There are three main ways in which you can own property in the UK;-
- In your sole name;
- In your joint names as Joint Tenants; and
- In your joint names at Tenants in Common.
Holding property in your sole name means that you own the legal title to the whole of the property alone.
When you own a property with another person(s) as Joint Tenants, all of the legal proprietors have equal rights to the whole of the property. This affects how the property will pass on your death, as rather than passing in accordance with the terms of your Will, your property would instead pass via survivorship to any remaining joint proprietor who survived you.
Tenants in Common
When you own a property with another person(s) as Tenants in Common, you each hold your shares in the property separately, and by default, these shares are presumed to be equal. As the interests in the property are held separately, this means that if one proprietor faced debt proceedings etc., only their specific share of the property may be included as one of their assets. Holding a property as Tenants in Common also means that when one of the proprietors die their share will pass according to the terms of their Will, rather than to the other proprietors automatically.
What is a Declaration of Trust?
A Declaration of Trust is a legally binding deed that sets out how you own your property with another person(s), and this can include people who are not registered as an owner at the Land Registry. These deeds can be made at any time whilst you own the property.
Declarations of Trust can be made in relation to any properties that you own either in your sole name or with another person(s) as Tenants in Common. However as they determine the beneficial interest each party has in the property, these deeds cannot be set up for properties that are held in joint names as Joint Tenants. Therefore, the Joint Tenancy would need to be severed in order for a Declaration of Trust to work. However this is not a complicated procedure and is currently free of charge to register with the HM Land Registry.
Why would I need a Declaration of Trust?
A Declaration of Trust may be required in any situation where you do not wish for each proprietor to have equal interests in the property. For example, it may be that one party contributed more to the initial deposit price, or that one party does more of the maintenance involved with a rental property etc., and therefore you would like to alter the share so that the respective proprietor has a higher interest in the property to reflect this.
It may also be required where one proprietor is a higher rate tax payer and the other a basic rate tax payer, and therefore you may wish for the income received from a rental property to be apportioned in a tax efficient manner. It is important to note that entering into a Declaration of Trust for Income Tax purposes will need to be reported to the HMRC.
It is also possible to prepare a Declaration of Trust in a property that you own in your sole name and this may be required, for example, where a family member has financially assisted you with the purchase of your property and you would like to ensure they receive their funds back when the property is later sold. By preparing a Declaration of Trust, this party is therefore entitled to a beneficial interest in the property despite not being on the legal title itself.
It is recommended that for all properties where a Declaration of Trust is created, but particularly those created for properties owned by a sole proprietor, that a restriction is entered onto the title at the Land Registry.
It is important to consider that when creating a Declaration of Trust, one party is sometimes gifting their interest in the property to another. They should therefore be aware of the risk that they are reducing their assets and may no longer be entitled to as much of the property as they were before, and therefore this may have an implication on unfortunate future events, such as divorce etc.
It is also often necessary to seek tax advice from an Accountant in relation to any tax implications the Declaration of Trust may impose on each party.
If you would like more information on Declarations of Trust, or to book an appointment for a free initial consultation with one of our solicitors to discuss these deeds further, then please do not hesitate to contact Jade Gani (firstname.lastname@example.org), Rachel Jones (email@example.com) or Mamta Rajanwal (firstname.lastname@example.org).