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Declarations of trust and why are they important

August 10, 2022
Wills, Trusts and Probate

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, such as children under the age of 18.

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 and/or rental income 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. 

Here are some examples:

  • Sarah and Andrew buy a property. Sarah puts £70,000 towards the purchase price. Andrew puts £25,000 towards the purchase price. The remaining funds are from a mortgage. Sarah and Andrew outline their contributions and have these amounts returned to them on a future sale.
  • Martin contributes £200,000 towards the property purchase price. Lewis contributes £5,000. The remainder of the purchase price is made up of a small mortgage of £40,000. Martin and Lewis evidence their contributions by a percentage. The proceeds are split according to the percentages: 89% to Martin and 11% to Lewis.
  • Lisa purchases a property with her mother, Mary. Mary pays for £250,000 worth of renovation works. A Declaration of Trust is drawn up. On a future sale, Mary receives the amount paid for works first. After that, the remaining proceeds are split equally between Lisa and Mary.

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 or under the laws of intestacy if there is no 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.

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 but it does go towards showing each parties intentions in the matter.

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 revoked/cancelled?

Yes, a Declaration of Trust can be revoked (or cancelled) but it has to be done by a further legal document confirming that both parties agree to the revocation of the original document. It simply cannot be torn up or ignored as it is a legally binding document.

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 Owner/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.

Do you need a Lawyer?

We strongly advise that you use a Lawyer to prepare your Declaration of Trust. 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 or all matters considered. On a future sale, you may not receive the correct funds or benefit as was intended. We recommend you seek advice (could you add a link to the dept page on the website) when preparing any legal document.

How much does it cost?

Our costs in relation to advising and drafting a straightforward Declaration of Trust are fixed at £850 plus VAT and disbursements. For more complicated matters, this fee may increase in reference to your Lawyer’s hourly rate. We will always advise you of our fees in advance. Please get in touch (could you add a link to the dept page on the website) with our Private Client team for further information about our prices.

Get in Touch

Our specialist solicitors would be pleased to assist you in writing a Declaration of Trust and the preparation of a Will. Please contact our Private Client team on 01293 596927 or email info@stevensdrake.com for more information.  

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