Declaration Of Trust All You Need To Know
The definitive solicitor’s guide for all you need to know when considering a Declaration of Trust!
With property prices rising at a greater rate than wages, individuals and couples are increasingly looking for alternative arrangements for buying a house. This might include clubbing together with friends or a partner to buy a property as joint owners, or seeking financial help from parents, relatives, or other individuals who are in a position to offer their support.
A Declaration of Trust (also referred to as a Deed of Trust) is often considered when multiple people have a stake in a property and there are no existing legal arrangements in place between them (for example, a Cohabitation Agreement) to determine what each person is entitled to and what should happen if the property is sold.
What is a Declaration of Trust?
A Declaration of Trust is a legally binding document made at the time of buying a property. It records the financial arrangements of everyone who has an interest in the property, detailing what share of the property they own and what should happen in various eventualities, such as if all owners agree to sell the property or if one owner wishes to buy out another.
What does a Declaration of Trust do?
A Declaration of Trust protects everyone’s interests in a property, ensuring each party gets what they are entitled to by their initial investment when it comes time to sell the property or sell a share of it. If there is no Declaration of Trust in place, it becomes more difficult to tell who should be repaid and how much they are entitled to when the property is sold.
There are many reasons to sign a Declaration of Trust. Some of the most common include:
Buying property as an unmarried couple: Despite the pervasive myth that couples who are cohabiting are covered by something called ‘common law marriage’, in actual fact couples who are not married or in a civil partnership do not have any of the legal protections afforded those whose relationship has been recognised by law.
This means there are no guarantees that each party will be treated fairly should the relationship break down and their co-owned property need to be dealt with. A Declaration of Trust can prevent uncertainty by specifying who will be entitled to what should the relationship end.
Protecting someone whose name is not on the mortgage: There are many reasons why someone might have an interest in a property and contribute payments towards it but not have their name on the mortgage.
Whether because they have poor credit or other debts that make them ineligible for another mortgage, or because they moved into a house already owned by another party, a Declaration of Trust will record the specific arrangement and ensure that the right parties retain their beneficial interest, if appropriate.
Reducing the risk posed by disagreements: A house is a significant investment, and as such all persons who have a stake in it should have their money protected.
While the Land Registry records ownership, it doesn’t take into account the specific proportions each party has contributed to a property, meaning that when it comes to selling, some stakeholders could find themselves out of pocket without a legal document recording their contributions.
Putting a Declaration of Trust in place protects against any disagreements and misunderstandings that may arise later down the line.
What should be included?
Each Declaration of Trust is different, and any good solicitor will tailor the deed to reflect the fact that no two financial arrangements are ever exactly the same. That being said, there are some details that all documents should contain:
- The amount each party has contributed to the deposit on the property
- The amount each party will contribute to the mortgage repayments and other outgoings
- The percentage of the property each party will ultimately own
- How much each party will get from the sale of the property
- How the property will be valued before it is put up for sale
Beyond these key pieces of information, various clauses can be added to account for different eventualities that may occur.
In addition, a number of arrangements can be chosen from for how equitable interest will be treated: if one party has invested more in the deposit, for example, they could receive that larger sum back alongside their agreed share of profits upon sale; or if one party is contributing less to the mortgage repayments than the other, then the share ration could be recalculated each year to reflect the amount each party has invested as this sum changes.
Is a Declaration of Trust legally binding?
A Declaration of Trust is a legally binding agreement, provided that it has been prepared correctly.
It should be noted that in some cases a distinction is made between a Declaration of Trust and a Deed of Trust, where the former is considered to be a more informal document that only records how shares in a property are split – not any further clauses pertaining to legal ownership or provisions for sale.
In many cases, however, these terms are used interchangeably, because in most cases a Declaration of Trust does contain more detail than just the beneficial interest split. In this case, the document needs to meet the stricter criteria of a deed in order to be executed.
As with any legal document, the Declaration of Trust must meet various criteria to ensure it will be recognised by law: it must be prepared as a deed (a formal legal document, usually drawn up by a legal professional), all parties concerned must be able to demonstrate that they entered into the agreement willingly and with full knowledge of what it entailed, and it must be signed by all concerned parties, and the signing witnessed.
Can a Declaration of Trust be overturned?
The point of a Declaration of Trust is to remove any ambiguity around what might happen to any interested party’s investment in a property in the future. It is designed to safeguard against misunderstandings, disagreements, and people changing their minds, and as such it is not easily changed.
That being said, circumstances do change, and if all parties who signed the original document give their consent then the Declaration of Trust can be amended or rewritten.
For minor changes, a deed of variation can be appended to the original document to add additional clauses. Provided the new deed is explicit in which parts of the original document it is replacing, this can be a simple way to update small details contained in the document.
For larger changes, it may be easier to have the Declaration of Trust rewritten in its entirety. Reasons to rewrite a Declaration of Trust could include the value of the property in question changing significantly (for example due to renovation work or the addition of an extension), or a change in the persons with a stake in the property (for example if one person is bought out). As soon as the new Declaration of Trust is filed, it replaces and invalidates any older versions.
A correctly prepared Declaration of Trust is designed to be unambiguous and comprehensive, which makes it intentionally difficult to challenge the deed in court. Only where fraud or misrepresentation can be proved to have occurred will a court consider disregarding a Declaration of Trust.
Does a Declaration of Trust affect a mortgage?
Not every Declaration of Trust will affect the mortgage on a property, but where it does the parties drawing up the deed will need to obtain the consent of the lender before the document can be filed.
Usually, a solicitor will review the document to determine whether it will affect the mortgage lender’s security and will contact the lender to obtain consent if necessary.
The primary concern of any mortgage lender is that they will be repaid, either through regular mortgage payments, or upon the sale, transfer, or repossession of the property.
If the Declaration of Trust includes any terms that might prevent the lender from recouping their money, then they will need to provide their consent. For example, sometimes a Declaration of Trust can be used to grant someone the legal right to live in a property without them being named on the mortgage. If the lender later tried to repossess the home, this person could block the lender from doing so as they would not be bound by the mortgage terms.
In most cases, the Declaration of Trust should not affect the mortgage lender’s security, in which case there would be no need to contact them before filing the deed. However, it is always worth confirming with the solicitor involved in drawing up the deed that the lender’s consent will definitely not be needed.
Considerations for Joint Tenants
When purchasing a property as joint tenants, it is assumed that each party owns an equal share in the property. If one joint tenant passes away, by default the other tenant will inherit their share. The share cannot be passed on in a will.
Considerations for Tenants in Common
Unlike joint tenants, tenants in common are considered to own their specific share of a property. This ownership will be recorded with the Land Registry and can be passed on in a will.
If one owner passes away with no will, the share of the property will be subjected to the rules of intestacy, meaning the share will not necessarily be passed to the other owner of the property, but more likely to relatives of the deceased.
In this instance, a Declaration of Trust can be useful for recording the exact shares of a property and how each party’s contributions are broken down.
In addition, if the tenants in common are an unmarried couple, a Declaration of Trust can work much like a cohabitation agreement to prevent any complexity or ambiguity regarding what happens to the property should the couple’s relationship break down and they choose to separate.
What happens if you get married?
Among other things, this act dictates how a court can act in settling a divorce, including what powers the court has to determine how property owned by the married couple is managed.
Should a married couple split and the divorce reach court, the court will still consider the Declaration of Trust as an indicator of the couple’s intentions. However, they have no obligation to honour the terms set out in the deed.
For greater certainty and to make legally binding arrangements contrary to the default terms set out in the Matrimonial Causes Act, a married couple should consider replacing their Declaration of Trust with a pre-nuptial or post-nuptial agreement at their earliest convenience.
Can I write my own Declaration of Trust?
As with most legal documents, a quick search of the internet will bring up many websites selling pre-prepared templates for those looking to write their own Declaration of Trust without involving a solicitor, and thus incurring the fees of a legal professional.
However, a Declaration of Trust is supposed to be a unique document detailing the arrangements between co-owners of a property and other interested parties. The deed’s value is in its bespoke nature, and following a template runs the risk of missing off important details specific to the particular arrangement in question.
Moreover, if the Declaration of Trust includes clauses and intentions regarding how the property is held, how it will be sold, and what actions are restricted, or if it transfers the legal title of the property, then it must be prepared and executed as a deed.
These formal legal documents require precise wording and need to be signed and witnessed before being executed. A solicitor can ensure that the document is accurate and legally robust.
Involving a solicitor who is able to give advice on the arrangements proposed in the Declaration of Trust can also be a prudent move, and one that could potentially save a sum many times that of the legal fees. For example, a solicitor can advise whether the Declaration of Trust will infringe on the rights of any lender with a stake in the property and can contact the lender for their consent if required.
How much does a Declaration of Trust cost?
Solicitors’ fees vary depending on a variety of factors including the location of the firm and the experience of the specific solicitor. The fee for a Declaration of Trust will be from £600 plus VAT and will depend on the complexity of the document, the number of clauses it incorporates and any additional consultations required during the drafting process. Following an initial meeting the fixed fee will be confirmed.
While an upfront charge approaching four figures may seem like just another inconvenient cost to be avoided while buying a property, a Declaration of Trust can potentially save property owners many times that amount should things go wrong down the line.
From acrimonious break-ups to simple misunderstandings, there are many ways in which co-ownership of a property can go badly wrong and leave one party seriously out of pocket. Putting a legally binding document in place to prevent this is simply common sense when dealing with what for many people will be the single biggest investment they make in their lives.
Other FAQs
What happens if only one of our names is on the mortgage?
In most cases if only one name is on the mortgage the property will have to be held in that name. Where a person who is not on the mortgage is to have a share in a property a Declaration of Trust will set out what they are contributing and what their share is. A restriction can be entered at the Land Registry to protect the interest of the person not included on the mortgage.
At what stage should I get a Declaration of Trust?
Ideally a Declaration of Trust will be prepared ahead of a completion of purchase, agreed and signed by all of the parties and then dated on completion. It is possible to put a Declaration of Trust in place after a purchase completes although it is advisable to have it in place beforehand since none of the parties can be bound to sign it following completion.
Where the parties who have shares in the property want to change their shares at a later date, for example to change the share of rental income they each receive or to reflect contributions made since the property was purchased, a Declaration of Trust can be drawn up to set out what is agreed.
It is possible to have further Declarations of Trust as circumstances change.
What is the difference between a Declaration of Trust and a Trust Deed?
A Trust Deed is a general term for a document which contains the terms of a Trust. A Declaration of Trust is a type of Trust Deed and is a document by which the person or people who own an asset declare that they hold it on Trust in specified shares for themselves and or other parties.
Why would I want to register my Declaration of Trust as a restriction on the land registry?
A Declaration of Trust is registered as a restriction on the land registry to ensure that the interests of all of the parties to the Declaration of Trust are protected.
How is a Declaration of Trust executed?
Following a meeting, a draft Declaration of Trust is prepared and sent to you to review. Once it is finalised a final copy is prepared and signed in the presence of witness. If restrictions are to be entered at the Land Registry we then submit the required Land Registry application on your behalf.
