What is a Declaration of Trust?
A Declaration of Trust is a legally binding document which records the ownership rights of a property.
It is commonly used where two or more people purchase a property together to clarify each person’s share and interest in the property. This is particularly useful where owners wish to hold the property in unequal shares or had unequal financial contributions.
A properly drafted and executed Declaration of Trust can provide certainty to all the parties involved and reduce the risk of future disputes. It can be relied upon as proof of the parties’ intentions and enforced by the courts if necessary.
Written by Aurora Chan. Legal Assistant
What is legal vs beneficial ownership?
There are two separate aspects of property ownership: legal ownership and beneficial ownership.
Legal ownership
Legal ownership is determined by the names which appear as the registered proprietors on the Land Registry title. They are responsible for the legal administration of the property, such as signing legal documents, and have the legal authority to make decisions about the property, such as selling it. Legal ownership cannot be divided into different shares and must be held jointly.
Beneficial ownership
Beneficial ownership is the right to benefit from a property. This may include the right to receive rental income, occupy the property, share in the proceeds if the property is sold, or otherwise benefit from its value. Beneficial ownership can be divided into distinct shares.
Legal owners and beneficial owners do not need to be the same people. Legal owners may hold the property on trust for someone else. Where the legal and beneficial interests do not align, a Declaration of Trust is useful to make clear who is entitled to benefit from the property.
Joint tenancy vs tenants in common
Where two or more people own the beneficial interest in a property, they can hold it in one of two ways: as joint tenants or tenants in common.
Joint tenancy
Joint tenants own the beneficial interest together as a whole with no distinct shares. Instead, each owner is treated as owning the entire beneficial interest. The rule of survivorship applies to joint tenants, meaning that if one owner dies, their share automatically passes to the surviving owners and does not form part of the deceased’s estate. Therefore, a property held as joint tenants cannot be left by will.
Tenants in common
Tenants in common each own a distinct share of the beneficial interest, which can be in equal or unequal proportions. For example, it can be held in 50/50 or 70/30 shares. Each owner’s share will form part of their estate upon death and pass in accordance with their will, or if there is no will, under the rules of intestacy.
A Declaration of Trust is particularly useful where a property is held as tenants in common, as it can record each owner’s beneficial share and any other financial arrangements relating to the property.
When is a Declaration of Trust useful?
A Declaration of Trust can be useful in a wide range of circumstances where it is important to record each person’s ownership interests, including:
- Unequal contributions:
Where co-owners purchase a property together, the default presumption is generally that they hold the beneficial interest equally. If one person contributes more towards the deposit, purchase price, mortgage repayments or other costs, a Declaration of Trust can record each person’s intended share and reflect their financial contributions.
- Property held on trust for children:
As children under the age of 18 cannot hold legal title to property in England and Wales, parents or other adults may need to hold the property on trust until the child turns 18. A Declaration of Trust can record that arrangement clearly.
- Unmarried couples:
Unlike married couples or civil partners, unmarried couples do not benefit from the same legal protections in relation to property ownership. To protect their interests in case of relationship breakdown or death of a partner, a Declaration of Trust can clearly set out each person’s beneficial interest.
- Contributions from non-owner:
Where other individuals contribute towards the purchase of a property but are not registered owners, a Declaration of Trust can record whether that contribution gives rise to a beneficial interest or is intended to be a gift. If the contribution is also intended to be protected in the event of a future marriage, a pre-nuptial agreement may also be appropriate, as a Declaration of Trust may not be valid under family law.
- Business arrangements:
Business arrangements are subject to strict contract rules unlike family arrangements. Where property is purchased as an investment or for business purposes, a Declaration of Trust can record each person’s ownership interest and establish clear arrangements from the outset to reduce the risk of future disputes.
What else can be included in the declaration of trust?
In addition to setting out who holds beneficial interest is held and in what shares, a Declaration of Trust can also make provisions for the following:
- Financial contributions: Recording each person’s contributions to the property, including contributions towards the purchase price, mortgage repayments, renovations or other costs. This can provide valuable evidence in case of future disputes.
- Sale of property: Stipulating what will happen if one of the owners wish to sell the property or their share of the property. This can include notice requirements, how the property should be valued, or whether the other owners have a right to buy out their share.
- Management of the property: Confirming arrangements for the day-to-day expenses and decisions relating to the property, such as payment of household bills or maintenance and repair costs.
- Dispute resolution: Establishing a process for resolving disagreements, such as requiring the parties to attend arbitration before commencing court proceedings.
Important considerations
A Declaration of Trust is an important legal document which could have significant legal and financial consequences. Before entering into one, there are several considerations to bear in mind.
Mortgage lender’s consent
If the Declaration of Trust would affect the mortgage lender’s rights or security (meaning their ability to recover the loan), then the lender’s consent must be obtained before filing the document.
Generally, if the Declaration of Trust only records the beneficial interests of the parties, the lender’s consent will not be required. Most professionally drafted Declarations of Trust will expressly provide that the mortgage must be repaid before sale proceeds are distributed to protect the lender’s security.
However, every situation is different depending on the terms of the mortgage and the provisions of the Declaration, so it is advisable to seek legal advice on this before entering into an arrangement.
Tax implications
A Declaration of Trust may have tax consequences, depending on how it is structured and the circumstances of the parties involved.
Potential taxes to consider include:
- Stamp Duty Land Tax (SDLT): In some circumstances, transferring or creating a beneficial interest in a property may give rise to SDLT.
- Capital Gains Tax (CGT): If a property that has increased in value, and an interest in that property is transferred, there may be a CGT liability.
- Income Tax: Where the property generates rental income, the beneficial owners will generally be taxed on their respective shares of that income.
- Inheritance Tax (IHT): A Declaration of Trust may also have Inheritance Tax implications if it qualifies as a lifetime gift.
The tax treatment of a Declaration of Trust will depend on your individual circumstances, including your wider tax position and the nature of the arrangement. You may wish to seek advice from a qualified tax adviser before entering into a Declaration of Trust to ensure that you understand any potential tax implications.
How can we help?
We can assist you with drafting and executing a Declaration of Trust in conjunction with the purchase of your property or anytime afterwards.
We will understand your circumstances and intentions and provide tailored advice on the most appropriate arrangement to reflect your wishes.
A properly drafted Declaration of Trust can protect your contributions and ensure your interests are accurately recorded. This helps to prevent misunderstandings and reduces the risk of future disputes.
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