What is a Declaration of Trust? Property Trust Deeds Explained
A declaration of trust is something you’ll come across when you’re planning to buy a property with someone else, or with the support of another person. It’s a legal document, also referred to as a deed of trust, which records the financial arrangements between everyone who has a financial interest in the property. This could be necessary if you’re buying as a joint owner or getting help from someone else, such as a parent.
How does it work?
Property is expensive. It’s not just the initial deposit, but the ongoing mortgage repayments. If you’re buying together with a partner or friend, it’s likely – and common – costs won’t be split 50/50. If you’re buying on your own, you might be getting financial help from family.
As this could add up to a substantial amount of money, it’s often advised to sign a document which protects everyone’s interests. That’s exactly what a declaration of trust does. If the house is sold or someone wants to be bought out, it ensures all parties get what they’re entitled to – according to an agreement made at the outset, typically when the property is purchased.
By signing a legal document which sets out how much each person has put in and what should happen in any eventuality, the aim is to remove uncertainty and eliminate the chance of disagreements down the line.
Without a deed of trust, it wouldn’t be clear how much should be repaid – and to who – when the property is sold. Instead, all beneficial interests in the property are registered. The respective shares set out in the document are the proportions used to distribute the sale proceeds.
To clarify why it’s beneficial, consider the following:
- If you’re unmarried, the same legal protection doesn’t apply if you split up. It’s not something any couple wants to think about, but it is a possibility. Without a declaration of trust or cohabitation agreement, couples in this situation have different rights to married couples.
- It protects everyone’s investments. It’s easy to get swept up in the excitement of a property purchase – especially if you’re a first-time buyer. It’s important to remember it’s not only going to be your home, it’s a huge asset. Could you re-start elsewhere without your initial investment back? If not, you should consider protecting it in order to protect your future.
- Reduces the risks of disagreements down the line. When you buy property, you – and any joint owner – will be registered as the legal owner with the Land Registry. However, this doesn’t always record the proportions contributed by each party and if you’re getting support but not buying with someone, it could ignore their involvement altogether.
- It’s also helpful when one party’s name isn’t on the mortgage. If you move in with someone who already owns their own home or you’re a homeowner who has invited their partner to move in, only one person’s name will be on the mortgage. The partner might contribute to the repayments and monthly bills, though. This means they could potentially have a beneficial interest – to protect all involved, it’s best to get any agreements in writing to prevent disagreements later.
What should be included?
As every situation is different, a good solicitor will tailor the deed of trust to your requirements. You can add clauses which you feel will further help to protect each person’s financial interest, but the document should include these details
- How much each party has contributed to the deposit
- How the mortgage will be paid off, and how much each party will be paying towards the repayments and other outgoings
- What percentage of the house each party will own
- How the proceeds of a property sale should be split
- An agreed way of valuing the property
You can be flexible with how equitable interest would be treated. For example, consider the following situations:
- One person invests more in the deposit. Upon sale of the property, they should have that money back as well as a larger share of any profits.
- One person invests more, but earns less. If this person is not paying as much towards mortgage repayments and bills, then the share ratio could change each year as their partner continues to pay extra by an agreed percentage until they’ve made up the difference in initial investments.
These are just two examples of how you can account for different intricacies with a declaration of trust.
Who would need a Declaration of Trust?
There are two main reasons you’d get a declaration of trust. These are:
- If you’ve bought property with someone else. If you’re not married to this person, then there aren’t any laws to protect your investments. It’s a good idea to record who has paid for what – even if it’s an equal split with both the deposit and ongoing payments.
- If you’ve received financial help. If the bank of mum and dad – or any other individual – has supported your purchase, they may want to get their initial investment back once you’re on your feet.
- If both the above apply. A lot of house buyers purchase property with someone else, and with the help of parents or other contributors.
Deciding whether it’s right for you is a personal choice. Some parents, for example, may be happy putting up money towards the deposit – without expecting any return. Others would like to share in any profit made on the house. For joint owners, it can seem like a difficult topic to approach.
For anyone investing in property, though, a declaration of trust should be considered. To highlight how it’s not just relevant for new homeowners, other reasons include:
- If you’re part of an unmarried couple, and one of you pays off part of their share. If you’re a joint homeowner, and one of you inherits a substantial amount of money, you might want to pay off some of the mortgage. It would still be worth having this increase in investment recorded with a legal document. The same can be said if you add value to your home with improvements paid for by one individual.
- If someone moves in with you into a home you own – or vice versa. If your partner moves in with you and years pass, during which they’ve contributed towards the mortgage and bills, they could claim a beneficial interest. Similarly, if it’s you who has been making payments towards a house you don’t own, you might think it’s time to claim how you’ve contributed significantly.
The importance of a Declaration of Trust for Cohabiting Couples
Cohabiting couples are one of the fastest growing family types in the UK, with many people choosing to live together without getting married. In 2017, there were 3.3 million cohabiting couples according to the ONS. While a lot of these couples will buy a house together, no-one enters a relationship expecting it to end. Sadly, many do.
Ignoring the scenario of splitting up is a risk; it’s about being pragmatic, rather than pessimistic.
Considerations for Joint Tenants
When you buy a property as joint tenants, it’s assumed you own the property equally. If one of you passes away, the other will automatically inherit the other’s share. You can’t pass it on in your will.
However, you might still want to register – and protect – a beneficial interest. In other words, to record your respective contributions to the purchase price and ongoing costs. You can still use a declaration of trust to achieve this.
In fact, it’s commonplace for joint tenants to do this. Ever since 1998, the Land Registry has included a declaration of trust panel on its form and in 2012, a voluntary joint owners form was introduced. It gives homeowners the option to declare interests from the start – otherwise they are assumed to have equal shares in the property.
Considerations for Tenants in Common
When you buy a property as tenants in common, you each own a share – something which will be evidenced on title at the Land Registry. In this case, if one of you passes away, that share will be passed on as set out in their will. Without a will, the rules of intestacy apply. This means it won’t necessarily go to the co-owner of the property. For couples with children from a previous marriage, for instance, this would be beneficial as their share can be left to their kids.
A declaration of trust is still useful because precise shares – including contributions to the deposit and plans for ongoing repayments – should be set out at the start. As an unmarried couple, if you don’t do this, complex property laws will apply if you separate.
As both joint tenants and tenants in common, a deed of trust is a way of securing the financial contribution with a legal agreement.
Can you change or challenge a Declaration of Trust
First things first, a declaration of trust is in place to make sure no-one can change their minds about how the money is split when the property is sold. But situations change, and such legal documents might need updating. The deed can be re-written to reflect changes, but it needs the consent of both parties.
If you want to make substantial changes to the deed, it’s typically best to get a new one written. If changes are only minor, you can enter a deed of variation. It refers to the existing declaration and adds the new clauses you need. It should clarify which details are replaced by this new deed of variation, whereas if you had a new deed written, as soon as it was filed, it would replace any conflicting information in the original document. You might want to change your declaration of trust if:
- You’ve made home improvements and increased the value of your home
- There’s a change in beneficiaries e.g. someone is bought out
You can’t backdate a deed of trust, though. If you want to include your intentions, it can be useful to reference past events. For example, if you own a house and wish to give some ownership to a new party, you could include a simple narrative of events. That way, someone reading the deed would understand the motivations for all details.
When intentions are clear, there’s less room for anyone to go back on the agreement. In fact, it can be difficult to challenge a declaration of trust in court – the only cases which tend to be represented are on the grounds of fraud or misrepresentation.
What happens if you get married?
Of course, many cohabiting couples will get married. If this is you, check your original declaration of trust. It might include provisions about what happens when you get married – but they won’t be conclusive, as section 25 of the Matrimonial Causes Act 1973 applies once you’re married, or in a civil partnership.
The deed of trust will give a good indication of your intentions, though, and can be considered in court. However, we recommend a pre-nuptial or post-nuptial agreement to capture the details of what would happen if you were to separate.
The cost of a Declaration of Trust
At Manak Solicitors, you can easily get a quote for our conveyancing services online – but please specify whether you need a declaration of trust written for an accurate price. Prices for this document start from £450 plus VAT.
We understand that living together – whether you’re buying for the first time or the fifth – is an exciting time. But do a quick Google search and you’ll immediately find horror stories of what happens if things go wrong.
By recording contributions to initial and ongoing payments, you can make sure your intentions are clear – otherwise, without any common spouse law in the UK, the courts will infer what was meant if you split up and disagree about the ownership of the property. As such, the cost of not having a declaration of trust is much more.
There is currently a Bill working through the House of Lords – the Cohabitation Rights Bill 2017-19 – which seeks to provide financial protections for people living together as cohabitants.
As experienced solicitors, Manak will keep updated on its progress, and how the reality of changing family dynamics is reflected in the law.
We can guide you through any stage of your property purchase, and pride ourselves on efficient conveyancing services. Get in touch with any queries about declaration of trusts.