Declaration of trust
When two or more people buy a house or a flat together they may want their legal relationship as owners to be tenants in common.
They might make a declaration of trust as a deed (a type of legal agreement) in order to record how the proceeds of the sale of the property will be divided given contributions to the purchase costs when it was bought and throughout the period of ownership.
What is a declaration of trust?
A declaration of trust allows you to set out how a property is owned in situations where you cannot or you do not want to register who really owns it at the Land Registry.
The document creates a trust, appointing trustees to hold property for the benefit of the beneficiaries.
A trustee is simply a person who is responsible for looking after the money or property that is held by the trust. Under the Trustee Act 2000, trustees are expected to act in a manner appropriate to the responsibility that comes with the position, and to protect the interests of the beneficiaries.
What does a declaration of trust do?
Property ownership is recorded in the title deeds, and copies of those deeds are held on public record at the Land Registry.
A declaration of trust overrides the title deeds. It confirms who are the true owners of the property and the proportions they each hold, irrespective of the title entries in the deeds.
It allows an owner who is not registered on the deeds at the Land Registry to recognised in law as an owner, and to be given the same legal protection as other owners.
A declaration of trust can be lodged at the Land Registry, so that it becomes public knowledge – allowing a prospective purchaser to know who they are buying from.
When might true property ownership not 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 for the 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.
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 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 take when making a declaration of trust
A trust deed changes who benefits from the property, in other words, who the true owners are. You should 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 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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