What is a Declaration of Trust and why is it so important?

What is a Declaration of Trust?

A Declaration of Trust is a legal document confirming the terms on which an asset, such as a property, is held on trust. The document usually records the portion of the ownership of the property, as well as other terms agreed by the parties.

The owners usually hold the property on trust for themselves as beneficial owners. However, individuals may hold the property on trust for someone else, even if they do not benefit from the property.

Please call us on 01707 329333 or email law@crane-staples.co.uk if you have any queries about the content of this article.

Please be aware that when this article refers to the UK, this covers the jurisdiction of England and Wales only. If you require legal advice in other jurisdictions of the UK, such as Scotland or Northern Ireland, you should contact a local solicitor.

What is the purpose of a Declaration of Trust?

A Declaration of Trust records the terms on which a beneficial interest in a property is held. It also acts as evidence of the agreement.

The document is used on a future sale or transfer of the property to confirm how the net sale proceeds are to be distributed or shares to be transferred. It also helps to ascertain details of the ownership and shares passing to an estate if one or more of the owners has passed away.

Additionally, it can outline the day-to-day management of property ownership, such as payment of mortgages, bills, renovations and other utilities.

Why is a Declaration of Trust important?

It is important because it protects your investment in a property if things do not go as planned.  It also records the position regarding how the property is owned and avoids  any assumptions or confusion as to the shares and general ownership of the property.

This ensures funds are protected and contributions are legally recorded, should the worse happen, for instance, if the owners separate.

It documents the position if one owner contributes more towards a purchase price, mortgage repayments or works to the property. Consequently, when the property is sold, funds are returned as agreed.

When is a Declaration of Trust necessary?

A Declaration of Trust is required when owners wish to legally outline their contributions to a property, either by lump sum or portion (such as a percentage or fraction), and their agreement as to how the proceeds are to be distributed on the eventual sale. For example:

• John and Grace buy a property. John puts £50,000 towards the purchase price. Grace puts £35,000 towards the purchase price. The remaining funds are from a mortgage. Grace and John outline their contributions and have these amounts returned to them on a future sale.
• Lewis contributes £200,000 towards the property purchase price. Harry contributes £5,000. The remainder of the purchase price is made up of a small mortgage of £40,000. Lewis and Harry reflect their contributions by a percentage. The proceeds are split according to the percentages: 89% to Lewis, 11% to Harry.
• Gary purchases a property with his father, William. Gary pays for £250,000 worth of renovation works. A Declaration of Trust is drawn up. On a future sale, Gary receives the amount paid for works first. After that, the remaining proceeds are split equally between William and Gary.

Tenants in Common vs Joint Tenants

Owning a property as Tenants in Common means owners own different shares of the property. When one owner dies, their share passes to the beneficiaries stated in their Will. Their share does not automatically pass to the other owner(s).

Owning a property as Joint Tenants means owners have equal rights to the property. On death, the property will automatically pass to the surviving owner. On the last death, the property will be inherited as per the terms of the last owner’s Will. You cannot pass ownership of the property under the terms of your Will if you own as joint tenants.

Particular care needs to be taken to address this issue and the appropriate advice should be taken from a legal professional when a Declaration of Trust is set up.

When setting up a Declaration of Trust it is extremely important that you also consider making a Will to ensure that your share of the property passes in accordance with your wishes. Without a valid Will in place, your share will pass in accordance with the government rules of Intestacy, which may not reflect your wishes.

Does a declaration of trust sever a joint tenancy?

Yes, a declaration of trust does sever a joint tenancy. The declaration of trust can confirm that from such date it is completed, two or more proprietors will own a property as tenants in common, rather than as joint tenancy. You cannot own a property as joint tenants if there is a declaration of trust involved.

Are Declarations of Trust legally binding in the UK?

Yes, it is legally binding on the owners. However, in divorce proceedings, a Family Court may disregard this when dividing financial assets.

As it is a legally binding document, a Declaration of Trust gives owners protection. This is particularly reassuring if a situation turns sour between owners who have split up. This article from The Guardian shows a real example of a separated couple who had a Declaration of trust for their property. Despite the objections and challenges made by one of the parties, ultimately, as a Declaration of Trust was in place, each party was legally bound to follow the terms set out in the document.

Can a Declaration of Trust be changed?

Whilst a Declaration of Trust cannot be amended, a supplementary Declaration of Trust can be made. This alters the terms of the original document. It refers to the original document, outlining what has happened since, and what the shares are now. For example, following additional contributions or works completed.

Can a Declaration of Trust be backdated?

A Declaration of Trust can be retrospective but only in particular circumstances and legal advice should be sought as this is highly specialised.

Is a Declaration of Trust void after marriage or divorce?

It is not void after marriage or divorce. However, should parties marry, then divorce, in future, a Court may disregard the terms as part of financial divorce proceedings.

What happens to a Declaration of Trust after death?

A Declaration of Trust will be considered in the estate administration of a deceased Trustee. The deceased’s share in the property will pass to the beneficiary named in their Will. If the deceased did not have a Will, intestacy rules will apply.

The deceased’s share in the property does not automatically go to the other owner(s) of the property. This only happens if the deceased’s Will states that the co-owner will inherit their shares in the property.

It is essential that unmarried couples who own their property as Tenants in Common have Wills in place. Intestacy rules mean the deceased’s partner would not inherit the deceased’s shares in the property. This could cause potential conflict between the deceased’s partner and the beneficiaries of the deceased’s estate, who now co-own the property.

Does a Declaration of Trust affect your mortgage?

Many mortgage lenders require the Declaration of Trust be reported to them. It is very rare that lenders have any issue with this. You must let your conveyancer know if you have one in place.

Are there any tax implications to setting up a Declaration of Trust?

There may be tax implications on how the shares are held, in particular if you change how the shares are held at a later date. It is therefore extremely important to take appropriate advice from a professional when setting up a Declaration of Trust.

What is the declaration of trust for tax purposes?

A Declaration of Trust can outline the beneficial shares that two or more co-owners have in a property. In some instances therefore, shares in a property are able to be catered in a way that is tax efficient for each property owner, depending on their income. We would advise that you seek financial advice on tax planning and if you are considering having a Declaration of Trust prepared for tax purposes.

Do you need a Solicitor?

We strongly advise that you use a Solicitor to prepare your Declaration of Trust.

Can I write a declaration of trust myself?

Whilst you may be tempted to create your own, or use a ‘Do it Yourself’ Declaration of Trust template, you risk serious legal implications of not having your wishes correctly reflected. On a future sale, you may not receive the correct funds or benefit as was intended. We recommend you seek advice from a Solicitor when preparing any legal document.

How much does it cost to get a declaration of trust?

Fees for a declaration of trust will vary between firms. At Crane & Staples, our fees for preparing a declaration of trust start from £500 plus VAT, depending on the complexity of the instructions. We will provide you with an accurate estimate once we have discussed your specific circumstances. Please get in touch with our Private Client team for further information about our prices and a bespoke fee estimate.

Who can witness a declaration of trust?

The witness must be an independent person, unrelated to the parties signing, and without any interest in the matter at hand. They must also be an adult, i.e. over the age of 18. A good example of someone who could be a suitable witness is usually a work colleague or a neighbour.

Does a declaration of trust need to be registered with HMRC?

This depends on the terms and parties to the Declaration of Trust. Where the beneficial and legal owners of a property differ, this automatically gives rise to a trust that needs to be registered with HMRC. There are further scenarios where a trust may need to be registered with HMRC and which a solicitor can advise of in an initial meeting. You can find out more about trust registration here.

Does a declaration of trust go on a Land Registry?

No it does not. You can however lodge a restriction on the property Title Deeds to note that there is a declaration of trust in place, between the owners, but the Land Registry do not require sight of the document to register this.

Do you have to pay stamp duty on a declaration of trust?

This depends on the terms and parties to the Declaration of Trust, and if there is any money changing hands between parties – also known as ‘consideration’.

Does a declaration of trust trigger CGT?

In certain circumstances, it may trigger a CGT liability. This is dependent on the facts of the matter. We would advise you seek legal advice if you believe there may be a CGT liability arising out of your Declaration of Trust. You can find out more about CGT here.

Does a will override a declaration of trust?

No. A Declaration of Trust outlines the shares a person has in a property. That Trust document will confirm what a deceased person’s share was at the date of their death, and that their interest in the property, is to go as per the terms of their Will. This is why it is very important to have an up to date Will.

Where can I get a copy of my Declaration of Trust?

You can request a copy from your Solicitor. It is imperative that the original signed document is kept safe, therefore we usually advise our clients that they retain a copy for their records and then we safely store the original in our safe storage deeds room.

How long does a declaration of trust last?

The Declaration of Trust will remain in place for as long as the property is owned by the parties involved.

Get in Touch

Our specialist solicitors would be pleased to assist you in writing a Declaration of Trust. We can also advise you on the process and implications of this. Please contact our Private Client team on 01707 329333 or email wills@crane-staples.co.uk for more information.