Declaration of trust
Useful Information Scenarios
We're purchasing a property, but a third party contributed to the price
It’s become increasingly common for parents to financially assist their children with a deposit for their first home purchase. The scenario below illustrates a case where a trust deed was established after the property acquisition. While it’s preferable to arrange a deed at the time of purchase to safeguard everyone’s interests, it’s still possible to create one later, provided all parties agree.
Bradley and Angela co-own a property, which they bought with a joint mortgage and unequal personal contributions to the purchase price. Additionally, Angela’s mother, Mary, contributed £50,000 towards the deposit.
Mary wishes to secure her investment, and both Bradley and Angela consent to repaying Mary’s contribution before any other distributions if the property is sold.
Here’s how a trust deed can be tailored for Bradley, Angela, and Mary:
For instance, Bradley and Angela bought the property for £500,000 with a £400,000 mortgage. Mary contributed £50,000, Bradley £30,000, and Angela £20,000. The deed would specify that upon sale, the initial £50,000 from the sale proceeds—after settling the mortgage and related costs—goes directly to Mary. Any remaining funds up to £500,000 would be divided 60% to Bradley and 40% to Angela. Any surplus would be shared equally between them.
Let’s say the property later sells for £600,000, incurring £340,000 in mortgage repayments and £10,000 in agent fees. The distribution would be:
- Remaining funds after expenses: £250,000
- Mary receives the first £50,000.
- The next £100,000 is split 60/40 between Bradley and Angela.
- The final £100,000 is divided equally.
In this hypothetical sale, the payouts would be:
- Mary: £50,000
- Bradley: £110,000 (60% of £100,000 plus half of the remaining £100,000)
- Angela: £90,000 (40% of £100,000 plus half of the remaining £100,000)
Note that Mary could also protect her interests by having a solicitor register a charge against the property. This legal safeguard is more costly and requires the mortgage lender’s approval. For more information on registered charges, please consult a legal expert.
Buying a property jointly with different contributions to the price.
George and Jennifer are teaming up to buy a property. Jennifer is investing £10,000 more than George towards the purchase. She would like to ensure that she recovers this additional £10,000 first if they decide to sell the property later.
The legal arrangement for this would be a Deed of Trust, which would record that, although they own the property equally, the first £10,000 from any sale proceeds—after paying off the mortgage and other selling expenses—should go to Jennifer.
Jennifer also has the option to link her extra contribution to the property’s market value, allowing her investment to increase as the property appreciates. The deed can be customized to reflect either scenario: a fixed return of Jennifer’s additional investment or an appreciation-aligned share. The choice depends on whether you prefer a certain sum upon sale or a share that adjusts with the property’s value, especially when there’s a significant difference in the contributions made by each co-owner.
I currently own a property, and my partner is moving in.
Jo is the owner of a property with significant equity and a small mortgage. Her partner will soon move in and contribute to the mortgage payments, household expenses, and property enhancements.
To formalize this arrangement, they could use a Deed of Trust. This deed would outline how the property’s value is shared between Jo and her partner, particularly upon its future sale. They have two main options:
- The deed could guarantee a predetermined amount for Jo when the property is sold, with the remaining proceeds (after mortgage and expenses) divided between them, potentially equally.
- Alternatively, the deed could specify their respective ownership percentages in the property, which might require a more intricate agreement.
For illustration:
- Current Property Value: £100,000
- Current Mortgage: £30,000
- Partner’s Contribution (e.g., for improvements): £20,000
- Mortgage Payments: To be split equally
Suppose in five years, they sell the property for £200,000, with a remaining mortgage of £20,000. The deed could define a “mortgage share” and an “equity share,” with 30% for the mortgage and 70% for equity. These shares would be allocated according to their agreed proportions, such as both having equal “mortgage shares” and Jo having a larger portion of the “equity share.”
In this scenario, the financial outcome for Jo would be:
- Sale of Property: £200,000
- Mortgage Share: £60,000 (30% of £200,000)
- Equity Share: £140,000 (70% of £200,000)
The “mortgage share” would first be used to clear the existing mortgage:
- Mortgage Redemption: £60,000 – £20,000 = £40,000, split equally, resulting in £20,000 each.
Then, the “equity share” of £140,000, agreed to be divided 80/20 in Jo’s favor, would be distributed as: - Jo’s Share: 80% of £140,000 = £112,000
- Partner’s Share: 20% of £140,000 = £28,000
Combining both shares, the total distribution would be:
- Jo: £112,000 (equity) + £20,000 (mortgage) = £132,000
- Partner: £28,000 (equity) + £20,000 (mortgage) = £48,000
While this approach may seem complex, it’s effective for situations like Jo’s. The exact “shares” of mortgage and equity would be determined by the parties involved. This example is a general guide to potential returns.
It’s worth noting that this example doesn’t include agent fees or other costs for simplicity, but such expenses would be accounted for in the actual deed.
Dividing the mortgage and equity aspects of the property.
A Deed of Trust is particularly useful when co-owners contribute differently to the mortgage and equity of a property. It ensures that each party’s share remains constant, preventing any changes in mortgage borrowing from affecting the other’s equity.
This deed might seem complex, but its core principle is straightforward: the shares of mortgage and equity are predetermined and do not fluctuate with the actual mortgage balance or property value. Here’s how it works:
Abdul and Sara have bought a property with a mortgage. Since Abdul will live there and Sara won’t, they’ve agreed that Abdul will cover all mortgage payments and associated costs. Consequently, Abdul will have full claim to the mortgage share and half of the equity share, while Sara will have no mortgage share and the other half of the equity share.
Let’s break down the numbers:
- Purchase Price: £200,000
- Mortgage: £150,000
- Mortgage/Equity Split:
- Mortgage Share: 75%
- Equity Share: 25%
Both Abdul and Sara contributed £25,000 towards the deposit, sharing the equity equally.
If they sell the property later for £300,000 with a remaining mortgage of £100,000, the distribution would be as follows:
- Property Sale Price: £300,000
- Outstanding Mortgage: £100,000
- Mortgage Share (75%): £225,000
- Equity Share (25%): £75,000
Abdul’s share would be:
- Mortgage Share: £225,000 minus the outstanding mortgage of £100,000, leaving £125,000
- Equity Share: Half of £75,000, which is £37,500
- Total: £125,000 (mortgage) + £37,500 (equity) = £162,500
Sara’s share would be:
- Mortgage Share: £0 (as agreed)
- Equity Share: The other half of £75,000, which is £37,500
- Total: £37,500
This structure ensures that Abdul’s additional mortgage payments are recognized, and Sara’s equity share is protected, regardless of the property’s selling price. Even if Abdul reduces the mortgage significantly, Sara’s share remains based on the equity portion alone. This method guarantees that each party’s investment is honored as per their initial agreement.
Safeguarding an investment in property.
A trust deed can serve as a safeguard for property investments, and we provide specialized investment trust deeds for this purpose.
The applicability of such a deed hinges on your unique situation, so it’s essential to consult with us before you proceed with any deed arrangements.
It’s crucial for the property owner to comprehend that upon the deed’s execution, the property enters a trust arrangement for those involved. Sometimes, a trust deed may not be the optimal solution, and in those instances, we’ll guide you towards alternative commercial agreements and recommend experts in that field.
Consider the scenario involving James and Paul:
Paul lent money to his friend James and sought to secure his loan. It’s always prudent to have a formal loan agreement detailing repayment terms and interest rates.
We formulated a trust deed indicating that James holds the property’s legal title in trust for both himself and Paul. The deed includes clauses that determine Paul’s financial entitlement upon the property’s sale, which is adjustable based on James’s loan repayments. This flexibility was agreeable to both parties, knowing that once the loan is fully repaid, as confirmed by a receipt, Paul’s claim under the deed’s terms ceases.
While we can create more intricate versions of this deed, we always evaluate the specifics of each case to determine if a trust deed is the right approach.
I'm purchasing my ex's share but can't refinance the mortgage.
William and Kate, after deciding to part ways, faced the challenge of separating their joint property ownership. William chose to leave the property, agreeing to sell his interest to Kate for £10,000.
When Kate sought to have the mortgage and property title transferred solely to her name, her bank denied the request, citing her income as inadequate for the necessary refinancing.
To manage their agreement, William and Kate opted for a trust deed. This document declared that they would hold the property as Tenants in Common, with Kate being the sole beneficiary.
The trust deed included safeguards for William, ensuring that Kate would handle all mortgage payments and related expenses, protecting William from any liability due to non-payment. It also granted William legal recourse should Kate not fulfill her obligations.
The trust deed recommended a three-year period for Kate to secure refinancing and remove William’s name from the mortgage and property records. If unsuccessful, William could insist on selling the property.
Additionally, the deed included a clause confirming William’s relinquishment of any financial interest in the property in exchange for the £10,000 payment.
Two years later, Kate successfully refinanced with a new lender, which allowed for the removal of William’s name from the mortgage and title deeds.
This arrangement provided assurance to both parties: Kate was aware of her financial responsibilities and had a timeframe to refinance, while William had the security of knowing he was no longer obligated for mortgage payments and had legal protection against default. The deed also served as formal acknowledgment of the payment from Kate to William.
My partner is moving in, but I don't want them to have any ownership stake in the property.
Recently, Claire and her new partner David decided to cohabit in her house. David agreed to equally share the mortgage payments and household expenses.
Claire, however, had concerns about potentially losing a portion of her property ownership due to David’s financial contributions. David clarified that he has no interest in claiming ownership; his contributions are merely his way of sharing expenses while living together.
To ease Claire’s concerns, they decided on a deed of surrender. This legal document explicitly states that David’s contributions do not entitle him to any ownership stake in the property, thus safeguarding Claire’s interests.
The couple acknowledges that their agreement might evolve, and they remain open to the possibility of creating a deed of trust in the future, granting David a share in the property.
The deed of surrender serves to document their current understanding and provide Claire with the assurance that she retains full control over her property until she decides to alter the arrangement.
For those interested, a deed of surrender application can be completed, offered at a fixed fee of £150 plus disbursements, totaling £180, inclusive of all taxes, ensuring transparency and no hidden costs.
Jointly purchasing with varying contributions to the price and future mortgage payments.
Sophie and Tom are jointly buying their first home, with Sophie contributing a larger sum of £90,000 to the purchase price, while Tom adds £10,000. They will equally share the additional purchase-related expenses, including Stamp Duty Land Tax, each paying £5,000.
Given that Sophie is currently not employed and Tom has a well-paying job, Tom will be shouldering a greater portion of the mortgage payments moving forward.
Sophie wants her larger initial contribution to be reflected in the property’s deed, ensuring she receives a commensurate return upon sale. Similarly, Tom wishes for his ongoing mortgage contributions to be recognized in the deed, increasing his share of any future sale proceeds.
This scenario is increasingly common, and a standard deed may not adequately address their specific needs. Instead of a fixed percentage, the deed will include a formula that accounts for both Sophie and Tom’s contributions towards the initial purchase, ongoing mortgage payments (whether regular or lump-sum), and any property improvements.
This approach ensures that their shares remain flexible and representative of their total contributions to the property over time.
Here’s an example of how this would work in practice:
- Property Purchase Price (2014): £310,000
- Mortgage: £210,000
- Property Sale Price (2018): £440,000
- Remaining Mortgage: £110,000
- Estate Agent Fees: £10,000
- Net Balance for Distribution: £320,000
During their ownership, Tom paid off £75,000 of the mortgage principal, while Sophie contributed £25,000. They also invested in property improvements, with Sophie adding £5,000 and Tom £25,000.
The distribution of the £320,000 balance would be calculated as follows:
- Contribution to Purchase Price: Sophie: £90,000 | Tom: £10,000
- Contribution to Purchase Costs: Sophie: £5,000 | Tom: £5,000
- Contribution to Mortgage Debt: Sophie: £25,000 | Tom: £75,000
- Contribution to Improvements: Sophie: £5,000 | Tom: £25,000
- Total Contributions: Sophie: £125,000 | Tom: £115,000
When converted to percentages:
- Sophie’s Share: £125,000/£240,000 = 52.08%
- Tom’s Share: £115,000/£240,000 = 47.92%
Thus, the net balance would be divided as:
- Sophie: 52.08% of £320,000 = £166,656
- Tom: 47.92% of £320,000 = £153,344
Through this method, known as a Commensurate Share Deed, Tom has effectively increased his share by contributing more towards the mortgage and property enhancements.
This option should now be selectable on the deed application form.