What is a Declaration of Trust?
A declaration of trust is commonly used to define ownership rights in relation to a property where multiple parties have contributed to the purchase price.
It acts a written record of the financial arrangement between the owners, outlining the proportion of the purchase price that each party paid and the conditions of the ongoing ownership.
A declaration of trust should be used by individuals who are making a joint purchase or with the financial help of another party.
The declaration of trust, also referred to as a deed of trust, also distinguishes between the legal owners, ie the individuals whose names are registered on the property title and hold a legal interest in the property, and the beneficial owners, ie individuals who retain interest in the property ownership despite not being named on the title. This could include parents who make a financial contribution to the purchase of the house for an adult child.
For instance, where you and your partner are unmarried and wish to buy a house together, a declaration of trust will document how much you each paid towards the purchase of the property including deposit and fees, the arrangement for making mortgage payments, and what should happen if your relationship should come to an end. Would the house be sold, and the proceeds split between the two of you, or is there an option for one partner to buy out the other partner’s share?
Why do you need a declaration of trust?
A declaration of trust will protect your financial interests in a jointly owned property by detailing what percentage of the property you own, the ongoing conditions of ownership and what would happen should the property be sold or if one of the owners wishes to sell their portion of the property to the other owner. It provides clarity on all conditions of ownership and can be especially helpful where the name of an owner is not registered with the Land Registry, such as when a property is purchased with financial help from a family member.
An example of this is where a young man buys his first home with the help of his parents. He can afford the monthly mortgage payments but has no money for a deposit. His parents pay the £20,000 deposit with the understanding that should their son sell his home, they will receive their £20,000 back.
A declaration of trust will protect the young man’s ownership of the property, ensure that his parents have no responsibility to make mortgage payments and that the £20,000 will be paid back to them on the sale of the property only. They cannot legally demand the £20,000 while their son still own the property, and should their son move a partner in, that partner will have no legal ownership over the property.
What does a declaration of trust include?
The contents of the declaration of trust will vary depending on the details of the purchase but may include:
- the intention of each party to enter into a trust
- details of the property concerned
- how much money each party paid towards the purchase
- how much each party will be repaid and when
- the percentage of the property that each party owns
- how much each party will receive upon the sale of the property
- where there is a mortgage in place, how much each party will pay towards that
- how any mortgage will be cleared
- how other payments such as council tax, insurance and utility bills are to be split between the owners
- whether one owner may buy another owner’s share of the property
- what will happen should one party wish to withdraw from ownership
So for instance, where three friends buy a property together but the amount of money they pay initially is not equal, their proportions of ownership will not be the same and therefore should the property be sold, the proportions they receive of the sale price will correspond to their proportion of ownership. A declaration of trust will ensure that these proportions of ownership and sale proceeds are made clear.
Where an unmarried couple buy a property jointly but in the name of only one of them, perhaps due to a bad credit rating or having just started out in self-employment, but both of them make equal payments to fund the purchase, a declaration of trust would clarify ownership, despite only one of them being named on the mortgage and Land Registry. Conditions of who is responsible to pay the mortgage each month could also be added to protect the partner who is named on the mortgage against his partner refusing responsibility for mortgage payments.
How to draw up a declaration of trust
All parties who have ownership of the property should be involved in the process of drawing up the declaration of trust. Legal advice can prove helpful in ensuring that the interests of everyone involved are protected lawfully by the declaration of trust and that all possible outcomes have been considered.
It will be necessary to compile a list of all payments made to purchase the property, including deposit, searches, estate agent fees, stamp duty and legal costs, with details of what proportion of these was paid by which owner and therefore how much money each owner would receive should the property be sold.
Where a declaration of trust is drawn up without the knowledge and agreement of all parties, the document could be seen as fraudulent and therefore invalid.
Once the declaration of trust has been drawn up, it should be signed, each signature witnessed, and a copy should be forwarded to all parties.
Generally, the declaration of trust should then be registered against the property title deeds at the Land Registry. However, in certain situations, such as where an individual has purchased a property with the help of another person (for instance, where parents help their daughter or son to buy their first home), it may not be necessary to register the declaration of trust. A solicitor can advise you on the right path to take in this regard.
Terminating your declaration of trust
Should any party wish to terminate the declaration of trust, they must give four months written notice to each of the other parties involved.
It would then be possible for a new declaration of trust to be drawn up between the remaining owners, if necessary.
Can you add a declaration of trust after the property had been purchased?
Although a declaration of trust is usually drawn up during the purchase process, it is possible to add a declaration of trust at any time after the property has been purchased.
For instance, where an individual who has purchased their home alone moves their new partner in at a later date, they may wish to draw up a declaration of trust to clarify ownership of the property and state who will make the mortgage and bill payments each month.
Is a declaration of trust legally binding?
Yes, a declaration of trust is legally binding. It changes the legal ownership of a property, may override ownership registered with the Land Registry and can be enforced in court.
Why take legal advice?
With their wealth of knowledge and experience, a specialist legal adviser can discuss all elements of your personal situation and help you decide exactly what should be included in your declaration of trust to ensure that the financial interests of all parties concerned are protected now and in the future.