Declaration of Trust Solicitors
If you are buying or investing in a property, getting married and want to protect your assets, or want to start planning where your assets go when you pass away, a declaration of trust is something you should get familiar with.
A declaration of trust is a legal document that outlines who owns what and who has to do what when it comes to things like property or investments. It's really handy if you're buying property with someone else or starting a business where you're putting your money together with someone else's.
At Lawhive, our network of property solicitors are experienced in creating Declarations of Trust that give you peace of mind and clarity on your legal position.
Get in touch with our legal assessment team today for a free case evaluation and fixed-fee quote. Our experienced solicitors will guide you through the process and make sure your interests are safeguarded.
In this article, we provide an overview of declaration of trust, covering its purpose, legal implications, tax considerations, and more.
What is a declaration of trust?
A declaration of trust, also known as a trust deed or trust declaration, is a legally binding agreement and document that outlines the rights and responsibilities of individuals (trustees and beneficiaries) around a specific asset or property.
It sets out the terms under which the asset is held, managed, and distributed among the beneficiaries for both when the owner is alive, and after they pass away.
What does a declaration of trust do?
A declaration of trust provides a picture of clear ownership. It spells out who owns what, particularly for assets like property or investments, to prevent disagreements or arguments.
It also ensures that beneficiaries (as outlined in a will) get their fair share of the trust property and that it's managed as the owner intended. This helps with making sure that assets are passed on to chosen beneficiaries smoothly when the owner(s) pass away.
Not only this, but a declaration of trust can help to manage assets involved and often sets out how the trust property is used and distributed, including any rules or instructions for the trustees.
Plus, as a bonus, it may help to lower tax bills by organising asset ownership and distribution in a tax-efficient way.
When might I need a declaration of trust?
You might require a declaration of trust when purchasing property or investing with others to specify each person's share and rights, whether it's a lump sum or a portion like a percentage. If one person contributes more money towards buying or maintaining the asset than the other person, a declaration of trust protects that investment.
For instance, let's say you're purchasing a house with your partner, but you're putting in more money for the deposit. A declaration of trust can outline the percentage of ownership for each person and what occurs if the relationship ends and the property is sold – you receive back the percentage of money you've contributed.
Or, consider a business scenario. You're starting a business venture with friends or colleagues. A declaration of trust can detail each person's share of ownership, duties, authority in decision-making, and what happens if someone wishes to exit the business.
Also, a declaration of trust is drawn up to safeguard assets and make sure they are transferred smoothly and without dispute to the selected beneficiaries after death.
What is in a Declaration of Trust?
A typical declaration of trust includes:
Identification of parties: Names and details of the trustees and beneficiaries involved.
Description of asset: Detailed description of the asset covered by the declaration, including any relevant identification numbers or legal titles.
Ownership shares: Specification of each party's share or interest in the asset, expressed either as a percentage or in specific terms.
Management and distribution: Terms about the management, use, and potential sale or distribution of the asset, including any restrictions or conditions.
Trustee powers: Powers granted to the trustee(s) to manage and make decisions regarding the asset on behalf of the beneficiaries.
Succession provisions: Instructions for the transfer or distribution of the asset upon specified events, such as death, incapacity, or reaching a certain age.
How long does a declaration of trust last?
The duration of a declaration of trust can differ based on what's stated in the document.
Often, it stays valid until a particular event happens, like the death of the owner(s) or the sale of the asset. Yet, it can also be cancelled or changed if all parties agree.
Is a declaration of trust legally binding?
Yes, once everyone involved has signed it, a declaration of trust becomes a legally binding document. It lays out legal duties and responsibilities for trustees and beneficiaries, and not following its terms can lead to legal consequences.
However, during a divorce, the family court might not take it into account when dividing financial assets.
Can a declaration of trust be overturned?
A declaration of trust can be disputed in court and, if there are reasons like fraud, undue influence, or incapacity when it was made, a court might cancel it.
Also, if things change or people's intentions shift, they can amend or cancel a declaration of trust through legal processes, like making a new declaration which overrules the old one.
It's important to get legal advice if you think a declaration of trust should be cancelled.
What are the tax implications of a declaration of trust?
A declaration of trust can have various tax implications depending on the circumstances.
Stamp Duty Land Tax (SDLT)
When property is transferred or shares in a property are divided under a declaration of trust, SDLT may be payable. The amount depends on the value of the property and the specifics of the arrangement.
Capital Gains Tax (CGT)
When transferring property or assets using a declaration of trust, there might be Capital Gains Tax (CGT) to pay if it's seen as a sale for tax reasons. The tax you owe can change based on things like if the property is your main home or an investment property.
Inheritance Tax (IHT)
If the declaration of trust involves transferring assets between family members, there may be implications for inheritance tax.
Gifts made during a person's lifetime can be subject to IHT if certain conditions are met.
Income Tax
If the trust generates income, such as rental income from a property, the trustees may be liable to pay income tax on behalf of the trust.
Annual Tax on Enveloped Dwellings (ATED)
If the property held in the trust is a high-value residential property, ATED may be applicable, and the trustees may need to register and pay the annual charge.
Tax Efficiency
A well-structured Declaration of Trust can sometimes be used to optimise tax planning, such as by allowing income or gains to be distributed among beneficiaries in a tax-efficient manner.
Does a declaration of trust affect a mortgage?
A declaration of trust can impact a mortgage, especially in cases of shared or co-owned property.
While it's uncommon for lenders to object to a declaration of trust, it's important to inform both your conveyancer and your chosen mortgage lender if you have one.
The declaration may detail each party's financial contributions and their responsibility for mortgage payments, along with any plans for selling or transferring the property in case of default or foreclosure.
Declaration of trust and joint tenants
In the context of joint tenancy, owners have equal rights to the property.
When one owner dies, the property will automatically pass on to the surviving owner, and then onto the beneficiaries as stated in the will when they subsequently pass away. This is why it is vitally important to address this when setting up a declaration of trust and make a will at the same time.
This can help prevent disputes and clarify ownership rights among joint tenants after both owners have passed away.
Declaration of Trust and Tenants in Common
In a tenants in common arrangement, property owners have distinct shares of the property.
A declaration of trust can specify each co-owner's share or interest in the property, as well as their rights to occupy, use, or sell it.
When one owner dies, their share doesn't automatically transfer to the other owner – it's divided according to the will's instructions among the beneficiaries.
Do cohabiting couples need a declaration of trust?
Yes, cohabiting couples can benefit from a declaration of trust, especially if they jointly own property or assets.
It can help clarify each partner's ownership rights, financial contributions, and responsibilities, as well as provide protection in the event of separation, death, or other life events.
What happens to a declaration of trust if you get married?
Marriage or civil partnership can affect a declaration of trust, particularly if the asset covered by the trust becomes marital property or is subject to matrimonial laws.
In such cases, the terms of the trust may need to be reviewed or amended to reflect the changed circumstances and the interests of both spouses.