Thinking of gifting property? Don’t overlook the Insolvency risk!

Transferring property to a spouse, child or other family member can be an attractive way to achieve estate planning or tax objectives. However, gifts of property often create risks that are often overlooked.

If an individual gifts property and subsequently becomes insolvent, a trustee in bankruptcy may seek to challenge the transfer as a transaction at an undervalue. In certain circumstances, the court can set aside the transfer, potentially affecting the recipient’s ownership of the property. This risk is particularly relevant where a valuable asset, such as land, is transferred for no payment or ‘consideration’, between family members. Although there may be entirely legitimate reasons for the arrangement, future creditors may argue that the transfer reduced the assets available to satisfy debts.

The implications often extend beyond the original parties. Mortgage lenders and future purchasers will commonly enquire whether the property was acquired by way of gift (and when) and may require insolvency indemnity insurance before proceeding with a refinance or sale. However, insurance is not a substitute for understanding the underlying risk and should not be viewed as eliminating the possibility of a challenge.

When considering a gift of property, you should assess:

• The transferor’s current and foreseeable financial position.
• Whether there is a clear commercial or family rationale for the transfer.
• The potential impact of the gift on future financing or a future disposal of the property.
• Whether insolvency indemnity insurance should be obtained.

A statement of solvency from the transferor can provide useful evidence of financial standing at the time of the transfer, but it is not a complete safeguard against a future challenge.

The key message is simple: a transfer between family members may appear straightforward today, but its consequences can extend for many years. Taking advice at an early stage can help identify risks, protect future marketability and avoid costly issues for both the recipient and any future lender or purchaser.

For property owners, insolvency considerations should form part of the discussion whenever a gift of property is proposed, particularly where the asset is of significant value or forms part of a wider succession planning strategy. Careful planning and appropriate risk management remain essential.