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What is a Declaration of Trust?

What is a Declaration of Trust?

Declarations of Trust are very useful documents when two or more people buy property jointly together. 

The Declaration of Trust will set out each owner’s share in the property.  It also sets out the rights and obligations of each owner in relation to the property, for example, relating to payment of outgoings and mortgage contributions.  The document details what should happen if one owner wishes to “walk away” from the property.  In those circumstances, the opportunity is given to the remaining owner to buy out the share of the owner who wishes to leave.  If a buy out does not happen then the property is placed on the open market.  The Declaration of Trust can detail how the property’s open market value should be determined in the event of any disagreement.  The proceeds of sale of the property would then be distributed to the owners in the shares as recorded in the Declaration of Trust. 

  • Example of a joint purchase with unequal shares

      An unmarried couple, Anne and Barry, are purchasing a house together for £300,000.  Anne is contributing £60,000 towards the purchase price, funded from the purchase of her flat.  The rest of the purchase price will be funded by a mortgage.  Barry does not have any cash to contribute to the purchase, but he will be contributing towards the mortgage equally with Anne.  Anne and Barry can execute a Declaration of Trust stating that if the property is ever sold, Anne will receive her initial cash investment before any sale proceeds (after the mortgage has been redeemed) are divided equally between them. 

  • Example of a property held in trust

      Charles is purchasing a house in his sole name, with the intention that the property will be lived in by his daughter Deirdre.  Charles intends that the property should be treated as Deirdre’s and in effect is a gift from him to Deirdre.  Charles can execute a Declaration of Trust stating that he holds the property on trust for Deirdre.

  • Example of the purchase of investment property and inheritance tax planning

      Elliot and Fearne own an investment property, for which they receive rental income.  In order to reduce their estates for inheritance tax, Elliot and Fearne would like to gift a percentage of the property to each of their children.  This will also provide the children with a share of the rental income.  Elliot and Fearne can carry out a Declaration of Trust each year to gift a percentage of the property to their children.  The percentage would need to be calculated so that Elliot and Fearne each gift the maximum percentage possible without incurring any Capital Gains Tax liability.  The Declarations of Trust should be updated annually so as to utilise Elliot and Fearne’s annual Capital Gains Tax allowance. 

  • Tax considerations when making a declaration of trust

      There may be Inheritance Tax, Capital Gains Tax and Stamp Duty Land Tax implications to any of the above transactions; but with the correct advice Declarations of Trust are an invaluable tool in recording property ownership and tax planning. 

Ask us about the benefits of creating a declaration of trust