What Is a Declaration of Trust?

If you are buying a property with someone else, you may have questions about who owns what, what happens if one person contributes more money, and what would happen if the property is eventually sold.

This is where a Declaration of Trust can be useful.

A Declaration of Trust is a legal document that records how a property is owned between two or more people. It can set out each person’s beneficial interest in the property and explain what should happen to the proceeds if the property is sold.

In this guide, we’ll explain what a Declaration of Trust is, when you might need one, how it works and why it can be particularly important when buying a property with someone else.

What is a Declaration of Trust?

A Declaration of Trust is a legal document that records the beneficial ownership of a property.

The person or people registered as the legal owners of a property may not necessarily have equal beneficial interests in it.

For example, two people might own a property together but contribute different amounts towards the deposit.

One person might contribute £60,000 while the other contributes £20,000.

A Declaration of Trust can record how the property’s beneficial ownership is divided and, depending on its terms, how the proceeds should be divided if the property is sold.

This can provide clarity and reduce the potential for disagreements later.

What is beneficial ownership?

To understand a Declaration of Trust, it helps to understand the difference between legal ownership and beneficial ownership.

The legal owner is the person registered as the proprietor of the property at HM Land Registry.

The beneficial owner is the person who is entitled to the financial benefit of the property.

These interests can sometimes be different.

For example, two people could be registered as legal owners while having different beneficial interests in the property.

A Declaration of Trust can record the agreement between the owners about those beneficial interests.

When might you need a Declaration of Trust?

There are several circumstances where a Declaration of Trust may be appropriate.

Buying a property with unequal deposits

Perhaps one person has saved a larger deposit than the other.

For example:

• Person A contributes £50,000

• Person B contributes £10,000

The owners may want their different contributions to be reflected in their beneficial interests.

A Declaration of Trust can document the arrangement agreed between them.

Buying with a partner

Unmarried couples buying a property together may want to record their respective interests in the property.

This can be particularly important where the couple has contributed different amounts towards the deposit, mortgage or other costs.

Buying with friends or family

A Declaration of Trust isn’t only for couples.

Friends, siblings, parents and children, or other people purchasing property together may also want to establish clearly how the property is owned.

One person contributes more towards the purchase

The initial deposit isn’t the only possible consideration.

The parties may have different arrangements concerning mortgage payments, renovation costs or other financial contributions.

The Declaration of Trust can be drafted to reflect the arrangement agreed between the owners.

Protecting a financial contribution

If one person contributes significantly more towards purchasing a property, they may want that contribution properly documented.

Without a clear agreement, disputes can potentially arise later about who is entitled to what share of the property’s value.

A Declaration of Trust can provide evidence of the parties’ agreed beneficial interests.

What can a Declaration of Trust include?

The contents will depend on the circumstances and the agreement between the parties.

A Declaration of Trust might set out:

• Each owner’s beneficial interest

• How the initial deposit is treated

• How mortgage payments are treated

• How other property expenses are divided

• How sale proceeds are divided

• What happens if the property is sold

• What happens if one owner wants to leave

• How a transfer of ownership might work

• How certain future contributions are treated

The document should be tailored to the particular circumstances of the people buying the property.

There isn’t necessarily a single arrangement that works for everyone.

Can a Declaration of Trust protect your deposit?

Potentially, yes.

This is one of the reasons people commonly consider a Declaration of Trust.

For example, imagine two people purchase a property for £300,000.

One contributes a £50,000 deposit and the other contributes £10,000.

They may want their agreement about those contributions to be recorded formally.

The Declaration of Trust could specify how the deposit contributions are treated when the property is eventually sold.

However, the exact wording is important.

There is a significant difference between saying:

“Person A gets their £40,000 additional contribution back first.”

and saying:

“Person A owns 70% of the property and Person B owns 30%.”

These arrangements can produce very different outcomes if the property’s value changes.

This is why you should obtain appropriate legal advice about the wording of the document rather than relying on a template.

What happens if the property increases in value?

This depends on the terms of the Declaration of Trust.

For example, suppose a property is purchased for £300,000 and later sold for £400,000.

If the owners have agreed to fixed percentage beneficial interests, the increase in value may be divided according to those percentages.

Alternatively, the Declaration of Trust could provide for specific contributions to be returned before the remaining equity is divided.

The important point is that the wording of the Declaration of Trust determines how the agreed beneficial interests operate.

This is why it is important to think carefully about the arrangement before signing the document.

What happens if the property decreases in value?

The same principle applies to a fall in value.

If the property is eventually worth less than the purchase price, the financial outcome can be very different depending on the terms of the Declaration of Trust.

For example, an arrangement that protects a specific deposit contribution may operate differently from an arrangement that simply gives each owner a fixed percentage of the property’s equity.

Your conveyancer or solicitor can explain the implications of the proposed arrangement.

Declaration of Trust and joint tenants vs tenants in common

A Declaration of Trust is often discussed alongside the choice between owning a property as joint tenants or tenants in common.

These are different concepts.

Joint tenants

Where property is owned as joint tenants, the owners generally own the property together rather than having separately defined shares.

There is also an important survivorship principle: when one joint tenant dies, their interest generally passes to the surviving joint tenant or tenants rather than under their Will.

Tenants in common

Tenants in common can hold defined beneficial interests in a property.

For example, the owners might agree that one owns 60% and another owns 40%.

This can be particularly relevant where the owners have made unequal financial contributions.

If you are considering how to hold a property, it is worth discussing the options with your conveyancer before the purchase is completed.

Is a Declaration of Trust legally binding?

A properly prepared Declaration of Trust can be a legally binding document.

However, its effectiveness depends on the circumstances and the terms of the document.

It is therefore important that the document accurately reflects the agreement between the parties.

If your financial arrangements are complicated, you should seek independent legal advice before entering into a Declaration of Trust.

Do I need a Declaration of Trust?

There isn’t a universal answer.

You may want to consider one if:

• You are buying with another person

• You are contributing an unequal deposit

• You want to record different ownership percentages

• You want to document how sale proceeds should be divided

• One person is contributing substantially more money

• You are buying with friends or family

• You want greater clarity about each person’s financial interest

For straightforward purchases where everyone is contributing equally and intends to own the property equally, a Declaration of Trust may not be necessary.

The right approach depends on your individual circumstances.

How much does a Declaration of Trust cost?

The cost will vary depending on the solicitor or conveyancer you use and the complexity of the agreement.

A straightforward Declaration of Trust may be relatively simple to prepare, while a more complicated arrangement involving different contributions, future payments or specific provisions can require more legal work.

When requesting a quote, ask whether the price includes:

• Preparing the Declaration of Trust

• Taking instructions from all relevant parties

• Explaining the proposed arrangements

• Reviewing amendments

• Execution of the document

• Any additional work required to reflect your particular circumstances

It’s important to establish the cost before instructing your legal professional.

Can you change a Declaration of Trust?

It may be possible to change or replace a Declaration of Trust, but this should be dealt with carefully.

If your financial circumstances or agreement with the other owner changes, you should obtain legal advice before assuming that an existing Declaration of Trust can simply be amended.

For example, the owners may decide that their respective contributions or ownership arrangements should change.

A solicitor can advise on the appropriate way to document the new agreement.

What happens if you don’t have a Declaration of Trust?

This depends on how the property is owned and the circumstances of the people involved.

If there is a disagreement about beneficial ownership, determining each person’s entitlement can become more complicated.

This is particularly relevant where one person has contributed substantially more money than another.

A clear written agreement can help avoid uncertainty by recording the arrangement that the owners agreed to.

It is generally much easier to discuss these issues before purchasing the property than to try to resolve a disagreement afterwards.

Final thoughts

A Declaration of Trust can be an important document when two or more people are buying a property and their financial contributions or intended ownership arrangements are not straightforward.

Its purpose is to provide clarity about beneficial ownership and, depending on the wording, how the financial proceeds of the property should be dealt with.

If you’re buying a property with someone else and contributing different amounts towards the purchase, it’s worth discussing a Declaration of Trust with your conveyancer before you exchange contracts.

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This article is intended for general information only and does not constitute legal advice. Property ownership and Declaration of Trust arrangements can have significant legal and financial consequences. You should obtain independent legal advice about your individual circumstances before entering into a Declaration of Trust.