With more and more first time buyers relying on the ‘bank of mum and dad’, along with a greater number of couples choosing to cohabit, Declarations of Trust are becoming an increasingly popular and important tool to protect individual’s interests within property.
What is a Declaration of Trust?
A Declaration of Trust (or otherwise known as a Deed of Trust) is a legally binding document entered into by individuals who are purchasing a property together to record how the property is to be owned. The document can set out the financial contributions made by each party, as well as any future financial arrangements. Importantly, a Declaration of Trust can include third parties who have an interest in the property but are not the registered proprietors.
When should a Declaration of Trust be made?
The need for a Declaration of Trust between co-owners arises when the property has been purchased between parties as Tenants in Common.
As explained by Gemma Bath in her article Five Things You Need to Know About Conveyancing, when more than one person is buying a property they can either own the property as joint tenants or tenants in common, the differences between these two forms of ownership are set out below:
- Joint tenants means that the property is owned in equal shares by all parties. When one person dies, the other(s) automatically inherit the deceased’s share. Accordingly, it is not possible for a joint tenant to leave their share otherwise.
- Tenants in common means that each person’s share is held in distinct proportions. This means that each party can leave their share of the property to somebody else and in the event of their death their share will pass according to the terms of their Will. In this regard, it is important to make a valid Will so that your interest in the property passes as you intend.
Since tenants in common own distinct shares within the property a Declaration of Trust can be used to record the exact percentage of each owner’s interest.
To ensure that the Declaration of Trust accurately reflects the intentions of the purchasers it is advised that a Declaration of Trust be entered into at the outset of the purchase.
Why should someone enter into a Declaration of Trust?
There are three main reasons:
Presumption: The presumption upon purchasing a property as tenants in common is that the proprietors will own the property in equal shares, i.e. if there are two purchases, 50/50. If this presumption is not the intention of the purchasers then a Declaration of Trust should be drawn up to set out the alternative intentions.
Disputes: If the actual intentions of the proprietors are not included within a Declaration of Trust then there is potential for a dispute when the property is to be sold. In the event that a dispute does arise, a Declaration of Trust is considered evidence of each party’s beneficial interest in the property. A Declaration of Trust can therefore prevent the potential stress, cost and uncertainty of legal proceedings.
Fairness : A declaration ensures that on the sale of the property all parties receive their intended share, according to what was agreed between them at the outset.
Who should enter into a Declaration of Trust?
A Declaration of Trust can be particularly important for a third party who has contributed towards the property but is not a registered proprietor.
This is often the case for parents who contribute towards the purchase price. If the parent is not a registered proprietor on the title documents, then a Declaration of Trust can be used to protect their financial interest in the property. This may be helpful in the event of their child going through a divorce or bankruptcy.
Co-owners of property may also wish to enter into a Declaration of Trust if they are not contributing towards the property equally. For instance, if one party is contributing a larger proportion of the deposit, or a greater share of the mortgage or even contributing to the property by way of house renovations.
What should a Declaration of Trust include?
A Declaration of Trust should confirm the extent of each interested party’s interest in the property, and as such it is helpful for the following to be noted:
- The percentage of the property each party will own
- Upon a sale of the property how the proceeds should be split
- How much each party contributed towards the deposit, and whether this sum will be paid back alike or be calculated in proportion to any increase in the value of the property
- Who will make the mortgage payments and in what proportions
- How much each party will be contributing towards outgoings.
Will the terms of the Declaration of Trust appear on the title deeds?
The existence of a Declaration of Trust can be noted on the title deeds as a restriction. However, the actual Declaration of Trust is not filed at the Land Registry and as such the terms remain confidential. Any party who has an interest in the property, but is not a registered proprietor, will not appear on the title deeds.
Does the Declaration of Trust need to be updated?
The parties will need to consider whether they would like fixed or fluctuating shares in the property. It may be appropriate for the parties’ shares in the property to fluctuate during the ownership of the property dependent on each parties’ financial contributions towards the property going forward.
If the parties do want to allow for fluctuating shares it is helpful to consider how they will keep records of their contributions and whether any updates to the Declaration of Trust will be required periodically to reflect this.
Do I need to tell my mortgage company?
If the parties are entering into a Declaration of Trust after the property has been purchased it may be necessary to seek advice as to whether the lender’s consent is required, as some lenders place restrictions on the transfer of the beneficial interest in the property. If you are in any doubt in this regard then you should seek legal advice.
What effect does a Declaration of Trust have on Stamp Duty Land Tax?
A Declaration of Trust itself does not constitute a transfer of land, and as such Stamp Duty Land Tax is not usually payable, (other than in relation to the purchase of the property itself). Caution should however be taken if the Declaration of Trust is entered into after the purchase and has the effect of transferring the beneficial interest in the property. If you are in any doubt tax advice should be sought.
If you would like further advice, or information on preparing a Declaration of Trust please contact a member of our Private Client team today. For advice on buying or selling your property, please contact a member of our conveyancing team.