Family Law Specialist

Nicola Williams Solicitor

Nicola Williams Solicitor

Cheadle, Stockport,
Greater Manchester

Gifted deposit and a deed of trust

If you are helping someone buy a property by gifting them some or all of their deposit, you should think about whether you need to make a declaration or a deed of trust.

The difference between a declaration of trust and a deed of trust

A declaration is a formal statement or announcement that is often intended to be legally recognised or binding.

A deed is a legally binding document.

Whereas a declaration doesn’t have to be in writing, a deed does.

What does a deed of trust protect that a declaration of trust doesn’t?

A deed of trust is a legally binding document that proves that either

you have an interest in the property or

the person you have given the deposit to has a greater interest in it than the other owner(s).

This might mean a right to a bigger share of the proceeds of sale or a right to live there or receive income from it.

A declaration of trust is a formal announcement or statement. It may be simply verbal or written in a deed.

Proving a declaration of trust is much harder when it is only verbal.

Therefore, it is always advisable to record the terms of a trust in a written deed.

Why protect a gifted deposit with a deed of trust?

The two main reasons to protect your gift are to prevent losses due to

relationship breakdown; and

bad debt.

Gifted deposit house deed of trust

Understanding shares in a property

Up to 4 people can be named on the title register at the land registry as owners of a property in England and Wales.

However, most jointly owned property is owned in two names.

The names on the title register are usually identical to the names on the mortgage. This is generally a condition imposed by the lender.

When you buy a property in joint names with another person, the transfer deed (known as land registry form TR1) tells us

the names of the legal owners; and

about the share ownership status.

Jointly owned property can be held in one of three ways:

All owners may own 100% of the property; or

It may be owned in equal shares; or

At least one owner has an unequal share.

Let’s take a look in more detail at what this means and what we call it in legal jargon.

All owners own the whole property – (joint tenants)

It is quite normal for married couples to own property in this way. It saves fuss and delay dealing with the property if one of them dies.

When you are joint tenants, you both own the whole property. If one of you dies, the other still owns the whole thing. There is no need for apply for probate to deal with the property, for example to sell it.

It’s a bit like having a joint bank account or a joint loan or mortgage. Your rights and responsibilities are identical.

If the surviving owner is not to automatically inherit the whole of the property when one owner dies, your conveyancer must not tick the box on the TR1 that says the owners are joint tenants.

If you are gifting part of the deposit to one owner (your son or daughter for example), you must understand that if this box is ticked, you are effectively giving the whole of your share of the deposit to all of the owners.

The property is owned in equal shares – (tenants in common)

If the owners of a property have a very simple agreement that

they own the property 50/50; and

each wants to be able to leave their 50% in their will,

then their conveyancer will tick the box in the TR1 that says ‘they are to hold the property on trust for themselves as tenants in common in equal shares’.

Again, if you are gifting part of the deposit to your child, you should be aware that your gift will be to both owners equally if this box is ticked.

At least one owner has an unequal share – (also tenants in common)

Typically, there are 2 owners of joint property. If they own it anything other than 50/50, they both have unequal shares.

But remember there can be up to 4 owners listed at the land registry.

Let’s say 3 friends own a property 40/40/20. Two of them have an equal share and one doesn’t.

Either way, the owners are called joint tenants in unequal shares.

If you own a property other than 50/50 it is vital that your conveyancer does not tick either the box that says you are joint tenants nor the box that says you are tenants in common in equal shares.

Your conveyancer must tick the box that says ‘they are to hold the property on trust’ .

If your conveyancer does not tick any box at all or ticks either of the other boxes, you will by default end up with either an identical 100% share that cannot pass on your will or an equal individual share.

The declaration of trust for a gifted deposit

If you are gifting a deposit and either

you want to have an interest in the property yourself; or

you want the person who you are giving the deposit to, to have a greater share,

this box must be ticked and there must be a declaration of trust.

In the space below the box that says you are to hold the property on trust, you can write the declaration of trust itself.

However, most people simply refer to the existence of a separate deed in this box for the following reasons:

to keep the details of their personal agreement private. A deed of trust does not have to be kept with the title deeds or sent to the land registry or mortgage lender.

a normal deed of trust can be quite long, and will not usually fit in the standard land registry form.

a gifted deposit usually involves people who are not named on the title to the property and as a result these (generally more complicated) agreements should ideally be kept separate from the TR1.

Tax considerations for a gifted deposit

Tax is likely to be a factor in deciding whether, as the ‘giver’ of the deposit, you use a deed of trust to protect your own share in a property or increase the share of the person you give the deposit to (e.g., your child).

Stamp duty

If you already own a property in your name, acquiring an interest for yourself in another property will give rise to additional stamp duty.

At 3% or more of the whole value of the property, this could be substantial. And first-time buyer exemption will be lost.

If you are gifting the deposit to your child, you may want to consider the option of increasing their share in the property rather than acquiring your own.

Alternatively, look into the option of a loan agreement if you need the money back.

Capital Gains Tax

If you have decided to go ahead with a deed of trust and you will acquire an interest in the property yourself, it’s worth remembering that you may not have to pay any capital gains tax when you come to sell it.

This depends on whether the property is a private residence and whether you have the right to insist on a sale.

This is more useful if you will need to be repaid at some point. If you are trying to advance an inheritance to a child, you need to know about inheritance tax rules.

Inheritance Tax

When you give away money during your lifetime as an advance inheritance, it might still be counted to work out inheritance tax.

As a general rule, after 7 years the gift will no longer be relevant to the calculation. But if you retain an interest in property, you haven’t given it away completely. Therefore, it will still be counted as your asset when you die and there may still be tax to pay.

Choosing the best solution for your gifted deposit

Choosing the right solution depends on many factors such as

why you are gifting the deposit,

who you are giving it to,

how old you are,

whether you need it back,

how much other capital you have,

I can help you decide

If all of this seems familiar but a little daunting, don’t worry about it. I’m here to help you decide which way forward is best for you. Whether that is a loan agreement or a deed of trust. Just get in touch and we can have a chat.

Dealing with the land registry

As part of my deed of trust service, I will send an application to the land registry to update the register with a standard form of restriction.

This means that whoever is entitled to an interest in the property will be notified of a sale. The restriction will need to be lifted before a new owner can be registered.

What if the mortgage lender objects?

A mortgage lender needs to protect its own interest in the property. Usually, a deed of trust does not affect that. I will check the terms and conditions of your mortgage and ensure that nothing is done that would leave you (or the person you are gifting the deposit to) in breach of the mortgage.

Find out more

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Nicola Williams is a Family Law Solicitor in the AFG Law Family Team at Cheadle Royal Business Park, Brooks Drive, Manchester, Cheadle SK8 3TD