Last updated on June 19th, 2020 at 09:00 am
How declarations of trust work
Your parents would like to give you and your partner £50,000 to help you buy your first house, but they want you to set up a declaration of trust to ensure their money is protected. Although you have heard of the legal term “declaration of trust”, you do not genuinely understand what it is or why do you need one.
This article aims to answer most frequently asked questions about the declarations of trust and how they are set up.
1. What is a declaration of trust?
Sometimes known as a deed of trust, a declaration of trust is a legally binding written agreement which confirms that two or more people jointly own a property and details the financial arrangements between them and/or anyone else who has a financial interest in the property.
What are the different ways a property can be owned jointly?
There are two different ways in which you can jointly own a property, such as:
Property held as joint tenants means each party owns an equal share of the property and has the equal, undivided right to keep or dispose of the property. This also means that when one of the owners passes away, the title of the property is automatically given to the other, surviving owner, regardless of whether the deceased owner had a will naming someone else.
Tenants in common
Property held as tenants in common means that each tenant owns separate and distinct shares of the property. In this case, when one of the owners passes away, they can pass their ownership interest onto a beneficiary in their will.
2. Why do you need to set up a declaration of trust?
A declaration of trust confirms the true ownership of a property in the proportions contributed by each party regardless of the title entries at the HM Land Registry.
The declaration of trust can be noted at the HM Land Registry (by entering a restriction on the register) in order to alert future purchasers that the registered owner is not alone in owning the property. In this way, the declaration of trust allows an owner not protected by being a registered owner of a property at the HM Land Registry to be protected as such.
3. When should a declaration of trust be created?
It is important to create the declaration of trust at a time when the owners of the property and other persons who may have contributed towards it agree as to who owns what shares of the beneficial interest in the land, and whether shares are to be equal or unequal and so on.
Ideally, the intention and/or any agreement as to how the parties are to hold the property should be addressed from the outset, to avoid any confusion in the future, should the property or a party’s interest need to be disposed of (for whatever reason).
However, if you have already purchased the property without considering the above, a declaration of trust can still be set up provided the co-owners agree. In this circumstance, we recommend that you seek independent legal advice at the earliest convenience so that you can understand what options may be available to you, should you ever consider to sell the property in the future.
4. What steps you should take when making a declaration of trust?
The first important thing to be aware of when setting up a declaration of trust is that a declaration of trust changes the beneficial ownership of the property. For this reason, you have to be absolutely certain of the decision that you are making to share the ownership of a property.
A second important thing to take into consideration is that the purchase of a property is a long-term commitment (longer than some marriages) and a declaration of trust reflecting the true ownership must be just that: the true ownership.
Thirdly, when deciding to set up a declaration of trust, you should work out very carefully the proportions in which you will own the property and include all the costs of the purchase in your calculations. The proportions that you set up from the outset are very important because they will be used to distribute the sale proceeds when the property is sold (or possibly the amounts that each party has to pay for the property to be sold if the property loses value). Please read the answer to question 5 below to find out about what other elements you should include in a declaration of trust.
Another step to follow when making a declaration of trust is that you need to ensure that the registered and true owner(s) complete the declaration of trust together. If the declaration of trust is completed without all parties’ knowledge and consent, then the declaration of trust could be considered fraudulent. Moreover, once the declaration of trust is complete, make sure it is dated on the date of the last party signature.
Lastly, although a declaration of trust is not registrable at the HM Land Registry, you can make future purchasers aware that someone else may have an interest in the property by either completing the declaration of trust panel in Form TR1 or Form JO (if you are currently purchasing the property) or entering a restriction on the title register of the property (if you already have purchased the property). Read more about How to register a declaration of trust at the HM Land Registry.
5. What you should include in a declaration of trust?
When drawing up a declaration of trust you will need to include all relevant information, which tends to change from case to case. The main elements to be included are:
- your joint intentions;
- each individual’s share in the property;
- who pays for stamp duty and the surveyor and solicitors’ costs;
- the individual’s entitlements if the property is disposed of;
- ownership of furniture;
- cost of decorating/refurbishing/remodelling;
- agreement as to the division of sale proceeds in the event of a decrease of a value of the property below the price originally paid for it;
- agreement on a procedure to govern the sale of the property if there’s a relationship breakdown between the parties;
- valuation methodology to follow, particularly if there is a fallout or deadlock between the parties;
- how mortgage payments, council tax, insurance, maintenance and household utilities payments are to be divided between the owners;
- an indemnity by one co-owner to another if the mortgage has been secured by only one of the co-owners;
- an adjustment mechanism if one party pays for improvements or repairs to the property or pays for all of the outgoings for a period of time;
- a first refusal ‘pre-emption’ right to purchase the property if one of the co-owners wants to sell; and
- a lodger being taken in if one party moves out.
You should also consider including other agreements/provisions based on your unique requirements, such as whether the people living in the home are allowed to smoke or keep pets.
For those of you who are more versatile with understanding the legal implications of declarations of trust, we have included a simple, and easy to adapt, declaration of trust template, together with guidance notes, in our shop.
6. How is each party’s share of property calculated in a declaration of trust?
The purpose of a declaration of trust is to avoid confusion and minimise the potential for any conflict if the property later needs to be sold or one of the co-owners needs to buy the other’s share. To achieve this purpose, the declaration of trust may either specify that each party is entitled to a set percentage of the property or it may set out a mechanism for calculating each party’s share if and when the property will be disposed of.
If party A contributed 65% of the deposit along with other purchase costs and monthly mortgage payments, and party B contributed solely 35% of the deposit, it would normally make sense for these to be the percentages of ownership each party held.
Alternatively, where party A contributes the majority of the deposit, but the mortgage payments are then split equally, party B will be slowly increasing his/her share of the total equity in the property over time. In this circumstance, best will be to agree on a formula for working out each party’s share when a sale is made to reflect the amount of equity each has built up at that point.
7. How is a declaration of trust executed?
As the declaration of trust is a deed, this means that in order to be validly executed it requires to be signed, dated, each signature be attested by an independent witness and then ‘delivered’, which simply means indicating that you intend to be bound by the deed. Learn more on how to sign a deed.
We recommend our clients to certify copies for everyone’s records. This means that each copy is confirmed by a qualified person, usually a solicitor, as a true copy of the original document.
8. Is a declaration of trust just for property owners?
The simple answer to this question is “No”.
As your parents have gifted you and your partner £50,000 to help you buy your first house, would be fair that your parents, or whoever else has a financial interest in the property, get their money back when the property is sold.
A declaration of trust ensures that everyone who contributed financially to the acquisition of the property, in whatever proportion, receives back their rightful financial share.
9. Is the declaration of trust legally binding?
The declaration of trust is legally binding provided that it is correctly executed and in compliance with the relevant formalities. It has the same legal power as a contract.
When a conflict arises between co-owners, we usually recommend considering instructing an independent solicitor (not the solicitor who acted for the parties when they bought the property and drafted the declaration of trust because he/she would be conflicted as he/she acted for both of the parties) to write to the other party explaining his/her obligations under the terms of the declaration of trust.
In the event this fails, similar to a contract, you may need to apply to the court to enforce it.
10. Can you change or challenge a declaration of trust?
A declaration of trust is in place to make sure that parties cannot change their minds about how the sale proceeds are divided when the property is sold. However, circumstances might change (for example, you made improvements and increased the value of the property or one of the beneficiaries has been bought out) and such legal agreements might need updating.
If you want to make substantial changes to the declaration of trust, we recommend you to get a new agreement in place. If they are only minor changes, you can consider entering in a deed of variation.
A deed of variation will cross-refer to the existing declaration of trust and contain the new clauses that you need. It should also clarify which details are replaced in order to avoid any potential conflicting information with the original document.
You cannot backdate a declaration of trust and if you want to make references to past events, you should consider including such references. For example, if you are the sole legal owner of a property and wish to give part of the beneficial interest to a new party, you could include a narrative of events, so any person who will read the deed to understand the course of events and the motivation behind setting up such a declaration of trust.
As mentioned before, the purpose of making a declaration of trust is to confirm the true ownership of the property and avoid any future confusion. Therefore, it can be difficult to challenge a declaration of trust in court. The only cases which tend to be represented in front of a judge are on the grounds of fraud or misrepresentation.
11. What happens to a declaration of trust if you get married?
If you get married to a partner who you own property with, your respective rights to the property will be determined by section 25 of the Matrimonial Causes Act 1973, potentially taking priority over any declaration of trust you previously entered into.
We usually recommend to include a provision in your declaration of trust for what will happen if you marry even if you have no immediate plans to get married.
Alternatively, you may consider transferring the terms of your declaration of trust into a pre-nuptial agreement. In this way, you clarify the course of the past events between the parties and avoid any future confusion.
12. What happens to a declaration of trust if one partner dies?
Here the answer depends on what form of co-ownership applies to your situation.
As joint tenants, the survivor(s) automatically inherits the whole of the property. In joint tenancy, co-owners do not have divisible shares and therefore they cannot dispose of their interest in the property under their will.
In contrast, as tenants in common, you can leave your respective share of the property to whomever you like as long as this is set out in a valid will. In the absence of a valid will, the standard rules of intestacy will determine who inherits your share of the property, meaning that your wishes will not necessarily be carried out.
13. What are the tax implications of a declaration of trust?
Tenants in common would usually be treated separately meaning each individual pays their own tax. In respect of income tax and capital gains tax, any profits and losses arising from the property will be treated as accruing directly to the relevant co-owners according to the beneficial shares in the property.
On the other hand, spouses and civil partners are generally treated as entitled to income in equal shares unless they opt for taxation on a different basis which corresponds to their beneficial interests or an exclusion applies.
There are two important tax implications that you need to consider before entering into a declaration of trust:
- If the declaration of trust has the effect of transferring a beneficial interest in the property from one co-owner to another, Stamp Duty Land Tax may be applicable;
- If the co-owners are changing the proportions in which they hold the property, then Capital Gains Tax is likely also to be payable.
14. Do you need a solicitor for a declaration of trust or can you create your own?
To be satisfied that a declaration of trust will work for each of the parties to it, and also that it will be binding, we recommend that appropriate legal advice is taken. If possible, each party should take independent legal advice.
We advise on an increasing number of declarations of trust matters each year. We can produce a declaration of trust on a fixed fee basis, usually for £350 plus VAT unless requirements and circumstances are particularly complex. Please email us to arrange a 20-minute no-cost no-obligation initial consultation to discuss your requirements.
As a starting point please complete this questionnaire which lists some basic details we will need in order to produce a declaration of trust.