What Is a Declaration or Deed of Trust?

When two or more people buy property together, there can be different expectations about who owns what and how much each person contributes. Without an explicit agreement, things can get complicated – especially if the contributions aren’t equal.

Even when buying with someone you trust, like a partner, friend, or family member, having a legal document that states everyone’s rights and responsibilities is critical to protecting your interests. 

In this post, we’ll examine how a Deed of Trust, also known as a Declaration of Trust, can help protect your investment, prevent future disputes, and ensure that all parties are on the same page from the start.

What Is the Main Purpose of a Deed of Trust? 

The primary purpose of a Deed or Declaration of Trust is to clarify how two or more people own a property. If numerous parties buy a property together and contribute different amounts of money, a Declaration of Trust is the document that outlines exactly who owns what 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 specialise in forcing people to do things they don’t especially want to do. At the outset of any personal or business relationship, including when buying a property with someone else, its unlikely much real thought is given to what might happen if something goes wrong. But things do go wrong. Perhaps the friend you buy a property with later enters into a difficult relationship; perhaps you want to sell but the other doesn’t. Perhaps one of you loses your job or enters bankruptcy or the joint owner dies. What happens then? 

A Declaration of Trust is essential if you’re planning to buy a property with somebody else and want to protect your share of the investment. The clearer the position between you, including in this type of contract (technically a deed), the less likely it is that there will be later disputes- precisely because you will have already confirmed what should happen, when. This can be especially important and valuable if you’re ever contributing unequal amounts or if someone else is gifting or loaning money for the purchase. 

Without this document, the law might assume equal ownership, which could cause issues if the property is sold or personal situations change.

When Is a Declaration of Trust Necessary? 

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 costs, 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 for offering the share to the other owner first or outlining a process for valuing and selling the property.

How Much Does a Declaration of Trust Cost in the UK?

To be clear, we’re litigation solicitors. We litigate disputes across the country dealing with property and the separation of financial interests and investments, but we don’t draft these documents. The cost of setting up a Declaration of Trust in the UK varies greatly depending on your solicitor’s fees and the complexity of your situation but typically ranges between £300 and £600. In comparison to the value of the assets involved- these are not commercially speaking significant sums.

If you have a more complicated financial arrangement, such as multiple co-owners or loan agreements, you can expect your costs to be at the higher end of this range. However, it’s important to remember that investing in the proper advice and setup for a Declaration of Trust can save you significant legal costs and headaches in the long run by preventing disputes over property ownership.

Is It Necessary to Inform a Mortgage Lender? 

Yes, you must inform your mortgage lender if you are setting up a Declaration of Trust. The lender, through the mortgage, has a financial interest in the property, and they need to be informed of any changes to the property’s ownership shares or responsibilities. 

In most cases, your solicitor will communicate with the lender to ensure that they are properly notified, but this is always 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. Financial advice should be obtained to ensure you’re clear on these. Here are the taxes that may generally apply:

Stamp Duty Land Tax (“SDLT”)

SDLT may be due if the Declaration of Trust transfers a share of the property and money or other consideration is exchanged. For example, if one co-owner pays another for a larger share of the property or takes on more of the mortgage, SDLT might be triggered. 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 calculated on the profit (or “gain”) made when an asset is sold or transferred. For residential property, the rates depend on your income tax band. These are subject to change from time to time.

Reliefs and exemptions can apply from time to time such as Private Residence Relief. 

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 has to declare their share of the rental income on their tax return each year.

For example, if one co-owner contributed 70% of the purchase price, the rental income may be split accordingly. This split must match what’s set out in the Declaration of Trust to avoid any tax discrepancies. 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 can refer to more general document used to transfer other assets into a trust for the benefit of beneficiaries beyond a property, but not always. 

Final Thoughts

A Declaration or Deed of Trust can be an important safeguard that protects your position and makes it easier, cheaper and quicker to litigate if/when you need to do so to force a certain outcome. Generally speaking if you have an agreement that clearly indicates the position of the parties, that will be highly persuasive for the court. This clarity, in turn, makes it more likely that we can force certain outcomes for you as quickly and as cost effectively as possible.

If you own a property jointly with another person who is no longer engaging with you and is not acting reasonably, we can assist you. Our specialist property litigation team act nationally in disputes involving co owners of property who have different ideas about what should happen now and moving forwards. We do not give divorce advice but if you are not married or own a property of any type with someone else, Contact our property litigation team at Helix Law today for advice and assistance on protecting and improving your position. We would love to assist you.