What is a Deed of Trust?

Sarah Ryan, Head of Private Client
Author:
Sarah Jones
Head of Property, Licensed Conveyancer
Date:
06/03/2020

A Deed of Trust, also known as a Declaration of Trust, is a legal document used by people buying a property. It states how much money each person has contributed towards the property purchase, and what should happen to this money if:

  • The property is sold
  • A relationship breaks down
  • One owner buys the other out
  • One owner gets married or has children
  • Someone who contributed towards the purchase wants their money back, for example, Mum and Dad.

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What Can a Deed of Trust be Used For?

A Deed of Trust, or Declaration of Trust, is used to record the financial arrangements of those who own a property together, or who have a financial interest in the property. Typically, this is needed because:

  • The legal owners have contributed different amounts
  • Someone other than the registered owner has a financial interest
  • One of the owners cannot be included on the Land Registry deeds

The Legal Owners Have Contributed Different Amounts

If you’re buying a property with someone else, ask yourself – are you investing an equal share into the property, and do you want to split any profits 50/50? If not, a Deed of Trust is for you. One person might be contributing a greater share to the deposit, the purchase price (if you’re a cash buyer), the mortgage repayments or maintenance costs. If so, they probably want a greater share when the property is sold. 

For example, imagine Alice and Ben buy a house together. Alice has saved £30,000 to put towards the deposit, but Ben has only managed to scrape £1,500 together. Their Deed of Trust could state that when the property is sold, Alice should get her £30,000 back and Ben should receive his £1,500. After that, any profits can be divided equally. Or, it can be expressed as a percentage instead.

You might feel that a legal record of your agreement isn’t necessary. After all, you’re buying a property with a partner, friend or family member. But bear in mind that relationships can sour. If you break up with your partner, or fall out with your friend or relative, it could be difficult to get your money back. A Deed of Trust will protect your investment, regardless of any personal issues that may arise.

Someone Else Has a Financial Interest

These days, it’s common to get a financial support from the ‘bank of mum of dad’ when buying a property. Or, a friend or other family member may have contributed towards the property purchase. If so, have you decided what should happen to this money in the future? These contributors are not the legal registered owners, but they still have a financial stake in the property. They may want to be reimbursed when the property is sold.

Let’s go back to our couple, Alice and Ben. Although Alice had a £30,000 deposit, she actually received £20,000 of this from her parents. Alice and Ben buy a property together, but three years later they break up. They have paid the mortgage and the property is put on the market, and because there is no Deed of Trust in place, the sale proceeds are split 50/50. Ben has now benefitted greatly from Alice’s big deposit, and her parents never see their £20,000 again.

Had there been a Deed of Trust, it could have stipulated that Alice’s parents should receive £20,000 following the sale of the property. Without a legally binding agreement, those who contribute towards a property purchase (but who are not the registered owners) are in a vulnerable position. There is nothing to say they have a stake in the property, and any verbal agreements may not be honoured.

Only One Person Named on Land Registry Deeds

Finally, it’s not always possible to name every owner on the Land Registry deeds. For instance, one owner might already have a mortgage, meaning they cannot be party to a second mortgage. In these circumstances, a Deed of Trust is used to verify the true ownership position. Then, when the property is sold, each person receives the correct percentage of the sale proceeds.

Alternatively, one owner might prefer to be a ‘silent’ investor. In other words, they contribute towards the property purchase, but are not named on the mortgage, Title Deeds or Conveyancing documents. This is a potentially dangerous position to be in, as there is absolutely no legal record of their stake in the property. A Deed of Trust is vital to ensure their investment is protected.

Do You Need a Deed of Trust?

If you are buying a property with someone else, or you are contributing money towards a buying a property, speak to us about getting a Deed of Trust. Generally, it is recommended for those who:

  • Are buying a home as Tenants in Common
  • Do not want to split all costs and sale proceeds evenly (regardless of whether they are buying a Joint Tenants or Tenants in Common)
  • Have received financial help from someone else
  • Have not registered their legal ownership of the property at the Land Registry
  • Have children from a previous relationship – if not held as Tenants in Common, these children could be disinherited

A Conveyancing Solicitor can draw up the Deed of Trust for you, ensuring that each person’s financial interest in the property is protected. The cost of a Deed of Trust is a very small price to pay for peace of mind. If you fail to put a Deed of Trust in place, you could lose your investment altogether.

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