Declarations of Trust and property ownership

Many people buy property jointly with a friend or partner, and in the first flush of delight in their new home, may not consider the problems that could lie ahead if a dispute arises and the terms of co-ownership have not been agreed and set out clearly. Many cases arising from such disputes reach the courts, often incurring substantial legal fees, when they can be easily avoided by drawing up a Declaration of Trust at the time the property is purchased. Similar issues can also arise when an original owner wishes to transfer a share of a property to another person (such as a child).

What can, and should, be included in a Declaration of Trust?

A Declaration of Trust can document any agreement related to the property made by the co-owners but there are a number of points that should be covered. For example, if the contributions of the co-owners towards the purchase of the property is unequal it is essential that this is recorded. Even if the property is owned as tenants in common, in the absence of any evidence as to an agreement about the proportions in which the property is owned, the court will start from a presumption of equal ownership . If the buyer making the greater financial contribution wishes to protect their full interest in the property a Declaration of Trust is therefore essential.

Buyers may also wish to set out who is responsible for the mortgage, what happens if money is spent improving the property and the position if a co-owner wishes to sell or dies. Co-owners might, for example, agree that if one of them wishes to sell the property the other owner should be given a right of first refusal to purchase it. Agreement as to the mechanics of valuation are essential whether the sale is to a co-owner or on the open market. If a sale is agreed between co-owners, for example, an agreement might provide that there should be a discount applied to the value of the selling owner’s share to reflect the greater ease of sale and the lower disposal costs. Most valuers, in the absence of any agreement, would apply a discount of 10-15% when valuing a part share in a property.

Prohibitions on one co-owner selling, mortgaging or gifting their share without the other owner’s consent could also be included, as could provisions in respect of insurance and repairs.

What about married couples?

If a married couple or couple in a civil partnership buy a property a Declaration of Trust to document unequal financial contributions can still be useful, bearing in mind that on divorce the court has wide powers to make property adjustments between the couple, taking into account all relevant factors including their relative needs. No such system of financial adjustment applies in the case of unmarried couples.

A married couple may wish to own their property as tenants in common as this is much more flexible for estate planning purposes. It enables them to leave their respective shares of the property into flexible life interest trusts providing protection and maximising the amount of their estate passing to their children. Inheritance tax savings can also be achieved by leaving a small share of the property belonging to the first partner to die to a discretionary trust in their Will. The survivor’s share in the property will then receive a valuation discount of probably 10% so saving inheritance tax on the second death. In other cases (for example if one party has been married previously and widowed) a gift of part of the property into life interest trusts for the children on the first death can maximise the amount of the residential nil rate band which is available.

In every case the clear lesson is that when buying a property, Wills should be reviewed, a Declaration of Trust considered and, if necessary, appropriate tax and estate planning put in place.