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Buying a property with someone else? Have you considered a Declaration of Trust?

If you are buying a property with someone else, you should consider whether you need a declaration of trust. 
 

When you buy property with another person, you can choose to own the property as joint tenants or tenants in common.  As joint tenants you will collectively and equally own the whole of the property without distinct shares.  When a joint tenant dies, their share automatically passes to the co-owner.

As tenants in common you will have separate shares.  You can pass your share to someone other than your co-owner.  The shares can be equal or unequal.

What is a declaration of trust?

A declaration of trust is a document which sets out what share each co-owner holds in their property.   A declaration should be made wherever tenants in common do not have equal shares.  When the property is sold, the proceeds will be shared out between the owners in accordance with the declaration. 

A declaration of trust can also be used to include other areas of agreement such as a process for sale if one co-owner wants to sell but the other one does not.

Why do I need a declaration of trust?

You should have a declaration of trust if you do not wish to own your property in equal shares with your co-owner.  It is important to prevent misunderstandings or disputes arising when the property is sold or upon relationship breakdown or death of a co-owner.

Common examples of when a declaration of trust is needed

  • If only one of the co-owners is paying the deposit or one is paying more than the other – perhaps using savings, an inheritance or a family loan.
  • Where the co-owners are not partners (perhaps friends or relations).  It is important to be clear who owns what.  
  • If you have children from a previous relationship that you want to save your share for.
  • To give someone a share who did not have a share before –for example  if your partner moved in to your property and has been paying the mortgage with you, you can give them a share through a declaration of trust.
  • To change shares of an investment property for the division of rental income between the co-owners.

What choices are there?

A Declaration can be flexible and give effect to many different arrangements.  At its most simple, a declaration can simply provide for fixed percentage shares (for example 60%/ 40%) that will stay the same throughout ownership. 

Alternatively, it can ‘ring fence’ an initial investment (the deposit) for the co-owner who paid it and thereafter split any remaining sale proceeds in fixed percentage shares.    Under such an arrangement provision is made for prioritising payments upon sale.

At the more complicated end, a declaration can provide for shares to change over time to exactly reflect the money that each co-owner invests both at the outset and during the period of ownership.   This will allow an owner who puts less or no deposit payment down, to accrue an increasing interest over time by paying off the mortgage.