A sale at an undervalue is when a purchaser is buying a property from the seller at lower value than it is worth. For example; a property worth £250, 000 may be sold for £200, 000 which means the discount or ‘gift’ is a resulting £50, 000. This is not uncommon in transactions amongst family members and also happens frequently in the property investor community.
In this type of situation a buyer can be put in a potentially dubious situation because if the seller is declared bankrupt within 5 years after the sale, then the property may be seized and be held by the trustee in bankruptcy. This could lead to the transaction being set aside and the purchaser being at a loss.
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.
In situations like this it is important for the seller’s solicitor to obtain a document known as a declaration of solvency from the person who is selling. This declaration of solvency gives the buyer an assurance that the seller was not potentially insolvent at the time he/she sold the property.
Some lawyers may also decide to obtain, an undervalue indemnity policy. This is indemnity insurance which is obtained by the seller to protect the buyer and assure him/her that the seller is solvent at the time of the sale. The indemnity policy provides protection for the buyer against financial loss that may be incurred as a result of a claim being made against them. The purpose of the policy is to put the purchaser back into the position they were before the claim by the trustee in bankruptcy is made.
The declaration of solvency and undervalue indemnity policy also provide protection for lenders such as banks and mortgage companies.