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When is a gift not a gift?
When the Insolvency Act was first introduced in 1986, it was to prevent property owners deliberately transferring their assets to a family member or close associate to avoid creditors.
So if an owner gifts their property or sells it at less than its market value and is declared insolvent within five years of the transaction, the transfer can legally be ‘set aside’. The property would then be deemed to be all, or part, of the original owner’s assets and used to help pay off their outstanding debts.
The Bank of Mum and Dad
Over the years, we have continued to develop and adapt our Insolvency Act covers as the concerns of lenders and the behaviour of borrowers have changed. So whether it’s a traditional Insolvency Act enquiry, or something a little more challenging, we have a number of policies to cater for the range of different scenarios and types of transaction. These include the transfer of equity, partners separating, inter-company transfers, family gifts, and more recently, parental help to buy. According to a report by Legal and General, the amount that parents provided in 2018 would make ‘the bank of Mum and Dad’ the 12th biggest mortgage lender in the UK, and there’s no sign of this changing any time soon. Accordingly, we have seen an increase in the number of requests for cover where parents gift their children some or all of the deposit for a property. This is to protect the lender’s security, should the parent be subsequently declared bankrupt within the time frame set out by the Insolvency Act.
Similarly, for buy-to-let properties, if a landlord is a private individual, they may decide that for tax reasons it would be beneficial to transfer the properties to a newly-formed registered company, and of course the lender would want to be protected against the risk of a future claim under the Insolvency Act.
It's all legit, Guv
Of course, most properties that are gifted or transferred are for perfectly legitimate reasons. So it could, for example, be a couple transferring equity from sole to joint names for re-mortgage purposes; or it may be a transfer from joint to sole names due to a divorce. In the case of a company transfer, it may be gifting property to a company director in return for a loan to the business.
If the property is sold before the five year period has expired, and the property is subsequently ‘set aside’, the most recent third party purchasers, as well as their lender, are clearly innocent parties and in these circumstances, our cover will protect both.
To find out more about our Insolvency Act indemnities, please call 01603 617617 or email enquiries@cli.co.uk.