Deed of Trust or Loan Agreement
(Last Updated: 10/12/2024)
14/06/2022
49
3 min read
Giving money to help someone buy a home is common practice, however the question of whether it is a gift or a repayable loan is important to confirm - especially if you want the money back. If the latter then to ensure you do get repaid your money you need to protect the investment with a Deed or Declaration of Trust or a Loan Agreement.
You need to choose whether you get a Deed of Trust or Loan Agreement if you pay money toward someone's house purchase that you want to see repaid to you - often a parent helping their son or daughter (Bank of Mum and Dad), a partner in a relationship or a friend. Whilst in some cases you can give a gifted deposit and want to see the money repaid often with some interest/gain.
There are tax issues for being a beneficial owner of a property which can make the granting of interest to a non-legal owner in a Deed of Trust costly for the purchaser of the property, however does a loan agreement offer the same protections and return that a Deed of Trust offer?
Deed of Trust
- Confirms an interest in the property
- Share any gain
- Terms of the sale
- Property obligations
- Stamp Duty Land Tax may be payable if consideration
- Capital Gains Tax may be payable
From £299 INC VAT
Loan Agreement
- Declare loan amount
- State interest rate
- Terms for repayment
- Debt secured as second charge
From £399 INC VAT
or we offer a Simple Loan Agreement here.
Do you need to inform the mortgage lender?
Whilst you can agree between yourselves how the investment is to be repaid, if you are obtaining a mortgage then you'll need to obtain mortgage lender consent if you are getting a loan. For some deeds of trust you don't need to so read more on why here - Does a declaration of trust affect the mortgage lender?
The mortgage lender will not allow any arrangement that effects their security over the property such that it will stop them obtaining an order of sale should they require to repossess the property. The mortgage will be registered as a first charge over the property which means it is repaid first before any other debt. Whilst a second charge is repaid after the first charge, it often is not repaid in full if the property is sold under market value.
Find out more - Does a Deed of Trust need to be registered at the Land Registry?
Why do a loan agreement instead of a Deed of Trust?
Where a Deed of Trust grants a beneficial interest in property to someone who owns another property this can effect the stamp duty land tax you pay in the following ways:
- First Time Buyer Relief - you will lose the ability to get the benefit of first time buyer relief if you are buying a property.
- Additional Home SDLT - on purchases over £40,000 there is an additional 3% stamp duty land tax to pay on top of the normal SDLT for the purchase.
Many loans, even simple loans between family are protected by the Consumer Credit Act which has additional protections for the borrower, and may leave the lender vulnerable.
Frequently Asked Questions
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Written by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Reviewed by:
Caragh Bailey
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.
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