Declaration of Trust

 What is a Declaration of Trust?

Also known as a Deed of Trust or Trust Deed, a Declaration of Trust is a legally binding agreement that sets out each party’s financial contribution and ownership share in a jointly owned property. It is particularly useful when the co-owners have contributed different amounts to the purchase and want to record those proportions formally.

Understanding Beneficial Interest and Tenants in Common

When two or more people buy property, they can hold it as either joint tenants or tenants in common. Joint tenants each own an equal share, regardless of how much they paid. If one owner dies, the other automatically inherits the entire property.

Tenants in common can own unequal shares, such as sixty percent and forty percent. These proportions can be set out in a Declaration of Trust. Unlike joint tenancy, there is no automatic inheritance, so each party can leave their share to someone else in their will. If no agreement is made, ownership is assumed to be equal, which could be unfair if one person contributed significantly more. A Declaration of Trust helps avoid this situation.

Why is a Declaration of Trust Important?

Buying property is a major financial commitment. A Declaration of Trust helps avoid future disputes by clearly documenting how much each person contributed, each person’s ownership percentage, what happens if the property is sold or one person wants to be bought out, and how proceeds from a sale will be divided. This clarity reduces conflict and protects everyone involved.

Who Should Have One?

Anyone buying a property with another person as tenants in common should consider a Declaration of Trust. This includes unmarried or cohabiting couples, friends or family members purchasing together, and joint investors. Unmarried partners, in particular, have no automatic legal rights to each other’s property. A Declaration of Trust is often the best way to protect your investment if the relationship ends.

Even if you are buying fifty-fifty, the document can be useful. However, it is essential if your contributions are unequal. For example, if you paid seventy percent of the deposit, you will want to make sure you receive seventy percent of the proceeds if the property is sold.

What If My Contributions Are Indirect?

Ownership shares can also reflect indirect contributions. For example, one person might pay the deposit while the other covers more of the mortgage. One person might pay for major renovations or improvements. Sometimes, someone moves into a partner’s property and contributes to bills or mortgage payments. Even if your name is not on the legal title or the mortgage, a Declaration of Trust can help protect your financial input.

How Does It Work?

Declarations of Trust are very flexible. They can include terms such as;

• Initial financial contributions, including deposit and legal fees;
• Ownership shares for each party;
• Ongoing contributions to the mortgage and property bills;
• What happens if someone contributes additional money in the future;
• Terms for the future sale of the property or buyout of one owner;
• Contributions from third parties, such as financial help from parents.

Minor updates can be made by adding clauses, while major changes may require a new Declaration. Begin by speaking to a solicitor, who can tailor the document to your situation. There may also be tax or inheritance issues to consider, and legal advice can help you determine whether additional documents, such as a will, are also needed.

How Is It Created?

First, all parties meet with a solicitor to discuss their financial contributions and potential future scenarios. The solicitor then prepares a tailored legal document. All parties have a chance to review the draft and suggest changes. Once everyone agrees, it is signed in front of a witness.

You can also request that a restriction be placed on the property’s title at the Land Registry. This prevents the property from being sold or transferred without the agreement of all parties. While the Declaration itself is not registered, the restriction adds extra protection.

When Should You Make One?

Ideally, the Declaration should be created when the property is purchased. However, it can be put in place at any time during ownership, especially when circumstances change. Examples include;

• Someone contributes more money;
• Major improvements increase the property’s value;
• One owner is being bought out;
• Ownership is being transferred, for example, to an adult child;
• Living arrangements change, such as a new relationship.

Does It Affect My Mortgage?

In most cases, a Declaration of Trust will not affect your mortgage or require approval from the mortgage provider unless it impacts their security. It is always best to consult a solicitor to determine whether the lender should be notified.

Tax Considerations

A Declaration of Trust can have tax implications depending on how ownership shares are divided. For example, Stamp Duty Land Tax may be charged if a change in ownership occurs and one party assumes more of the mortgage or compensates the other. If the property has increased in value and one person transfers a share to another, Capital Gains Tax may apply.

Rental income from the property is also taxable. The way this income is split between co-owners must follow the terms of the Declaration. Because tax rules can be complex, legal advice will ensure your arrangement is both fair and tax-efficient.

Real Case: Culliford versus Thorpe

The legal case of Culliford vs Thorpe, decided in the High Court in 2018, highlights why it is essential to have a written agreement. In this case, a couple who lived together agreed to share a property that was legally owned by only one of them. After the legal owner passed away without leaving a will, the surviving partner had to go to court to prove they had a beneficial interest in the property.

The court eventually agreed that the couple had intended to share the property, based on their actions and evidence. However, the lack of a written Declaration led to a long and stressful legal process. The safest option is to put your intentions in writing in a Declaration of Trust signed by all parties.