A Declaration of Trust is a legally binding document that outlines the financial arrangements between individuals who share an interest in a property. It specifies the ownership shares and the rights of each party involved, providing clarity on what should happen if the property is sold or if one owner decides to buy out another. This document is particularly important when multiple owners or contributors are involved, such as when an unmarried couple, friends, or family members purchase a property together. Without a Declaration of Trust, it can be difficult to determine who is entitled to what, potentially leading to disputes. By clearly setting out each person’s financial interest, a Declaration of Trust helps protect everyone’s investment.
A Declaration of Trust is vital for anyone buying a property with others. It ensures that all parties’ contributions, whether financial or otherwise, are properly recorded and safeguarded.
For example, if one person has contributed more towards the deposit or made larger mortgage repayments, a Declaration of Trust ensures they will be compensated fairly when the property is sold. Additionally, it clarifies ownership shares when they are not equal, making sure that each party’s share is clearly defined from the outset.
Unmarried couples, in particular, benefit from a Declaration of Trust, as they do not have automatic legal rights over each other's property. This document ensures both parties are treated fairly if the relationship ends.
Similarly, friends or family members purchasing property together can use a Declaration of Trust to ensure that everyone’s contributions are recognised and protected. By providing clarity and preventing misunderstandings, this document reduces the risk of future disputes.
Every Declaration of Trust is bespoke and tailored to the specific financial arrangement of the parties involved, but certain key details should always be included.
First, the document should specify how much each person contributed to the deposit when purchasing the property. This helps avoid disputes over ownership percentages later on. Additionally, it should outline each party’s contribution to mortgage payments and other ongoing expenses related to the property, such as maintenance or repairs.
The Declaration of Trust should state the percentage of the property each party owns. This ensures that, if the property is sold, each party will receive their fair share of the proceeds. The document should also include provisions for how the property will be valued before being sold, and what process will be followed if one party wishes to sell their share or the entire property.
Depending on the circumstances, the document can also include additional clauses to address potential future events, such as one party buying out another’s share or changes in the property’s value due to renovations.
A Declaration of Trust offers significant legal benefits. Firstly, it helps to prevent disputes by creating clarity around ownership and ensuring that each party understands their rights and obligations.
This is especially important in the event of a relationship breakdown or if the property is sold.
Moreover, the Declaration of Trust protects financial contributions by documenting how much each person has invested. This ensures that, when the property is sold, each party will be entitled to a fair share based on their initial contributions and ongoing payments.
For those who are not named on the mortgage but have contributed financially to the property, the Declaration of Trust provides security by ensuring their investment is recognised.
Provided it is properly executed, the Declaration of Trust is a legally binding document, meaning it can be enforced through the courts if necessary.
There are several scenarios where a Declaration of Trust proves invaluable. For example, unmarried couples buying property together often rely on a Declaration of Trust, as they do not have the automatic legal protections afforded to married couples.
This document ensures that both parties’ investments are safeguarded in case the relationship breaks down. If the property is sold, each person will receive a share of the proceeds that reflects their contributions.
Similarly, a Declaration of Trust is essential for protecting someone who is not named on the mortgage but has contributed financially to the property. Whether this is due to financial circumstances or other reasons, the Declaration of Trust ensures that the person's contribution is recognised, even though their name is not on the mortgage documents.
Joint tenants and tenants in common can also benefit from a Declaration of Trust. Joint tenants share equal ownership of a property, while tenants in common can own unequal shares. In a tenants-in-common arrangement, the Declaration of Trust helps clarify the exact share of the property each person owns, preventing potential conflicts in the future.
Additionally, a Declaration of Trust can protect parental contributions or financial help from relatives. If parents or other family members provide financial assistance to help someone buy a home, the Declaration of Trust ensures they are repaid from the proceeds of the property sale.
In all these cases, a Declaration of Trust acts as an essential legal safeguard, protecting everyone’s interests in the property and helping to avoid disputes.
A Declaration of Trust can have important implications when it comes to mortgages, particularly if there are clauses within the document that could affect the lender’s security.
The parties drawing up the Declaration of Trust will need to consider if the agreement will affect the lender's position, if it does they will need to secure the mortgage lender's consent before filing the document. Lenders are primarily concerned with ensuring that they will be repaid, whether through regular mortgage payments or from the sale of the property.
In most cases, a Declaration of Trust deals with the equity of the property and has a provision stating that the mortgage should be paid first.
If the Declaration of Trust includes terms that could potentially interfere with the lender’s ability to recover their funds, such as giving someone the legal right to reside in the property without being bound by the mortgage terms - the lender’s consent will be required.
The lenders’ charge will always be recovered first which may make the agreement you have in the declaration untenable.
For example, if a person who is not named on the mortgage has the legal right to live in the property, this could make it more difficult for the lender to repossess the home in the event of a default on payments.
However, in most situations, a Declaration of Trust will not affect the lender’s security, meaning no lender consent is necessary.
It’s always advisable to confirm this with a solicitor to avoid any potential issues. Additionally, if the property is later remortgaged, the new lender may also need to be consulted about the Declaration of Trust, even if the original lender was informed.
Setting up a Declaration of Trust typically involves working closely with a solicitor to ensure the document is legally binding and accurately reflects the intentions of all parties involved.
The process usually starts with a meeting where the financial contributions and ownership shares are discussed. Based on this, the solicitor will draft the Declaration of Trust, ensuring that it contains all the necessary clauses to protect everyone’s interests.
Once a draft is prepared, it will be sent to all parties for review. Any adjustments can be made at this stage to reflect specific preferences or financial arrangements. Once the final version is agreed upon, it must be signed by all parties in the presence of a witness, making it a legally binding document.
If the Declaration of Trust affects the mortgage lender's security, the solicitor will also contact the lender to seek their consent before the document can be executed.
In cases where the document contains provisions that restrict the sale of the property, the solicitor may also need to apply to the Land Registry to record a restriction against the property title. This ensures that the terms of the Declaration of Trust are followed if the property is sold.
While a Declaration of Trust is designed to remove ambiguity and protect all parties' financial interests, it can be overturned or amended in certain circumstances. If all parties who signed the original document agree, the Declaration of Trust can be altered or completely rewritten.
This is usually done through a Deed of Variation, which allows for minor updates to be appended to the original document, such as changing how the property is sold or adjusting ownership shares as circumstances evolve.
For more significant changes, the entire Declaration of Trust may need to be rewritten. This could happen if the value of the property has changed significantly, for instance, due to renovation work, or if one person has bought out another’s share. Once the new Declaration of Trust is finalised, it invalidates any earlier versions.
However, challenging a Declaration of Trust in court is difficult. The document is intended to be unambiguous and comprehensive, making it hard to dispute.
Courts are unlikely to overturn a Declaration of Trust unless there is evidence of fraud or misrepresentation. Therefore, it is vital that all parties fully understand the implications of the document before signing it, and that it is drawn up by a legal professional.
Setting up a Declaration of Trust can have important tax implications that property owners need to be aware of.
For instance, Stamp Duty Land Tax (SDLT) may be triggered if there is a transfer of ownership or a change in ownership shares, particularly when one party takes over another’s share of the mortgage. If the transfer involves an exchange of economic value, SDLT could be payable on the transaction.
Additionally, Capital Gains Tax (CGT) may apply when a share of the property is transferred or sold. If the property has appreciated in value since its purchase, the person transferring their share could be liable to pay CGT on the gain. This is particularly relevant for buy-to-let properties or second homes, as principal residences are generally exempt from CGT.
Inheritance Tax is another factor to consider. A Declaration of Trust can affect inheritance tax liabilities, especially if one of the owners passes away and their share of the property is inherited by someone else. Depending on the terms of the Declaration, this could have tax implications for the beneficiaries of the estate.
Lastly, if the property generates income, such as from rental payments, the Declaration of Trust could affect how that income is taxed. In cases where the income is split between multiple owners, the proportion of income allocated to each party will depend on the ownership shares specified in the Declaration of Trust.
It is essential to seek advice from a tax professional to understand how these liabilities apply to your specific circumstances.
At Premier Solicitors, we specialise in providing expert and affordable legal services, including assistance with Declarations of Trust.
Our experienced private client solicitors are dedicated to guiding you through the process, ensuring your property interests are protected and all legal requirements are met.
To find out how we can support you with your Declaration of Trust, please contact us at 01234 358 080, or visit our contact page to submit an enquiry form. We’re here to help every step of the way.
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