05 December 2017
Last updated at 10:12
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The Defective Gift - PSG Financial Services look at Insolvency Act Indemnity Insurance
PSG Financial Services explain the importance of Insolvency Act Indemnity Insurance when gifting funds for a home purchase to a family member.
More and more parents are giving financial help to their children for home purchase, but if a family member gives a gift, informal loan or a discounted purchase price they then potentially acquire an interest in the property. If a person who made the “gift” becomes bankrupt, for example in situations where property is gifted to children, transferred at less than its true value, or when the deposit has been provided by someone other than the buyer, it is possible for the gift to be set aside or overturned and for the trustee-in-bankruptcy to claim an interest in the property.
The Law
The law behind this is S339 of the Insolvency Act 1986 (The Insolvency (England and Wales) Rules 2016) which states that if a bankrupt individual has within the previous five years “entered into a transaction with any person at an undervalue,” then “the trustee of the bankrupt’s estate may apply to the court for an order” to restore the gift to the donor for the benefit of the creditors.
So, a loan or a gift from a parent to a child, to help in a home purchase, would be a transaction at an undervalue since the parent is unlikely to demand any interest on the loan or ask for any “valuable consideration” in return for the gift. The asset to be returned to the donor is now not money but a property interest in the home of the son or daughter. Consequently, this would be available to the creditors thus putting the title that the mortgagee and mortgagor have in the property at risk.
The Insolvency Act legal indemnity insurance policy provides protection if the donor becomes insolvent and creditors of the donor make a claim on the property as well as the lender’s security.
The Handbook 5.16.3 states:
‘If you are aware that the title to the property is subject to a deed of gift or a transaction at an apparent undervalue completed within five years of the proposed mortgage then you must be satisfied that we will acquire our interest in good faith and will be protected under the provisions of the Insolvency (No 2) Act 1994 against our security being set aside. If you are unable to give an unqualified certificate of title, you must arrange indemnity insurance (see section 9)
‘You must effect an indemnity insurance policy whenever the Lenders’ Handbook identifies that this is an acceptable or required course to us to ensure that the property has a good and marketable title at completion’.
As a rule, it is always prudent to obtain a Declaration of Solvency from the Donor (the person making the gift) and taking out an indemnity policy to protect the Donee (the person receiving the gift) against the possibility of a claim being made against the property by a Trustee in Bankruptcy.
PSG Financial Services have a range of over 35 Title and Legal Indemnity Policies available to order online, including Insolvency Act Indemnity Insurance, giving instant cover and peace of mind to your client. If you are unable to meet the ‘Statements of Fact’ for our online policies, our expert Customer Services team can assist you with bespoke quotes from a choice of insurers to find you the best level of cover.
To find out more about the policies available from PSG Financial Services, contact customerservices@psgfs.co.uk or call our National Customer Services team on 01226 320076.
Source:
https://www.lawsociety.org.uk/support-services/advice/practice-notes/making-gifts-of-assets/
https://www.cml.org.uk/lenders-handbook/englandandwales/#C8777 (5.16.3)
https://www.legislation.gov.uk/uksi/2017/366/made
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