What Is a Declaration of Trust?
A declaration of trust, also known as a deed of trust, is a legal document that details financial arrangements for everyone with a financial interest in the property. This important document is necessary for anyone buying a property as a joint owner.
Who Creates a Declaration of Trust?
A declaration of trust is usually drawn up when a property has multiple legal owners but not all the owners have contributed equally to the property purchase. For example, an unmarried couple may purchase a home together but one of them provided most or all of the deposit.
Anyone who contributes to the purchase of a property and who wants their investment back will benefit from a declaration of trust. With property prices and interest rates at an all-time high, plenty of buyers rely on a financial contribution from the Bank of Mum and Dad to get on the property ladder. If Mum and Dad want the money back at a later date, to fund their round-the-world cruise, then a declaration of trust is essential.
How Does It Work?
Buying a property is exciting but it is important not to get swept away by paint samples and furniture brochures.
A declaration of trust is there to protect everyone’s interests. If two people buy a property together, both of their names will appear on the Land Registry, but this doesn’t record how much each party contributed to the purchase.
For example, Camilla and Charles buy their first home together but are not married. Camilla works as an engineer and has a good salary but Charles is still studying for his PhD, so has no real income. Camilla contributed the majority of the deposit. Things are great for three years and then life happens and our unhappy couple decide to split up. The declaration of trust drawn up when Charles and Camilla bought their home now comes into play, ensuring Camilla gets back the money she’s entitled to, as per the agreement, when the house is sold.
During the conveyancing process, a declaration of trust can also be used when there is a party whose name isn’t on the mortgage. For example, Helen moves in with Roger, who already owns a property. She plans to contribute financially toward the mortgage or bills because she wants to be an equal partner. Doing this would give her a beneficial interest in the property, so Roger’s solicitor advises him to have a declaration of trust drawn up, as it gives him protection from future disagreements.
Without a declaration of trust, it would not be clear who was entitled to what when the property is sold. As you can imagine, this has the potential to create a lot of problems, especially in the event of a relationship breakdown.
What Must Be Included in a Declaration of Trust for Property?
A solicitor will tailor a declaration of trust to fit your exact requirements, as not everyone is in the same situation. However, the main details that are usually included in a deed of trust are as follows:
- The sum each buyer contributed to the deposit
- What percentage of the property each party owns
- How much each party pays toward the mortgage and how the mortgage is expected to be repaid (e.g., from the future sale of the property or an investment policy)
- How any sale proceeds will be split when the property is sold
- How the property will be valued
The agreement is entirely flexible and can be adjusted in many ways. For example, Samantha and Ryan buy a house together. Ryan contributes 80% of the deposit and Samanatha 20%, but Samantha pays 80% of the mortgage while Ryan gets his new business up and running. On the face of it, Ryan should get more from the sale proceeds because he paid the lion’s share of the deposit, but Samantha is contributing more to the mortgage, so any declaration of trust drawn up needs to reflect the inequality. In this instance, the share ratio can change over time as Samantha’s investment in the property grows with each mortgage repayment.
Specific Guidelines for Joint Tenants
When two people buy a property as ‘joint tenants’, they each have an equal share. If one person dies, the other inherits their share; it can’t be passed on to an heir. However, a declaration of trust can be used to record respective contributions, such as when one person paid a larger share of the deposit.
Buying a property as ‘tenants in common’ is different. Here, a person’s share of the property can be passed on, as per the terms set out in their will, rather than the co-owner of the property. A declaration of trust helps to protect both parties’ financial contributions.
Can a Declaration of Trust Property be Changed?
Situations do change and sometimes legal documents need to be updated, usually via a deed of variation.
A declaration of trust can be revised at a later date but all parties must consent to any changes. This prevents one party from benefiting from the change without the knowledge of the others. Where significant changes are required, it is usually better to have a new declaration of trust drawn up. This may happen if the original property has been substantially renovated or one of the people with a financial interest in the property has been bought out by another.
It is important that any changes and intentions are clear, so motivations are understood. It is also important to be aware that making changes to a declaration of trust can have tax implications, so always take legal and financial advice before making changes to an existing deed of trust.
A deed of trust can impact the following:
- Stamp Duty and Land Tax
- Capital Gains Tax
- Income Tax
- Inheritance Tax
How Long Does It Last?
A deed of trust is usually aligned with the lifespan of the ownership of the property, as long as specific conditions are met, or until a specific event takes place. For example, Charles and Camilla’s declaration of trust was effective for the three years they owned their property. Once they sold their home, the declaration ceased to be valid.
Can a Declaration of Trust be Challenged?
It is very difficult to challenge a declaration of trust drawn up by a competent and experienced solicitor. The whole point of a deed of trust is that it eliminates ambiguity over who is entitled to what. The only time a declaration of trust can potentially be challenged in court is when there are accusations of fraud or misrepresentation.
For example, all parties entering an agreement must be able to demonstrate they understand what it entails, and everyone must sign the document in the presence of witnesses.
Heald Nickinson: Experienced Property Solicitors
With a team of experienced solicitors, we can guide you through the process of creating, reviewing, or amending a declaration of trust to meet your specific needs, ensuring peace of mind and security for your property investments
If you need advice on declarations of trust, scroll down and submit a contact form or directly reach out to us on 01276 680000.
