What is a Deed of Trust or Declaration of Trust?
Without an explicit agreement, things can get complicated – especially if the contributions are not equal. Even when you’re buying with someone who you trust, such as a partner or friend, a legal document that outlines everyone’s rights is essential to protect your interests. In this post, we will examine how a Deed of Trust (also known as a Declaration of Trust) can help protect your investment and prevent future disputes. It also ensures that all parties are on one page from the beginning.
The main purpose of a Deed, or Declaration of Trust, is to clarify the ownership of a property by two or more parties. A Declaration of Trust is used when multiple parties purchase a property and each contributes different amounts of money. It outlines who owns which share.
It ensures that when the property is sold, or one person wants to leave the arrangement, all contributions are appropriately recognised and legally protected.
Why Do I Need a Declaration of Trust?
We’re litigation solicitors. We are litigation solicitors. It’s unlikely that anyone will give much thought to what could happen if things go wrong when starting a business or personal relationship, such as buying a house with someone else. Things do go wrong. You may want to sell the property but your friend does not. You may lose your job, go bankrupt or the co-owner dies. What happens if this happens? If you plan to buy a house with someone else and want to protect the investment, a Declaration of Trust will be essential. The more clear the agreement between you is, even in this type contract (technically, a deed), then the less likely there will be disputes later, precisely because you have already agreed what should happen and when. This is especially valuable if there are any unequal contributions or if another person is lending or gifting money to purchase the property. A Declaration of Trust is useful in any situation, but especially when:
Unequal Contributions: You and the co-owner contribute different amounts toward the purchase or mortgage.
Gifted or Loaned Money: If someone has gifted or loaned money, you want to make sure their contribution is documented.
A Declaration of Trust is really sensible in any situation but especially with:
Unequal Contributions: You and the co-owner contribute different amounts toward the purchase or mortgage.
Gifted or Loaned Money: If someone has gifted or loaned funds, you want to make sure their contribution is documented.
Investment Property: You’re buying the property as an investment and want to clarify how any future profits (or losses) will be split.
Relationship Protection: You’re an unmarried couple or friends buying a home and want to protect your financial interests in case the relationship changes.
What Should Be Included in a Declaration of Trust?
- A Declaration of Trust is an important legal document, and while you can technically draft one yourself, it’s almost always best to leave it to a solicitor to reduce your risk of disputes down the line.
- With that said, here are the key details you can typically expect to see in a Declaration of Trust:
- Ownership Shares: The Declaration of Trust should clearly set out the percentage of each party’s property, which is particularly important if contributions are unequal.
- Contributions: It’s essential to document who paid what toward the deposit, mortgage, and other initial costs. This might also include any gifted or loaned funds to ensure that every contribution is adequately recognised.
Sale Proceeds: The document should state how the co-owners will divide the proceeds from the future property sale. This can account for unequal contributions or agreements made upfront about how profits (or losses) will be shared.
Ongoing Costs: Specify how any ongoing property-related expenses will be divided. This could include maintenance, repairs, insurance and property taxes. Clarifying this upfront can prevent disagreements over financial responsibilities.
Exit Plan: It’s crucial to have provisions in place for what happens if one party wants to sell their share or if personal circumstances change. This can include rules such as offering the share first to the other owner or outlining the process for valuing the property and selling it. We litigate across the country, dealing with property and financial interests and investments. However, we do not draft these documents. The cost of establishing a Declaration of Trust varies depending on the complexity of the situation and your solicitor’s fee. It is usually between PS300 and PS600. These costs are not significant in comparison to the value and complexity of the assets. You should remember that investing in a Declaration of Trust and getting the right advice can save you a lot of money and headaches by preventing disputes about property ownership. You must inform your mortgage lender that you are setting up the Declaration of Trust. The lender has a financial stake in the property through the mortgage and must be notified of any changes made to the property ownership or responsibilities.
- In many cases, your lawyer will contact the lender and ensure that they are properly informed, but it is worth double-checking. Failing to inform the lender could cause issues down the line, especially if there are further changes to the ownership or a sale.
- What Are the Tax Implications of Setting up a Declaration of Trust?
- Setting up a Declaration of Trust can have several tax implications depending on the property’s specific circumstances and the parties involved. To ensure that you are clear on the tax implications, it is best to seek financial advice. Stamp Duty Land Tax (“SDLT”)
- SDLT is due if a share of property is transferred and money or another consideration is exchanged. The tax is calculated based on the value of the transaction and whether it meets the SDLT threshold. The tax is calculated based on the value of the transaction and whether it meets the SDLT threshold.
- These change periodically in line with government policy and so care should be taken to ensure you’re clear on the SDLT implications as apply to your transaction.
Capital Gains Tax (“CGT”)
CGT might apply when a share of the property is transferred between co-owners through the Declaration of Trust. The tax is based on the profit or “gain” made when an asset has been sold or transferred. The rates for residential property are determined by your income tax band. They can change at any time.
If you’ve lived in the property for the whole time you’ve owned it, you’ll likely be fully exempt from CGT.
Inheritance Tax (“IHT”)
Although a Declaration of Trust won’t trigger Inheritance Tax immediately, it may become relevant later on. If the property is held in trust and the person who set up that trust passes away, the value of the property could form part of their estate for Inheritance Tax purposes.
Income Tax
If the property generates rental income, the way that income is divided between co-owners may change based on the Declaration of Trust. Each co-owner must declare their share of rental income each year on their tax returns. To avoid any tax discrepancies, this split must match the Declaration of Trust. Income tax rates are currently 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.
Frequently Asked Questions
What Is an Example of a Declaration of Trust?
A typical example of when a Declaration of Trust is best suited is when two or more people buy a property together and contribute different amounts. The Declaration of Trust would then outline how much each party contributed and how any sale proceeds should be split to ensure fairness.
What Is the Difference Between Declaration of Trust and Trust Deed?
In practical terms in relation to property; very little. A trust deed is a more general document that can be used to transfer assets to a trust, including property. However, this is not always the case.
Final thoughts
A declaration or deed of trust can be a valuable safeguard to protect your position. It also makes it easier, quicker and cheaper to litigate when you need to to force a specific outcome. In general, if the agreement clearly identifies the positions of the parties it will be persuasive to the court. This clarity makes it easier for us to force you to reach a certain outcome as quickly as possible and at the lowest cost. Our property litigation team acts nationally in disputes between co-owners of property who disagree on what should be done now and going forward. We do not offer divorce advice, but if you own property with someone else or are not married, contact our property litigation team today at Helix Law for advice and assistance. We would be delighted to help you.
