What is a Declaration of Trust for Property?
A declaration of trust, as opposed to a Deed of Trust, is drafted on paper and signed by the legal owner with no need for a solicitor to be involved in its preparation; but this has major limitations.
Without the formality of a deed, disputes may arise over the terms of the trust (like when one party wants to force a sale), the identity of the beneficiaries, or the extent of their interests. It may not be as effective in protecting the interests of beneficiaries against third-party claims, such as creditors or a new partner.
What does declaration of trust mean in property?
It's a legally binding document which, at minimum, outlines an agreement that exists between joint property owners (either legal and/or beneficial), confirming the terms under which the property is held 'on trust'.
It might include the term 'absolutely', but it usually includes the portion of ownership; for example, I own 40%, and you own 60%.
What is the difference between a declaration of trust and a trust?
A trust is a legal agreement where people look after money or property on behalf of a beneficiary. The legal owners usually hold the property on trust for themselves, but they may also hold the property on trust for other beneficial owners. For example, you may hold a property on trust for a child until they reach 18 years of age.
A declaration of trust outlines who owns what share of a property and how mortgage payments are divided between owners. This makes it easy to work out who legally gets what when the property is sold.
Book a FREE 15-minute meeting* with our specialist trust solicitor. They'll listen to your case and suggest ways forward, including the costs, with no obligation to use our services after the free meeting.
- How can I put my house into a trust?
- What are the costs associated with setting up and maintaining a trust?
- What assets can be placed in a trust? Can I still live in the property?
- What happens if my circumstances change? Can I modify or revoke the trust?
Is it worth getting a declaration of trust?
A declaration of trust outlines the agreed terms for holding a property and distributing income or proceeds from its sale. It protects the interests of all parties in case the relationship ends or if the property needs to be sold for any reason.
It means that if or when you sell the property or one of you buys another owner out, the proceeds will be divided fairly, as you've agreed when executing the deed.
How does marriage affect a declaration of trust?
If you are cohabiting with your partner and have a declaration of trust in place, but decide to get married, the declaration of trust will automatically be cancelled. If you end up divorced, the court might review the declaration of trust for additional information in the division of assets.
Do you need to register a declaration of trust with HMRC?
Whether you need to register the trust with HMRC depends on how it's set up and who's involved. If different people own the property legally and actually, you usually need to register it with the tax office.
Why do I need a declaration of trust?
Examples of when you might need this formal legal document:
- You put £15,000 into a deposit on your first home, which you purchased with a second owner who contributed £5,000. With a declaration of trust, the proceeds of a future sale are split 75% / 25% after the remaining joint mortgage is repaid. With a floating Deed of Trust, the second owner's share could increase over time as you continue to make equal mortgage repayments.
- Your partner sells their home and moves in with you into a house you own. They pay £60,000 to renovate your property, representing 20% of the property's resulting value. A declaration of trust is drawn up, giving them a 20% share of the beneficial interest in the property.
- You put £10,000 towards your child's deposit on a home purchase with their partner. The couple pay the rest of the deposit and buy with a mortgage. A Deed of Trust is drawn up for the property to be sold if they break up and for your £10,000 to be returned to your child before they split the rest of the equity.
What is the difference between a will and a declaration of trust?
A declaration of trust determines what share of the property belongs to your estate, and then the will determines how your estate will be administered. This, and your will, work together for separate functions, so you should always use a deed or declaration and a will.
When one person dies with a declaration of trust and a Will, their share of the house goes to whoever they've named in their Will (their beneficiary).
If they don't have a Will, even with a declaration of trust in place, the government decides who gets it (rules of intestacy) which means your spouse will inherit if you are married or civil partners, or your closest relative if not.
Without a will, the relatives of the deceased may inherit nothing if the deceased was married or the children of the deceased could end up forcing the sale of the property against the other owner if they were not.
Does a declaration of trust trigger CGT?
A declaration of trust can trigger a chargeable event for CGT purposes, meaning that if the property's value has increased since it was acquired, a capital gain may arise.
If the declaration is made at the time of purchase, generally no CGT is triggered. However, if the declaration is made after the purchase, CGT might be applied to the difference between the original purchase price and the current market value at the time of declaration.
- Get up-to-date property tax advice on SDLT, CGT, IHT, personal vs partnership vs company structure.
- Free 15-minute initial consultation with a qualified accountant from our panel of tax advisors.
- Ask your tax questions and get guidance on what you can do next.
- If further accountancy work is required, you'll be quoted for this as a separate piece of work with no obligation to purchase.
Getting a declaration of trust as tenants in common
You can't have a declaration of trust as joint tenants. Only property owned as tenants in common can be placed into trust through a declaration or deed.
If the property is held as joint tenants, you must sever the joint tenancy first. This can be done by the solicitor who drafts your deed when they register the finalised deed at the Land Registry.
Change from joint tenants to tenants in common with a deed
The deed protects the interests of both parties and provides evidence for tax purposes. We can draft your deed in one to two working days for just £500 INC VAT.
Once finalised, the solicitor will submit your application to the Land Registry to sever your joint tenancy.
Who drafts the declaration?
A simple declaration of trust is a self-declaration drafted by the owners of the property. It is important to note that the declaration:
- Does not transfer the legal title.
- Is not a deed and no reference to a deed can be included on the document.
- Is not signed by the beneficiaries, but signed by the legal owner/s only.
- Is not witnessed (like a deed).
- Is not registered as a restriction at the Land Registry.
- Can be back-dated (unlike a Deed of Trust), subject to evidence being provided to demonstrate that the trust was in existence before it was drafted**
** If you have previously declared income from the property in different beneficial shares in the past, you cannot backdate the declaration.
A Deed of Trust is drafted by a professional solicitor and is much more valuable if you need to legally enforce any of the terms.
What is included within a declaration of trust?
- The intention between the parties to create a trust.
- What is being held on trust (this is normally the property address).
- Who has the beneficial interest (if held absolutely, then the beneficial interest split isn't stated).
What is the difference between a deed and a declaration of trust?
A declaration states the beneficial interest split of property between people and doesn't include any other legally binding clauses, whereas a Deed of Trust includes a declaration as well as:
- Clauses and Intentions. A deed will include clauses that state how the property is going to be held, its purpose, how the joint owners will sell in the future, or restrictions stopping certain actions from taking place.
- Registered at the Land Registry. A restriction such as Form A or Form B can be applied against the legal title to protect the interest of the beneficial owners - especially if one of them isn't a legal owner.
- Signed as a deed in front of witnesses. A deed is a more formal legal agreement than a simple declaration, which does not require a signature; a deed must be signed and have its signature witnessed. See how to execute a deed
A Deed of Trust offers greater protection for a beneficiary who is not registered on the legal title and as such the majority of express trusts are drafted as a Deed of Trust.
How much does a declaration of trust cost?
Most conveyancing solicitors will draft you a basic declaration at a cost ranging from £240 to £500 INC VAT.
At SAM, for this cost, you can get a more comprehensive legal agreement. This agreement will outline not only the division of the deposit but also the contributions to mortgage repayments, what happens in case your relationship breaks down, and the steps to take if you need to sell the property but cannot reach an agreement.
We draft these deeds of trust for our clients and for any joint owners looking to outline their intentions with a property.
Our basic Deed of Trust costs a fixed fee of £299 and we can return the first draft within Drafted within 1-2 days Often on the same day. We don't offer a simple declaration which is not also executed as a deed, as they are not legally robust enough.
Arrange a free consultation with one of our experienced conveyancing executives if you are:
- Severing joint tenancy to register as tenants in common, or vice versa.
- Buying with your unmarried partner, to protect your shares in case the relationship breaks down.
- Married or civil partners let a property, and one of you is in a lower tax bracket.
- Buying with friends or family, to protect shares based on initial and ongoing contributions from each party.
- Going to invest money in unequal shares, improvements, or renovations on the property.
- Buying a property with a mortgage, where one or more borrower(s) will not be a legal proprietor.
- Unable to buy the other owner out and want to surrender your share.
Can a declaration of trust be challenged?
Yes, it can:
- Fraud or Misrepresentation: If it can be proven that a party was misled or provided false information to induce the creation of the trust, the declaration can be challenged.
- Undue Influence: If one party exerted undue influence over another to create the trust, the declaration may be set aside.
- Lack of Mental Capacity: If a party lacks the mental capacity to understand the nature and effect of the trust, the declaration may be invalid.
- Mistake: If there was a mistake in the creation of the trust, the terms, or the identity of the beneficiaries, the declaration may be challenged.
On sale, the legal owner uses the declaration to distribute the sale proceeds to the beneficial owner. A declaration is 'legally binding' as long as it is:
- drafted by the legal owner;
- on a property the legal owner has a right to transfer the beneficial interest;
- on a property held solely or as tenants in common;
- not avoiding bankruptcy proceedings; or
- not for any criminal activity.
The beneficial owner has no rights to stop the sale, nor are they made aware of the sale as they do not have a restriction registered at the Land Registry.
This is why it is important to consider whether you feel a declaration offers you appropriate security or if you should draft a Deed of Trust instead.
A Deed of Trust still confirms the beneficial interest split, but it's registered with additional clauses like selling rights and property management intentions. A deed provides better protection for all parties involved, ensuring their original intentions are met.
Book a FREE 15-minute meeting* with a property dispute specialist who will listen to your issue and suggest ways forward, including the costs, with no obligation to use our services after the free meeting.
- What are you due on sale?
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- Mediation and Settlement Agreements.
- Applications to court, including Declaratory Orders, Regulatory Orders, Occupational Rent.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
