Why your conveyancer asks about gifts and insurance

As part of our September Property Essentials series, we’re looking at some of the key processes and procedures that take place behind the scenes when buying or selling a home.

Imagine: you’ve found your dream home, your offer has been accepted and your solicitor is working through the paperwork. They identify a potential issue that catches many buyers off guard:

“There was a gift of the property three years ago. We may need an indemnity policy.”

For most people, the natural reaction is: why does a gift cause a problem? After all, giving someone a property is usually a generous act, not a suspicious one. But in conveyancing (the legal process of transferring property), a gift of a property, or a share of a property, in the history of a title can ring alarm bells.

Why does a gift of a property matter?

When a property has been given away rather than sold, it’s known legally as a ‘transaction at undervalue’. Under the Insolvency Act 1986, if the person who made the gift later becomes bankrupt, a court can set the gift aside, potentially reversing the transfer if the bankruptcy happens within five years of the date of the gift.

This doesn’t mean anything untoward has happened. The law simply recognises that someone in financial difficulty might try to put their assets beyond the reach of their creditors by giving them away. The five-year window exists to guard against that risk.

If you’re buying a property and there was a gift in the chain of title within the last five years, your solicitor will typically ask for a declaration of solvency and arrange an indemnity policy to protect you against the (usually very small) possibility that the gift could be challenged.

What is an indemnity policy?

An indemnity policy is a type of insurance that protects a buyer, and usually their mortgage lender and successive owners too, against a specific risk attached to the property. It’s not the same as buildings insurance. Instead, it covers a particular legal defect or uncertainty in the title, something that is unlikely to cause a problem but could potentially be costly if it did.

The good news is that these policies are usually inexpensive, often requiring a low-cost, one-off payment. In most cases, they continue in perpetuity.

What happens after five years?

Once the five-year period has passed, the main insolvency risk expires. In most cases, if a gift was made more than five years ago, no indemnity policy is needed for this particular risk.

However, there’s a separate provision deriving from section 423 of the Insolvency Act 1986, which has no time limit at all. This covers transactions made deliberately to defraud creditors. It’s much harder to prove and the risk diminishes over time, but some lenders may still want the comfort of an indemnity policy, particularly if the gift was relatively recent.

Why does my solicitor need to check all of this?

Your solicitor’s job is to make sure that when you buy a property, you receive a good and marketable title: one that you can enjoy without legal challenges and one that you, or a future buyer, can sell or mortgage without difficulty.

Checking for gifts, insolvency risks, charity compliance and other title matters is all part of that process.

Most of the time, the answer is straightforward: the risk has passed, or a simple indemnity policy provides a safety net. But skipping these checks could leave you exposed to problems that are far more expensive to fix after completion.