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

When you buy property with another person, you need to consider whether you will own the property in equal shares or unequal shares and you will also need to decide whether you want to own the property as joint tenants or tenants in common.

As joint tenants you equally and jointly own the whole of the property.  You do not have distinct shares and when a joint tenant dies, their share automatically passes to the co-owner.  You cannot gift or sell your share to someone else.

As tenants in common you each have separate shares.  You can sell or gift 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 your respective shares in the jointly owned property.  If you do not want to have equal shares, you must own the property as tenants in common and you will need a declaration of trust.   When the property is sold, the proceeds will be shared out between the owners in accordance with the declaration.  If you do not make a declaration of trust, the basic legal presumption is that you own the property in equal shares and you would have to prove otherwise in the event of a dispute.

A declaration of trust can also be used to set out other areas of agreement such as what should happen if one wants to sell and what payments take priority from the sale proceeds.

Why do I need a declaration of trust?

You should have a declaration of trust if your property shares are not equal.  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

• Where one of you pays the deposit or a greater share of the deposit.
• Where one of you is gifted or borrows money from parents or other friends/ relatives to pay your share of the deposit.
• Where you are not married or partners (ie. you are friends or relations).
• If you buy property with a new partner or spouse and have children from a previous relationship whose interest you wish to protect.
• 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 or otherwise contributing to the property.
• To change shares of an investment property for the division of rental income between the co-owners.

Are there different types of declaration of trust?

A Declaration of trust can be very straight forward or more complicated, depending on your situation.    At its most simple, a declaration of trust can provide for fixed percentage shares (for example 60%/ 40%) that will stay the same throughout ownership.

Alternatively, a declaration of trust can be used to ‘ring fence’ your deposit and thereafter provide for even (or uneven) shares of what is left.    Under such an arrangement provision is made for prioritising repayment of the deposit from the sale proceeds.

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 a co-owner who has paid less or no deposit to accrue an increasing interest over time by paying off the mortgage or paying for renovations and upkeep.