Buyer’s Guide – Declaration of Trust- What is it ? Do I need one?

Buying a property can be a complicated process.  This Guide should help you to decide whether making a Declaration of Trust is something you should consider when buying a property.

If you are buying with another person it would be a great idea to read this guide in conjunction with our Joint Ownership guide which explains the different ways in which joint owners can elect to hold a property.  A Declaration of Trust is only suitable where you own the property as tenants in common.

A declaration of trust will:

• Confirm the extent of their respective beneficial interests.
• Set out any express terms that the co-owners want to include.

It is extremely important that you instruct a qualified conveyancing solicitor to draft the declaration of trust on your behalf. There are certainties that must be satisfied for an express trust to be valid.

I am buying a property with my girlfriend. My Mum and Dad are putting in £20000………

The first thing to do is to have a full and frank discussion with your co-purchaser and your parents as to what everybody requires.  If your parents are concerned with protecting their contribution in the event of a relationship breakdown, they may require that you enter into a Declaration of Trust to ensure that the £20000 comes to you upon sale of the property before the remainder of the proceeds are equally distributed.  Your co-purchaser may agree that this is fair therefore meaning all parties are in agreement.

The Declaration of Trust need not be a complicated document in this situation and can implement the wishes of the parties so that upon completion of the sale, once any mortgage and legal and estate agent expenses are paid, the first £20000 of the net proceeds of sale are paid to you and the remainder be split “50/50”

I have managed to save £20000 to put into the joint purchase with my boyfriend.  I would like to ensure (and my boyfriend agrees) that I should receive a higher share of the net proceeds when we come to sell…..

This can be done by drafting the Declaration of Trust in fixed unequal shares.  In this document you can agree to provide that upon sale of the property, after any mortgage , legal and estate agency expenses the net proceeds may be distributed in designated percentages e.g. 60/40.

I am buying a property with my girlfriend and we are putting in unequal sums towards the deposit, but it will be me paying the mortgage- can we draw something up that allows our shares to change as I make more mortgage payments?

Yes, this is possible too.  A Declaration of Trust providing for “floating shares”  is possible reflecting changing shares as one party contributes more during their ownership of the property.

My parents are putting in some money towards the joint purchase with my girlfriend.  They would like their contribution to be protected so that they receive it back on sale of the property.

It is also possible for a declaration of trust to hold a property on trust for the legal co-owners and a third party beneficiary. This would be a much more complex document as it would need to balance the interests of each party. The third party will not doubt be viewing their interest as a long term investment to be repaid to them on sale. Additional provisions to protect that investment such as insurance obligations on the legal co-owners will be necessary.   Beware here as your parents in this situation will need to take independent legal advice. If you are obtaining a mortgage, you will need to check that your Lender will agree to such a document as it involves a third party interest.

How is the Declaration of Trust recorded to make sure it is implemented?

Registration and restriction on title

It is important that you keep a safe record of any declaration of trust which you have entered into with a co-owner. A declaration is not substantively registrable at HM Land Registry. It is not possible to register a notice on the registers of title in respect of an interest under a trust of land. The trust document will not be filed at the Land Registry and it will not be available for public inspection. A positive outcome of this is that you can keep the exact details of the trust arrangements confidential. However, it is still necessary to alert third parties to the existence of the tenancy in common and the need to pay the purchase money to at least two trustees. This is done in registered land, by entering a restriction on the register. A further restriction may need to be placed on the title if there are any limitations placed on the trustees’ powers in the declaration of trust or if there is a third party beneficiary named in the document as a beneficiary.

Other matters to consider

Depending on the circumstances, the co-owners may wish to include the following additional provisions in a declaration- this is more complex document:

• Limitations on trustees’ powers. For instance a declaration of trust could impose limitations such as a requirement to obtain consent for a particular type of disposition.
• Provisions relating to a mortgage. If the property is mortgaged, provisions may be needed to cover; (i) Which of the co-owners will pay the mortgage and in what proportions, or (ii) An indemnity by one co-owner to the other(s) if the mortgage secures borrowing by only one of the co-owners.
• Other outgoings.
• Express trust for sale.
• to deal with a situation where one of the co-owners wants to sell
• practical arrangements for day-to-day issues such as how the parties will arrange for maintenance and meet other expenses related to the property.

Tax issues

Please note this is guidance only and does not constitute tax advice. You are strongly recommended to seek specialist tax advice from a chartered accountant before entering into a Declaration of Trust.  Some points to consider are…..

Income tax and capital gains tax

Tenants in common are generally treated separately for tax purposes so each individual will pay their own tax. For income tax and capital gains tax (CGT) purposes, any profits and losses arising from the property will be treated as accruing directly to the relevant co-owners according to their beneficial shares in the property.

Spouses and civil partners are generally treated as entitled to the income in equal shares unless they opt for taxation on a different basis corresponding to their beneficial interests or an exclusion applies.

Where the co-owners are changing the proportions in which they hold the property, CGT will be payable (subject to annual allowances and other reliefs) where a gratuitous benefit has been intentionally bestowed on one of the others.

Inheritance tax

The declaration of trust will evidence the extent of each co-owner’s beneficial interest in the property for the purposes of ascertaining the extent of their estate on death. A tenancy in common is often used in inheritance tax (IHT) planning so that each co-owner may make full use of their nil rate band.

A lifetime gift (known as a transfer of value for IHT purposes) may arise as a result of the declaration of trust. This may occur where:

• One co-owner made a greater contribution towards the acquisition of the joint property than the share as stated in the declaration.
• One co-owner is giving away part of their share in the property to the other(s).

Some gifts, for example, those between spouses or civil partners are exempt from IHT.

An outright gift, that is not an exempt transfer may be a potentially exempt transfer. If the donor survives for seven years from the date of the gift, the gift becomes fully exempt. If the donor fails to survive for seven years, the gift becomes chargeable and will use up all or part of his nil rate band.

Stamp Duty Land Tax

A declaration of trust does not, of itself, constitute an acquisition of a chargeable interest and there should not be any Stamp Duty Land Tax (SDLT) payable. If the declaration of trust is executed alongside a land transaction such as the purchase of the property by the co-owners, then the land transaction will be liable to SDLT.

SDLT may be due if the declaration of trust has the effect of transferring the beneficial interest in the property from one co-owner to the other, subject to a mortgage or if there is any other form of chargeable consideration provided for the beneficial interest.