What is a Deed of Trust
What is a Deed of Trust?
A Deed of Trust in the UK, also known as a Declaration of Trust, is a legally binding document stating the division of ownership of a property. It is used by ‘tenants in common’ who have paid different amounts into the purchase of the property. Once the Declaration of Trust is in place, both parties will know exactly where they stand if the property is sold, or one person wants to be bought out in the future.
Setting out these financial arrangements from the outset in a Deed of Trust removes any uncertainty as to what will happen to each person’s financial investment in the property and will hopefully reduce any future disagreements.
What are tenants in common and how do they differ from joint tenants?
When you buy a property with another person, you will be asked whether you want to be joint tenants or tenants in common. It is entirely up to you which one you choose depending on your individual circumstances. The right choice for you will depend on a number of different factors, including your own situation and the relationship you have with your co-purchaser.
Ordinarily, when you buy a property, you will be listed as joint tenants, which means that if one of you were to die, the other one will inherit the property outright.
If you’d rather your share of the property went to family however, or if you’re contributing different sums of money, you can opt to be tenants in common and have a Deed of Trust created to protect your individual shares.
How is ownership divided?
Here are the key differences between joint tenants and tenants in common to help give you more clarity.
Joint tenants – You both own the entire property
Tenants in common – You each own a share of the property as a percentage
Can I leave my share of the property to someone else in my will?
Joint tenants – No, the property automatically passes to the other owner(s)
Tenants in common – Yes, because you’ve protected your part of the asset. It belongs to you, meaning you can pass it on to whomever you want
Can I get a separate mortgage?
Joint tenants – No, because you are technically buying ‘as one’, you need to get one joint mortgage
Tenants in common – In theory, yes – but most lenders would require a joint mortgage
Do we all have to agree to selling the property?
Joint tenants – Yes
Tenants in common – Yes
Who is a Declaration of Trust for?
A Declaration of Trust is typically taken out by couples, but it can also be used by family members or friends who are buying the property together.
You’re less likely to need a Deed of Trust if you are buying your property 50/50 with your partner, as the final sale value of the property would be split evenly again after any legal costs have been taken out.
But if you have both put in different amounts of money into an investment, a Deed of Trust ensures each party gets their fair share back. This can prove incredibly useful in the unfortunate event of a break-up or dispute.
If Sam and Paul buy a house together for £250,000 and Sam has put in 60 percent of the deposit, whereas Paul has only contributed 40 percent, a Declaration of Trust will ensure that if they come to sell the property, Sam will get back 60 percent and Paul will get 40 percent.
If there was no Deed of Trust in place, the couple could enter a dispute over who owns what share of the property, and there would be nothing to legally stop Paul claiming 50 percent instead of his 40 percent as the property is owned jointly.
In addition, if Paul contributed more towards the monthly mortgage payments than Sam did and also paid to have the house decorated, this can be recorded on the Deed of Trust, and the resulting amount will be divided to reflect these extra payments.
This is called a Commensurate Share deed and is just one of many options available.
What is a Declaration of Trust used for?
The most common use for a Declaration of Trust is to keep a legal record of the different contributions made towards a property, but it can be used for a number of other purposes. These include recording:
- How much each party has paid towards the property
- What each person’s share in the property is
- If one person has put extra money in at a later date, for example in renovations
- How much each person is responsible for in outgoings such as mortgage payments, bills and maintenance
- If a third party, such as a relative, has invested money and is not listed on the title deed but still wants to protect their contribution
- If one party is unable or unwilling to buy the other out and wants to officially surrender their interest in the property
Can I Create A Deed Of Trust Myself?
While it is possible to create your own Declaration of Trust for your property, you might find it includes mistakes or is not recognised in a court of law. We recommend you hire a conveyancing solicitor to create your Declaration of Trust, as this way it is legally binding.
When you hire a solicitor to draw up your Deed of Trust, you’re giving yourself complete peace of mind knowing that you’re protecting your investment.
How does a Deed of Trust Work?
The great thing about a Deed of Trust is how flexible it is, because it will be written according to your own circumstances. However, because of this flexibility, you’ll need to sit down with your Declaration of Trust solicitor to discuss what you want your agreement to cover.
Your Declaration of Trust solicitor will then draft a contract and you will both sign it. If you want the changes to be recorded on your title deed, your property lawyer will organise this with the Land Registry afterwards. This will ensure the property cannot be sold without each party’s consent.
Why do I need a Deed of Trust?
A Deed of Trust is a bit like a prenuptial agreement – it keeps the assets of one or both partners safe in the case of a break-up or dispute and is a valuable tool for a variety of people. When you buy a property, there is a huge amount of money at stake, and a Declaration of Trust offers that peace of mind.
Because everyone’s situation is different, having a Deed of Trust contract drawn up by a conveyancing solicitor not only protects each parties’ investment, it alleviates the risk of disputes should the relationship come to an end.
In addition to the protection given by a Deed of Trust, your solicitor will be able to advise you as to the tax and planning implications that come with buying property jointly. They may also suggest you create a will to ensure that your assets are safe and will go to whomever you choose.
Does a Declaration of Trust affect my mortgage?
A Declaration of Trust that doesn’t affect the mortgage lender’s security doesn’t require the lender’s consent. When drawing up the Deed of Trust, your solicitor has an obligation to act in the best interest of you, their client, and also the mortgage lender during the purchase of property.
Because the Deed of Trust can be drafted either during the conveyancing process when you bought the property, or at a later date during your ownership, the question of whether your mortgage lender needs to be informed of the deed is one that only your Declaration of Trust solicitor can answer. This is because each situation is different.
Can a Declaration of Trust be overturned?
A Declaration of Trust can be overturned as long as all parties are in agreement. If the parties agree, the Declaration of Trust can be amended, or even waived completely.
If situations change, the Deed of Trust should be updated to reflect this change, but it cannot be backdated. The deed can be re-written to reflect the changes, but it needs consent. If you want to make substantial changes to the deed, it is best to get a new one written.