Declaration of Trust: Safeguarding Your Assets for Future Generations

• Posted onMay 24, 2024

In today’s housing market, it’s increasingly common to purchase a home with a partner or friend rather than going it alone. However, many conveyancing firms fail to highlight the importance of obtaining a Declaration of Trust. This document clearly outlines each person’s contributions to the property, reducing the likelihood of future disputes and enhancing the protection of your investment. Harriet Pearce, a Trainee Solicitor from our Private Client Department, and Helen Holloway from our Residential Conveyancing Department explain what a Declaration of Trust is and how it can protect your assets for the future.

A declaration of trust is a legally binding agreement made at the time of buying a property. It records the financial arrangements of everyone who has an interest in the property. It gives details of what share of the property a person owns and what should happen in various eventualities, such as when a joint owner dies, the split of the net proceeds of sale if all owners agree to sell the property or if one owner wishes to buy out the other(s).

A Declaration of Trust confirms how the net proceeds of sale are to be distributed to ensure that everyone gets the share that they are entitled to. It is a good way of protecting your investment if things don’t go as planned, for example if the owners separate.

What should a Declaration of Trust cover?

A fundamental role of a Declaration of Trust is to establish clarity regarding ownership of assets. In scenarios where multiple parties contribute to an asset or property, such as joint ventures or co-ownership arrangements, a Declaration of Trust clearly outlines each party’s share and entitlements. This transparency mitigates conflicts and ambiguity over ownership, thereby safeguarding the assets involved.

It is important to set out your wishes clearly in a Declaration of Trust. We would recommend the following should be contained in the Declaration of Trust:

• The amount each party has contributed to the deposit for the purchase of the property.
• The amount each party will contribute to the mortgage repayments and other outgoings.
• The percentage of the property each party will own, and what percentage each party will receive from the sale of the property.
• The change in percentages if one party contributes more towards any changes, i.e. refurbishments.
• When the property should be sold and in what circumstances i.e. Divorce, and how the property should be valued.

Will a Declaration of Trust protect my Assest?

A Declaration of Trust eliminates any doubt regarding the distribution of funds when the property is sold or when one person wants to be bought out. It may stipulate that you each receive your initial investments back first, with the remaining proceeds divided equally or based on individual mortgage contributions. Additionally, if one party plans to make further financial contributions to the property, such as additional mortgage payments or renovations, these arrangements can be documented. If there is no Declaration of Trust in place, it can become difficult to tell who should be repaid and how much they are entitled to when the property is sold.

Is a Declaration of Trust easy to break?

A Declaration of Trust is a legally binding agreement, as long as it has been prepared correctly. As with any legal document, the Declaration of Trust must meet various criteria to ensure it will be recognised by law and will need to be prepared and executed as a deed. Deeds are formal legal documents with precise wording that need to be executed in a particular way. All parties will also need to demonstrate that they have had a full understanding of the agreement and enter into it of their own free will and the document must be signed by all parties and witnessed.

Does a declaration of trust end on death?

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

The deceased’s share in property owned as tenants in common does not automatically go to the other owners of the property. This only happens if the deceased’s Will states that the co-owner will inherit their share in the property.

It is essential that unmarried couples who own their property as tenants in common have Wills in place. Intestacy rules mean that 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.

What are the benefits of a declaration of trust? A Declaration of Trust can specify the beneficial ownership share among multiple co-owners of a property, potentially allowing for tax-efficient arrangements based on individual income levels. For spouses or civil partners, it can be particularly beneficial for income tax purposes. By default, joint property ownership assumes a 50-50 split unless otherwise stated at purchase. However, if one owner falls into a higher income tax bracket, adjusting the ownership split through a Declaration of Trust could yield tax advantages. We advise that you speak to a tax advisor on this specific tax planning for more information.

Can I write the Declaration of Trust myself?

You may be tempted to create your own or buy a DIY template, however you run the risk of serious legal implications of not having your wishes correctly reflected. For example, on a future sale, you may not receive the correct funds or benefit as you had originally intended.

Can a Declaration of Trust be changed?

If you want to make any major changes to your agreement, you should probably get a new Declaration of Trust drawn up. However, if they are only small changes, you can get a deed of variation drawn up which will outline any changes made. We would recommend this is also drawn up by a legal professional to make sure it complies with relevant laws and requirements.

For personalised guidance, including expert advice on Declarations of Trust and securing your future, reach out to us at 01453 847200. Let’s simplify your life together. Contact us today to take the first step towards peace of mind.