Declaration of trust
What is a declaration of trust?
A declaration of trust is a simple statement that assets, usually real property such as a house, is held on trust for one or more beneficiaries.
What is the difference between a declaration and a deed of trust?
Most conveyancing solicitors do not differentiate between a deed of trust and a declaration of trust. Commonly, both terms are used to mean the same type of legal document.
A deed of trust is a legally binding document that contains a declaration of trust, but which also contains other statements (technically called 'trusts') that describe how the assets in trust should be dealt with. Where the asset is a property, these might cover:
the appointment of trustees to hold property for the benefit of the named beneficiaries;
the intentions for the use of the property;
how rental income might be used or distributed; and
how proceeds of sale will be divided and who will receive them.
Why use a deed of trust?
There are several reasons why you might make a trust deed.
Flexible ownership interests
When two or more people buy a house or a flat together they may declare their legal relationship as owners to be tenants in common rather than joint tenants.
As tenants in common, the co owners hold the property in specific shares rather than all holding the whole property together.
Tenancy in common is usually preferred because it allows the owners to leave their share of the property in their Will.
On the title deeds, you can state the legal ownership shares in the property. For example, one party might own 66% and the other might own 34%.
However, many joint owners contribute to the purchase price of a property differently. One might provide a greater proportion of the deposit for a mortgage, while the other might pay higher contributions to the mortgage payments or later pay for rennovations and improvements.
A deed of trust allows the owners to specify how proceeds of sale can be split in much more detail than can be recorded on the title. It can record initial amounts contributed and describe the calculation for the distribution of sale proceeds. The people who receive the proceeds may even be different to the owners on the title (for example, their children).
More than four owners
By law, property may only be owned by a maximum of four legal owners. By using a deed of trust, you can specify an unlimited number of beneficial owners.
Keeping ownership interests private
Property ownership is recorded on the legal title, and copies of those deeds are held on public record at the Land Registry.
There are circumstances where the owners of a property may not or cannot be recorded on the title records.
Because a deed of trust is not legally required to be registered anywhere (although it is possible to register it at the Land Registry), the underlying financing of the purchase can be kept private.
When might true property ownership not be registered?
Situations in which true ownership might not be recorded on the title deeds include:
where one person is buying a property with the help of a mortgage, and some of the deposit or capital to secure the loan is being put up by other parties
where two people want to buy a property together with a mortgage, but under the terms of another mortgage, one of them cannot be a party to another one
where multiple parties wish to own property as tenants in common, with different shares
The most common example of when a declaration of trust is used is the situation where an adult son or daughter borrows money for a deposit on a first house from his or her parents.
The parents may have a mortgage already, and the terms of that mortgage prevent them from borrowing under another. So the son or daughter has to apply to a mortgage lender for a mortgage for his or her house alone.
However, the parents want the security of knowing that when the house is sold, they will get the loaned deposit back. There may be an arrangement to pay them some of the increase in the property price as interest. They may want to make sure that a girlfriend, boyfriend, husband, wife or partner does not become entitled in any way to the money they put in if there is a relationship breakdown.
So the parents lend the money for the deposit to the son or daughter. The son or daughter obtains a mortgage, and the title deeds state that the son or daughter is the sole legal owner of the property (the mortgage charge is also recorded). The parents and child create a declaration of trust that sets out the true ownership, and who receives what share of the sale proceeds when the property is finally sold on.
In legal jargon, the deed of trust records the parents' beneficial interest in the property.
Steps to make a declaration of trust
A trust deed changes who benefits from the property, in other words, who the true owners are. You can register it at the Land Registry (so that it is recorded on the public record). The change of ownership can be enforced in a court.
The first consideration is therefore whether making a declaration of trust is in the interests of all parties. Responsibility for the upkeep of the property and any mortgage repayments will change proportionally as well.
The next matter to consider is what proportion each owner will own. The total cost of the property is likely to include the purchase transaction fees, stamp duty, mortgage interest and perhaps obvious repairs or renovations. Your deal with the other joint owners might be that you pay some of these disproportionately to your share. The proportions that you set out in the trust deed are those in which any sale proceeds will be distributed. If the property is sold for less than total costs, someone financing the deposit might not get back all that he or she put in.
You can put other matters in the trust document, such as how repairs to the property will be paid for. However, because your deed is likely to be registered and available for public inspection, you might not want to keep those type of arrangements private. You can record them in another agreement between yourselves.
The deed of trust must be created by the registered owners and with the knowledge and approval of all the true owners. If the consent of the registered owner has not been given, the deed could be void, and registration of it could be fraudulent.
You can make a declaration of trust at any time. Usually, one is made on the completion date of the property purchase so that the true owners never risk that their interest in the property cannot be claimed by them.
As mentioned before, you can (and we recommend) registering the deed of trust at the Land Registry alongside the title deeds. This lets other people know that the true owners have a beneficial interest. To do this, you complete the declaration of trust section in Form TR1 if you are making the trust on the completion date, or Form JO if you are not.
Alternatives to using a deed of trust
You don't have to make a deed.
Alternatively, if there are four or fewer beneficial owners then you could use an agreement under hand (a normal agreement that does not have to be witnessed) called a tenants in common agreement. As far as ownership is concerned, this has the same effect as a declaration of trust. The difference is that a trust is not made.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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