Buying a property with another person is a significant legal and financial commitment. Where two or more people contribute to a purchase, it is important to record clearly who owns what, how financial contributions are to be treated, and what should happen if the property is sold or one party wishes to be bought out. A Declaration of Trust is commonly used for this purpose.
In England and Wales, a Declaration of Trust is a legally binding document that records the beneficial ownership of property. This means it sets out the financial interests in the property, which may be different from the names shown as legal owners at HM Land Registry.
Declarations of Trust are particularly important where unmarried couples buy together, where deposits are unequal, where parents contribute money towards a purchase, or where the parties want certainty about how sale proceeds will be divided. Without a clear written record, disagreements may later have to be resolved by reference to complex trust law principles, which can create uncertainty, cost, and unnecessary conflict.
What Is a Declaration of Trust?
A Declaration of Trust is a formal legal document that confirms how a property is owned beneficially. It records the parties’ intentions at the time the document is made and provides evidence of how each person’s financial interest should be calculated.
It may deal with matters such as:
- The percentage share owned by each party;
- The source and treatment of deposit contributions;
- Responsibility for mortgage payments;
- How sale proceeds will be divided;
- What happens if one party wants to leave or be bought out;
- How rental income should be shared, where relevant; and
- Whether ownership shares are fixed or capable of changing.
The key distinction is between legal ownership and beneficial ownership. Legal ownership refers to the persons registered as proprietors at HM Land Registry. Beneficial ownership refers to the persons entitled to the economic value of the property. Two people may both be registered as legal owners, but their beneficial shares may be unequal. A Declaration of Trust records those unequal interests.
How Legal and Beneficial Ownership Differ
When a property is purchased jointly, the owners are usually registered at HM Land Registry as the legal proprietors. However, the Land Registry title will not usually state that one person owns 70% and the other owns 30%, or that one party’s larger deposit should be protected on sale.
This is where a Declaration of Trust becomes important. It sits alongside the registered title and records the underlying financial arrangement between the parties. If a dispute later arises, the document can be relied upon as evidence of the parties’ agreed intentions.
For example, two co-owners may buy a property for £400,000. One contributes £80,000 towards the deposit and the other contributes £20,000. They may decide that the first £80,000 and £20,000 should be returned to them respectively on sale, with any remaining equity divided equally. Alternatively, they may agree that the property is owned in fixed shares of 80% and 20%. These are materially different arrangements, and a properly drafted Declaration of Trust can make the position clear.
When Is a Declaration of Trust Needed?
A Declaration of Trust should be considered whenever the financial arrangements behind a property purchase are not entirely equal or straightforward. It is especially useful where the parties want to avoid future uncertainty.
Common situations include:
- Unmarried couples buying a home together: Cohabiting couples do not have the same property rights as spouses or civil partners. A Declaration of Trust can provide clarity about each person’s entitlement.
- Unequal deposit contributions: If one buyer contributes more at the outset, the document can state whether that contribution is to be protected.
- Different mortgage contributions: Where one party pays more of the monthly mortgage, the parties may wish to record how this affects ownership.
- Family assistance with a purchase: Parents or relatives may contribute money as a gift, loan, or retained interest. The nature of the contribution should be documented.
- Buy-to-let investments: Investors may contribute unequally or agree different shares of rental income and capital growth.
- Tenants in common arrangements: Where co-owners hold property in defined shares, a Declaration of Trust can specify those shares in detail.
The absence of a Declaration of Trust can create significant evidential problems. If the parties separate, one owner dies, or the property is sold, the parties may disagree about what was intended. The court may then have to consider bank transfers, correspondence, conduct, mortgage payments, and other evidence to infer the parties’ intentions.
Declaration of Trust and Unmarried Couples
Declarations of Trust are particularly relevant for unmarried couples. There is a common misconception that long-term cohabitation creates rights similar to marriage. In England and Wales, there is no general doctrine of “common law marriage”. Property rights for unmarried partners are usually determined by ownership, trust law, and evidence of financial arrangements.
This can lead to harsh outcomes if the parties have not documented their intentions. For example, one partner may have contributed to mortgage payments or improvements but may not be named on the legal title. Alternatively, both partners may be on the title, but one has contributed substantially more to the deposit. A Declaration of Trust can reduce the scope for disagreement by recording the agreed position in advance.
Declaration of Trust or Deed of Trust: Is There a Difference?
The expressions Declaration of Trust and Deed of Trust are often used interchangeably in property transactions in England and Wales. In many cases, both terms refer to a document that records beneficial interests in land.
Strictly speaking, a Declaration of Trust describes the function of the document: it declares how property is held on trust. A Deed of Trust may be used more broadly and may include other trust-related arrangements. In practice, the label is less important than the content, execution, and legal effect of the document.
A document described as a Declaration of Trust should be carefully drafted so that it clearly identifies the property, the parties, their respective interests, and the circumstances in which the arrangement may be varied or brought to an end.
What Should a Declaration of Trust Include?
A comprehensive Declaration of Trust should deal with the main issues likely to arise during ownership and on sale. The content will depend on the parties’ circumstances, but typical provisions include:
- Identification of the property: The address and, where available, title number.
- Details of the parties: The legal owners and any other persons with a beneficial interest.
- Ownership shares: Whether the parties hold fixed percentages or another formula applies.
- Deposit contributions: Whether contributions are to be repaid before profits are divided.
- Mortgage obligations: Who is responsible for payments and whether unequal payments affect shares.
- Outgoings and expenses: How insurance, repairs, service charges, and maintenance costs are to be shared.
- Sale arrangements: How and when the property may be sold.
- Buy-out mechanisms: What happens if one party wishes to purchase the other’s interest.
- Rental income: How income and expenses are divided if the property is let.
- Variation provisions: How the Declaration may be changed in the future.
Ambiguous or incomplete documents can create disputes rather than prevent them. For example, a document that records deposit contributions but says nothing about mortgage payments or future improvements may not fully resolve the parties’ intentions.
Declarations of Trust and HM Land Registry
A Declaration of Trust is not normally registered in full at HM Land Registry. The Land Registry records legal ownership, but it does not usually publish the detailed financial arrangements between co-owners.
Where property is held as tenants in common, a Form A restriction is commonly entered on the register. This restriction indicates that the property is held on trust and prevents a sole surviving co-owner from selling the property without appropriate steps being taken. However, it does not state the percentage shares or reveal the contents of the Declaration of Trust.
The Declaration of Trust should therefore be stored safely with the property documents, as it may be needed on sale, remortgage, separation, or death.
Joint Tenants and Tenants in Common
Co-owners of property in England and Wales usually hold the beneficial interest either as joint tenants or tenants in common.
Joint tenants own the whole beneficial interest together. If one owner dies, their interest usually passes automatically to the surviving owner by survivorship, regardless of what a will says.
Tenants in common own distinct shares, which may be equal or unequal. Each owner’s share can usually pass under their will or intestacy on death. A Declaration of Trust is most commonly associated with tenants in common because it can define the precise shares or formula for division.
Can a Declaration of Trust Be Changed?
A Declaration of Trust can usually be changed only if all relevant parties agree, or if a court orders otherwise. Changes may be documented by a deed of variation, a new declaration, or another formal document. The appropriate method will depend on the terms of the original declaration and the nature of the change.
A variation may be needed where the parties’ financial arrangements alter, one person contributes a further lump sum, a party is added or removed from the title, or the property is remortgaged. It is important that any change is recorded clearly; informal understandings may be difficult to prove later.
Tax Considerations
Declarations of Trust can have tax consequences. Depending on the circumstances, relevant taxes may include Capital Gains Tax, Income Tax on rental income, Stamp Duty Land Tax, and inheritance tax considerations. Tax treatment may be affected by whether a transfer of beneficial interest has occurred, whether consideration has been given, and whether the property is a main residence or investment property.
Where tax is relevant, the document should be prepared with the tax consequences in mind. An incorrectly structured arrangement may produce unintended liabilities.
Using Declaration of Trust Templates
A fixed-fee Declaration of Trust template may be suitable for straightforward circumstances, particularly where the parties agree the position and the ownership shares are simple and fixed. Templates can be a cost-effective option where the arrangement does not involve complex family, tax, lending, or future contribution issues.
However, templates may be inappropriate where contributions will vary over time, parents or third parties are involved, there are potential disputes, or the parties require a bespoke formula for calculating shares. A document that does not reflect the parties’ true intentions may be of limited assistance if a disagreement later arises.
Conclusion
A Declaration of Trust is a valuable legal document for property owners in England and Wales. It provides clarity, protects financial contributions, and reduces the likelihood of disputes about beneficial ownership. It is particularly important for unmarried couples, unequal contributors, family-assisted purchases, and investment property arrangements.
By recording the parties’ intentions clearly at the outset, a Declaration of Trust can help ensure that each person’s interest in the property is properly recognised and that future sale proceeds are divided in accordance with the agreed arrangement.