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Transfers at an undervalue / Selling your property at a discount – implications of bankruptcy

What is a Transfer at Undervalue?

Selling your property at a discount or a ‘transfer at undervalue’ as it is known in Conveyancing terminology is something that should be understood fully by a buyer proposing to purchase a property under these circumstances.

A transfer at undervalue may arise when an individual wishes to sell a property to a family member or a business associate; a property worth £250, 000 may be sold for £200, 000 which means the discount or ‘gift’ is a resulting £50, 000.

What are the risks associated with buying a discounted property?

The risk of buying a property at a discount is that if the seller is declared bankrupt after 2 or 5 years the sale could be ‘set aside’ by the trustee in bankruptcy.

It can also be ‘set aside’ if the transaction at an undervalue was made to an ‘associate’ of the donor. ‘Associate’ is widely defined in the Insolvency Act 1986, s. 435 to include the donor’s spouse, employers, employees, partner and partner’s relatives.

Obtaining Indemnity Insurance

It is important that both the seller and buyer’s Conveyancing Solicitor are informed by their respective clients that a sale at a discount/transfer at an undervalue is to take place.

The seller’s Conveyancing Solicitor should obtain a declaration of bankruptcy from the seller to be forwarded to the buyer’s Solicitor; an indemnity insurance policy should then be taken out to cover the buyer and/or lender.

This will cover the costs of action that may be taken in the event that the seller is declared bankrupt within 2 or 5 years of the sale to the buyer, making the sale void.

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