What is a Declaration of Trust for Property?
A declaration of trust, as opposed to a deed of trust, is drafted on a piece of paper and signed by the legal owner with no need for a solicitor to be involved in its preparation; but this has major limitations. Read on to understand the risks of using a simple declaration versus the benefits of a legally sound deed.
Below, we go into more detail about the risks of a simple declaration of trust for property, especially where one party wants to force a sale.
What does declaration of trust mean in property?
A declaration of trust for property is a legally binding document which, at minimum, evidences that a bare trust exists between joint owners of property (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%.
Declaration of Trust Tenants in Common
It is worth noting that you must own the property as tenants in common in order to hold unequal shares, but you can easily change to tenants in common with a severance of joint tenancy.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.
Is it worth getting a declaration of trust?
A Declaration of Trust records and evidences the agreed terms for how you will hold the property and divide income from it or proceeds from the sale. It can protect the interests of all parties in the event that the relationship breaks down or the property must be sold for any reason.
Setting out your intentions in a Deed of Trust avoids any assumptions or confusion which might cause problems and expensive disputes in the future. 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.
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 purchase with a second owner. They put £5,000 into the deposit, and the rest is funded by a joint mortgage. With a declaration of trust for property, you can make sure the proceeds of a future sale are split 75% / 25% after the remaining mortgage is repaid. With a floating deed of trust, you could make sure that the second owner's share increases 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 they are buying 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.
Getting a Declaration of Trust as Tenants in Common
You can't have a declaration of trust as joint tenants. Only property jointly 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 that is 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 prior to when it was drafted**
** If you have previously declared income from the property in different beneficial shares in the past, then 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 for Property?
- Confirm the intention between the parties to create a trust
- Detail 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 or Declaration of Trust?
A declaration is different to a deed of trust. A declaration simply states the beneficial interest split of a property between people and doesn't include any other legally binding clauses, whereas a deed of trust includes a declaration as well as the following extras:
- 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 robust legal agreement, unlike a simple declaration which is not signed; a deed needs to be signed and the signature witnessed. See how to execute a deed
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. However, for this cost, you can get a more comprehensive legal agreement that sets out not just the deposit share but also mortgage repayment contributions, what happens if your relationship breaks down and even how to sell when you don't both agree.
We draft these deeds of trust for our clients and for any joint owners looking to clearly set out their intentions between themselves and the other tenant in common. 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, so you can protect shares based on the initial and ongoing contributions from each party.
- Going to invest significant money in unequal shares, into improvements or renovations on the property.
- Buying a property with a mortgage, where one or more of the borrowers will not be a legal proprietor.
- Unable to buy the other owner out and want to surrender your share.
Is a declaration of trust legally binding?
On sale, the legal owner uses the declaration to distribute the proceeds from the property 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 challenge with this, though, is the beneficial owner has no rights to stop the sale, nor are they made aware of the sale taking place as they do not have a restriction registered at the Land Registry. This is why it is incredibly 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 affirms the beneficial interest split, however with it being registered and with the additional clauses often included, such as selling rights and property management intentions, a deed has greater protection for all parties involved, to ensure their original intentions are handled accordingly.
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.
