What is a Declaration of Trust?
A Declaration of Trust (sometimes called a Deed of Trust) is a legal document which is drawn up when more than one person is involved in the buying of a property (or a share of the property) and is used to confirm the financial arrangements agreed when the property is brought. A Declaration of Trust provides clarification to everyone involved and hopefully will prevent any upset or disagreements arising in the future.
This can be especially useful when someone (perhaps a parent or friend) loans money to the buyer to enable them to purchase their home or if the property is being brought by joint owners who are contributing in uneven shares to purchase the property. The Declaration of Trust will explain what should happen to the property if it is sold or if one party wishes to buy out another.
A Declaration of Trust is a legally binding document and the parties must follow the directions contained within it. It is therefore imperative that all the parties involved are happy with the terms and that they have sought the right advice. The document should be drafted at the time the property is brought so that all the parties are protected from the outset.
In a world where it is becoming more and more difficult for younger people to get onto the property ladder the ‘bank of Mum and Dad’ is becoming a common solution. For parents that have savings to help their child buy a property, loaning them the money to help with deposits could also be a good investment. For those that would prefer not to give the money as an outright gift but instead want to loan this (on whatever terms they are comfortable with) having a correctly drafted Declaration of Trust to explain this is a vital to help protect their interest. The Declaration of Trust can specify how much money was loaned and how and when this should be repaid.
It is not only parents that may have helped with the purchase of a property, however, the advice would be the same for anyone, whether they are other family members, friends or even a loan from someone’s business.
Another common situation, where having a Declaration of Trust drafted would be advisable, is when a property is purchased as joint owners but for whatever reason the costs are not being divided equally. This could be because one owner is contributing more to the purchase price or perhaps the agreement is that one owner will buy the house but the other will cover all the ongoing costs.
When you purchase a property with someone else you will be asked whether you wish to purchase the property as joint tenants or tenants in common. If you choose to own your house as tenants in common you can stipulate in what shares you wish to own the property, for example, 50/50 or 40/60. This may be sufficient, but you may still need to have a Declaration of Trust drawn up to explain any specific financial arrangement you have agreed. Although your ownership will be recorded on the Land Registry it will not record any other agreement you might have made, so it is important that this is written into the Declaration of Trust.
If you choose to own your property as joint tenants this means that you and your co-owner will both own the whole of the property. You will not therefore own certain individual shares of the property. Owning a property as joint tenants is common for couples who would wish their partner to automatically become the sole owner of their home if anything were to happy to them. It is still possible for a Declaration of Trust to be completed, even if you choose to own your property as Joint Tenants.
A Declaration of Trust will commonly include;
· Details of how much each person contributed to the purchase price and how much should be repaid and when.
· What percentage of the property each person will own and how any equity will be split if the property is sold.
· How much each person will contribute towards the payment of any mortgage and how the mortgage will ultimately be paid off.
It is up to the people involved to decide and agree exactly what is included in the Declaration of Trust but it is important that any agreement is cemented in this document so everyone can be assured that their interests are protected.