What is a declaration of trust when you buy a property?

Lianne Priest, Solicitor in Coodes Solicitors’ Residential Property team, explains how a Declaration of Trust can be used when buying a property.

With property prices increasing at a greater rate than wages, potential buyers are looking for other arrangements to help them to get onto the property ladder. One option is to buy a property with the help of a family member or friend. To protect everyone’s interests, you could put in place a Declaration of Trust.

More of our clients are asking us about using a Declaration of Trust when buying a property and this trend is likely to continue with the rising cost of living and the buoyant property market.

What is a Declaration of Trust?

A Declaration of Trust is also referred to as a Deed of Trust and can be used when you are buying a property with someone else, or another person is financially contributing to your purchase. For example, this could mean you are buying a property jointly with your partner or your parents are supporting you to get onto the property ladder.

A property is a significant investment, so everyone who has an interest in it is well advised to ensure their money is protected. A Declaration of Trust sets this out in a legally binding document.

In a Declaration of Trust a property owner (or owners) can declare that they hold a property on trust for the benefit of one or more people, called ‘beneficiaries’. A beneficiary may or may not be a legal owner of the property.

A Declaration of Trust ensures that each individual gets what they are entitled to. This will be based either on their initial investment or the interest that has accumulated over the duration of ownership, when the property is sold.

Do I really need a Declaration of Trust?

Putting a Declaration of Trust in place protects against any disagreements or misunderstandings that may later arise.

Although the Land Registry records the legal ownership of a property, it doesn’t take into account the specific contributions each person has made. Therefore, when it comes to selling the property, someone who has financially contributed towards the property but is not on the registered title, could find themselves out of pocket. That is because they don’t have a legal document recording their contributions and may need to go through costly court proceedings to determine their interest.

If you buy a property jointly without having a Declaration of Trust in place, this could cause problems when you sell your home in future. That is because it’s usually more difficult to tell who is entitled to receive a share of the net sale proceeds and how much they are entitled to.

Many people assume that it is only the legal owners who are entitled to the net sale proceeds on sale, but this is not the case. A Declaration of Trust clearly sets out the intentions of everyone who has been involved in the purchase. This therefore removes any ambiguity about the extent of everyone’s interests and how the net sale proceeds should be divided.

If you are buying the property with the aid of a mortgage, your mortgage lender must consent to the Declaration of Trust if the terms will affect their security.

Is a Declaration of Trust right for me?

There are three common situations in which a Declaration of Trust is appropriate.

1. Relatives offering financial support

A Declaration of Trust could set out an agreement between an owner (or owners) of a property with a third party. For example, this could be a relative, who will not be a legal owner of the property. The Declaration of Trust will state the extent of the third party’s interest, including when and in what circumstances they may recover their interest and how much they will be entitled to receive when the property is sold.

2. Some unmarried couples

A cohabiting couple who want to contribute different amounts towards the deposit and/or mortgage repayments may wish to enter into a Declaration of Trust. It will record their intentions as to how the net sale proceeds should be divided in the event the property is sold.

There is a myth that couples who live together are protected by ‘common law marriage’. In fact there is no such thing in UK law. This means that if the couple separates, one person may be unfairly disadvantaged and will not be able to rely on the provisions available to married couples who divorce.

If an unmarried couple already own the property and the property is held jointly as tenants in common, this can be placed into trust through a Declaration of Trust. If the property is held as joint tenants you must sever the joint tenancy first.

Provided there is no conflict of interest, one solicitor may prepare the Declaration of Trust for both individuals if they know and agree on precisely the terms they wish to enter into. However, it may be appropriate for both people to obtain independent legal advice about whether a Declaration of Trust is right for them. They may be advised to consider another agreement, such as a Cohabitation Agreement or Pre-Nuptial/Post-Nuptial Agreement.

3. Protecting someone whose name is not on the property title

A person may not appear on the property title and/or be a party to the mortgage but might have an interest in a property because they have contributed towards it.

This could be because they have poor credit or other debts that make them ineligible for another mortgage. Alternatively, it could be because they moved into a house already owned by their partner. A Declaration of Trust will record the specific arrangement and ensure that everyone receives the appropriate share of the sale proceeds based on their respective beneficial interests.

What happens if I get married?

If a cohabiting couple with a Declaration of Trust gets married or enters into a civil partnership, the terms of the Declaration of Trust will be overridden by the provisions of the Matrimonial Causes Act 1973 or the Civil Partnership Act 2004.

These provisions will dictate how a court can resolve the divorce financial settlement. This includes the court’s powers to determine how property owned by the married couple is dealt with and what factors should be taken into account.

If a married couple divorces, the court may consider the Declaration of Trust as an indicator of the couple’s intentions. However, the document may not carry a significant amount of weight, depending on the circumstances of the particular case. The court is under no obligation to adhere to any of the terms set out in the Declaration of Trust, particularly if it would be unjust and unreasonable to do so.

For greater certainty, a married couple should consider entering into a pre-nuptial or post-nuptial agreement as soon as possible either instead of or in addition to a Declaration of Trust.

How can Coodes help?

Our Residential Property team regularly assists with the preparation of a Declaration of Trust. Combining our experience in Family law and conveyancing, Coodes can advise on the implications of entering into a Declaration of Trust on separation.

We can prepare Declarations of Trust for clients who are purchasing and have already agreed the terms of the trust. We can also provide independent advice on your legal position in respect of a proposed purchase and advise which document is appropriate for your individual circumstances.

The law surrounding this area is complex, so if you are considering entering into a Declaration of Trust please get in touch.

For further information or advice please contact Lianne Priest in Coodes Solicitors’ Residential Property team on 01326 214030 or lianne.priest@coodes.co.uk.