What is a Deed of Trust?
A Deed of Trust is a legal agreement that sets out the financial arrangements between joint owners of a property. A Deed of Trust is normally used when the owners have different percentage shares in a property (tenants in common), or they contribute different amounts to the purchase of the property.
The agreement removes uncertainty and formalises each party’s financial investment in their house, flat or other property or assets.
What’s the difference between joint tenants and tenants in common?
In England and Wales, up to 4 people can co-own a residential property as either 'joint tenants' or 'tenants in common'.
When you own a property as joint tenants, each person owns the entire property equally and there are no distinct shares. There is also a right of survivorship, meaning that if one owner dies, their share of the property automatically passes to the surviving owner(s).
Tenants in common
If you own a property as 'tenants in common', each person owns a specific share of the property. Two tenants in common could each own equal 50% shares in a property, or they could own different sizes of share, e.g. 75% : 25%.
Similarly, three tenants in common could own equal 33% shares in a property, or they could own different sizes of share, e.g. 50% : 25% : 25%
If a tenant in common dies, there is no right of survivorship, so their share does not automatically pass to the other joint tenants. Instead, their share becomes part of their estate and can be sold or transferred as specified in their will.
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When would I need a Deed of Trust?
As tenants in common, you will need a Deed of Trust to outline each party's individual financial contributions, ownership shares, and responsibilities within a legally binding framework. It also sets out what happens if one party fails to uphold their obligations.
A Deed of Trust is a straightforward and cost-effective way of ensuring that all parties are treated fairly.
The following are the most common circumstances in which people enter into a Deed of Trust:
Unmarried couples buying a house together
When a couple who are not married or in a civil partnership buy a property together, a Deed of Trust can specify the amount each party is contributing to the purchase, and how the proceeds from a future sale will be divided.
Joint property investment
If two or more individuals are investing in property together, a Deed of Trust can clarify each individual's share in the property, and in any rental income or sale proceeds.
Parental help with a home purchase
Typically, when a parent helps their child buy a property, the parent’s financial contribution is not reflected in the legal title of the property. A Deed of Trust can specify that the parent's contribution was a loan or an investment, thereby protecting the parent's financial interest.
If one person is on the mortgage, but another person will also be living in the property and contributing to the mortgage payments, a Deed of Trust can specify each person's financial responsibilities and share of the ownership.
Protecting a financial contribution
If one party is contributing a disproportionate amount of money (relative to their share) for the deposit, renovations, or mortgage payments, a Deed of Trust can ensure that their contribution is accounted for when the property is sold.
Cohabiting couples making unequal contributions
For cohabiting couples who have made unequal financial contributions to the property, a Deed of Trust can outline each party's financial interest
Friends buying property together
When friends buy a property together, a Deed of Trust can document each person's share and financial contributions, as well as how the proceeds from a sale or rental income will be divided.
A Deed of Trust can be used as part of Inheritance Tax (IHT) planning or other tax purposes to establish that a property is held in unequal shares.
If you receive income from a buy-to-let property that you jointly own, HMRC will assume that you own an equal share and they will tax you accordingly.
If you don't own an equal share, you can notify HMRC of your actual share of ownership, and your split of the income from the rental property by submitting a Declaration of beneficial interests in joint property and income (Form 17).
When you submit Form 17 to HMRC, you will also have to provide a copy of a Deed of Trust.
Protecting assets in case of relationship breakdown
For cohabiting couples, a Deed of Trust can protect each party's investment in the property in case of a separation or divorce. It could also stipulate who gets to remain in the property.
Change in financial arrangements
The financial arrangements between co-owners may change, for example, if one person pays for the cost of essential repairs or renovations; in such cases, a Deed of Trust can be created or updated to reflect the new financial arrangements.
Is a Deed of Trust the same as a Declaration of Trust?
A Deed of Trust and a Declaration of Trust are not technically the same thing. A Declaration of Trust is a legally binding statement that assets, such as a property, are held in trust.
Since a Deed of Trust always contains a Declaration of Trust, along with other statements, most conveyancing solicitors use the terms interchangeably.
What’s in a Deed of Trust?
A Deed of Trust will contain a Declaration of Trust, the names of all legal and beneficial owners, and other statements setting out how the property is held, used and paid for.
These statements could include each party’s:
- Contributions to the property purchase price, the deposit and other purchase costs
- Contributions to maintenance and repair costs
- Contributions to the mortgage repayments, utility bills and other outgoings
- Distribution of sale proceeds in the event of a sale
- Distribution of rental income
- Pre-emption rights (the right of first refusal where one party agrees not sell their share without first offering it to the other party.)
It is also common to describe what the process will be if one or more parties decide that they want to sell the property in the future.
How does a Deed of Trust protect me?
A Deed of Trust sets out in clear, legally binding terms the financial arrangements between two or more parties. These arrangements could include each person's contributions to the purchase price, mortgage payments, bills, and maintenance costs, as well as how the proceeds from the sale of the property will be divided.
A surprising number of property co-owners never have the potentially awkward conversation about ‘who gets what’ in the event of a sale or separation.
By entering into a Deed of Trust, you will have ensured that all parties share a common understanding of what they are agreeing to when buying a property with someone else, and what happens in the event of a sale or separation.
The Deed is a written record of what was agreed, which can prevent misunderstandings and potential acrimony in the future.
A Deed can provide a framework for resolving disputes. For example, the Deed of Trust may include provisions for what happens if one party wants to sell the property and the other does not, or if one party can no longer afford to contribute to the mortgage repayments.
By entering into a Deed of Trust, a dispute is far less likely as all parties have signed a legal agreement. If a dispute cannot be avoided, however, the Deed could ultimately form the basis of litigation.
How do I get a Deed of Trust?
In theory, any legal professional should be able to draft a Deed of Trust for you. A layperson with property law experience could even draft one themselves, though any errors or omissions in the technical legal language could have serious legal consequences. A poorly written Deed of Trust could be effectively worthless, or worse, achieve the opposite of the agreement you have in mind.
To ensure your Deed is watertight, you should instruct a specialist property solicitor to draft your Deed of Trust. An experienced property lawyer will also be able to discuss your needs and intentions with you in detail, and will be able to suggest additional issues or protections that you hadn't considered.
How much does a Deed of Trust cost?
Deeds of Trust are a very cost-effective way of protecting your investment in a jointly-owned property. The legal fees for arranging and drafting a Deed of Trust may vary depending on the complexity of the document, and whether you require any additional steps to be carried out, such as registering the Deed at HM Land Registry.
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If you have any questions about getting Deed of Trust, or you would like to find out whether it is the right option for you, we can help.
Is a Deed of Trust legally binding?
Yes, a Deed of Trust is a legally binding document that outlines the financial arrangements and ownership shares of a property between parties.
Will I need to get the Deed of Trust witnessed?
Yes, for a Deed of Trust to be legally valid, it will need to be be signed by an independent witness who is over 18 and not related to you.
Am I legally required to have a Deed of Trust?
No, there is no legal obligation to enter into a Deed of Trust. It is estimated that only around 20% of Tenants in Common enter into a Deed of Trust, even though around 75% of people say that the partner or co-owner received more than their fair share when the property was sold.
Can a Deed of Trust be overturned?
A Deed of Trust can be challenged in court if there's evidence of fraud, duress, or a significant mistake, but overturning a Deed is generally difficult.
Will I have to tell my mortgage lender?
You may not need to notify your mortgage lender when creating a Deed of Trust, unless your mortgage agreement specifically requires it.
Is a Deed of Trust registered at HM Land Registry (HMLR)?
It is not necessary to register your Deed of Trust with HMLR. HMLR records the legal ownership of the property, but it does not record the beneficial interests that a Deed of Trust relates to. The Deed of Trust is a private agreement between the parties involved and does not need to be made public by registering it with any official body.
It is possible to register the Deed of Trust with the HMLR if you prefer. Doing so will guarantee that the property cannot be sold without the approval of all individuals named in the Deed.
Can I get a Deed of Trust if we have already bought the property?
You can draft a Deed of Trust after the property has been purchased, although it's often easier to set this up at the time of purchase.
The process of working with a solicitor to draft a Deed of Trust can raise questions you may not have considered, and which may be harder or more costly to resolve once a purchase completes and your interest in the property is registered.
Can we change a Deed of Trust?
Yes, a Deed of Trust can be amended if all parties agree to the changes. You should instruct a solicitor to amend the Deed of Trust, to ensure the changes are correctly implemented.
Can we dissolve or cancel a Deed of Trust
A Deed of Trust can be dissolved if all parties agree, and the dissolution is legally documented.
What is a floating Deed of Trust?
Floating Deeds of Trust are less common in the UK, but if used, they usually allow for variable financial contributions from parties over time.
Where is a Deed of Trust stored?
The original Deed of Trust may be kept by the solicitor who drafted it, and digital and/or paper copies are provided to each party. A copy of the Deed may also be registered at HM Land Registry if required.
What happens if there is no Deed of Trust?
Without a deed of trust, there's no legal document outlining ownership shares or responsibilities, which may lead to disputes in the future.
Do I need a solicitor, or can I do it myself?
Several websites offer Deed of Trust templates that are either free or cost under £35. Be very careful about relying on a document that hasn't been drafted to your specific requirements. Don’t assume that the person drawing up the template knows any more about the legal requirements of the document than you do.
In general, even small modifications to a basic Deed of Trust template can alter the meaning and legal effectiveness of the document.
It is particularly important to get a specialist legal professional to draft your Deed of Trust if there are likely to be tax implications, or there is even a small likelihood that the document will need to be relied upon in future.