideration. Heather later becomes bankrupt. The trustees of Heather's bankrupt estate apply to the court to obtain an order to void the undervalue transfer and obtain an order to sell the property to enable the repayment of the creditors.

What is the time limit for a transaction undervalue?

Called the "Relevant Time" the time period is 5 years prior to the presentation of the bankruptcy petition. The transfer cannot be reversed by Trustees in Bankruptcy following the five year period after the transfer date.

Insolvency Act 1986: Section 341 - “Relevant time" under ss. 339, 340.

(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,

Transfer at Undervalue Property Transfer at undervalue conveyancing - What is the process?

Normally handled as a sale and purchase with independent solicitors acting for the seller and the buyer. The family agree a price under the market value, sometimes for zero consideration, and the transfer is completed. The value between the current market and the consideration paid, if anything, is classed as a gift.

Example of a transaction under market value for zero consideration

Jane and Michael want to give their property to their son Joshua. The property's current market value is £500,000, however they agree to give the property to Joshua for £0. Jane and Michael instruct their solicitor to handle the sale legal work and Joshua instructs a separate, independent solicitor. Joshua can choose to skip certain parts of the standard conveyancing process.

The conveyancing process is different if you are getting a mortgage. If you are getting a mortgage then read our article on - How to gift property

How do you value the current market price of a property?

You need to know the current market value of the property in order to work out if the transaction is at undervalue. Property prices can go up or down so to find out the current market value as at today's date you have the following options:
  • RICS Valuation - instructing a Royal Institution of Chartered Surveyors (RICS) Valuer/Surveyor for a current market value figure provides an expert, independent opinion of the current market value of the property. Costs for this report vary depending on location, size and estimated value of the property. If you are transferring at undervalue and the transferee is getting a mortgage then you can choose to rely upon the lender's RICS mortgage valuation to confirm the current value of the property. Our surveyors can provide a RICS valuation and we cover the whole of England and Wales.
  • Local Estate Agent - you can get a local estate agent to provide you an opinion on the current market value of the property. It is a free of charge service and as such you have no recourse in the future if the valuation is wrong.
  • Online Market Research - you can use Rightmove or Zoopla's online property valuation tools. It is less accurate than an estate agent's opinion as it doesn't factor in current market trends.

Could your transaction be voided if you buy a property previously bought undervalue?

As the time limit is 5 years from the date of transfer undervalue, what happens if the new owners seller the property on the open market at full market value? It is quite conceivable that this could be the case. Using the example above between Jane and Michael transferring for zero consideration to Joshua. One year later Joshua sells the property for £500,000 to Michelle and Mohammed. 6 months after completion takes place Michael is made bankrupt. Would the trustees in bankruptcy look to void the sale between Joshua, Michelle and Mohammed as well as the undervalue sale between Jane, Michael and Joshua?

This has not ever been tested in law, however there is an opinion that as long as the transfer between Joshua, Michelle and Mohammed was at full value and in good faith then it falls outside of the Insolvency Act rules.

How do you spot if you are buying a property previously purchased undervalue?

The solicitor acting for the buyer should look to see the value of the transfer registered at the Land Rergistry for the previous transaction; shown within the Official Copy of Register of Title.
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