What is a deed of trust?
A deed of trust is a legally binding document that sets out important information about the ownership of and rights over a property.
This information is usually far more detailed than the basic details held by the land registry on the TR1 transfer of title deed.
What is a declaration of trust?
The declaration of trust is actually a specific clause in the deed itself.
It declares that a new trust is being created.
Why would you want a deed of trust?
A deed of trust (or declaration of trust) is desireable where:
- at least one person has rights in or over the property (or the equity in it); and
- those rights are not clear from the TR1 that is available from the land registry or any other documents of title or title deeds that you may keep separately.
For example, someone other than the legal owner may have the exclusive right to live in the property until he/she dies.
This will not usually be recorded in the TR1.
Someone other than the legal owner may be entitled to some of the equity on a sale.
Or, the property is owned by one person (who is named as the transferee on the TR1) but he/she has bought it on behalf of someone else, and that person is in fact entitled to all of the equity.
Can details of a trust be written into a TR1 transfer deed?
In our opinion, a few words on the TR1 is not usually adequate, no. And the TR1 does not cover all cases where a trust may arise either.
This is why not:
Section 10 of the TR1 transfer deed is only for joint owners.
All jointly owned property is held on what is known as a statutory trust.
Section 10 is where the type of statutory trust between joint owners is selected in the TR1.
If the property is owned on trust as “tenants in common” rather than on trust as “joint tenants”, a restriction will be placed against the property title to notify any future purchasers.
The land registry needs to know which of these ways the property is held, so that they know whether to add the restriction to the title register.
Section 10 does not deal with situations where one single buyer is going to hold the property on behalf of another person, because it is only to be completed where there are two buyers.
So in all cases where there is only one buyer, you will need a separate deed of trust and a separate application to register a restriction.
Not enough space on the form.
As section 10 of the TR1 is not really there to deal with all aspects of a trust, it isn’t very big.
Only very basic details of the new joint ownership of a property can fit on there. Almost all trusts are too detailed to write in such a small space.
A standard deed of trust runs to approximately 5 or 6 A4 pages. Inevitably therefore you would need to prepare a separate document to accurately record the details of the trust.
Historically, one of the reasons trusts came into existence was to protect the privacy of the person with an interest in a property.
The TR1 is a public document and copies can be requested upon payment of a fee to the land registry. So the legal ownership of a property is easily discovered.
Wanting to keep your personal business private is not unlawful but tax must be paid when due.
Partly for this reason, trustees are usually responsible for arranging payment of tax due on behalf of a trust. For example on purchase, disposal of and income from a property.
There is no need for the land registry to see the details of the trust deed itself and details of the beneficiaries under the trust are not recorded. The land registry is only concerned with the legal title to the property.
There is a limit on how many legal owners a property can have.
A maximum of four people can be registered as legal owners of a property.
Now you may think that is more than enough, and usually it is. But we have dealt with more than one case where more than four individuals owned a property together.
For example when the home of an elderly parent has been passed down to the adult children, and there are more than 4 of them.
A deed of trust can be created so that at least one or two of the children are the legal owners but they are holding the property on trust for all of the children together (including themselves) in equal (or unequal) shares.
It would be very unusual to add the details of other beneficiaries of the trust to the TR1 in these circumstances.
But all our trust needs to say is we are splitting the equity 55/45. Can’t we just put that?
Really? Just 55/45.
Of a share of the gross proceeds sale and then you each pay your share of the mortgage?
Or should it be a share of the net proceeds? The difference can be thousands of pounds. It matters to get it right. It actually matters quite a lot.
When you start to really think about the end result, you may as well do it properly.
Your property is probably your most valuable asset after all.
Do we need to write the details of the trust down at all?
Now this is very tricky territory.
Trusts can be resulting, implied or construed from behaviour or and financial contributions. They do not absolutely have to be written down.
But this is not necessarily a good thing.
In fact, in our experience it leads to significant problems if they aren’t, not least of which is trying to prove that the trust actually exists.
Remember, there doesn’t need to be a falling out for a situation to arise where you may need to prove the trust exists and can’t.
You might need to prove it to the benefits agency; or to reduce payments in respect of care home fees or inheritance tax, capital gains tax or income tax.
An express trust is a trust that is written down. An express declaration of trust or deed of trust trumps both an implied and a constructive trust.
And we cannot emphasise enough how important it is to get the wording right because there are circumstances when the court cannot change an express trust even if the result is completely unfair to one party.
The court has wide powers to create and vary trusts on divorce, including altering the share one person has in a property.
There is no such power generally to alter the size of a shareholding where the legal owners or people with interests in the equity in the property are not married.
So it is vitally important to express those shares accurately in the first place when creating an express trust.
So, in summary, what is a deed of trust?
- A deed of trust (sometimes known as a declaration of trust) is a legally binding document.
- It sets out the rights and interests in property that may not be known simply by looking at the title deeds.
- If a property is being bought in joint names, it is necessary to indicate on the TR1 transfer deed at section 10, whether the purchasers are buying as joint tenants or tenants in common.
- There is no requirement to put any further details of a trust on the TR1. It isn’t possible if there is only one purchaser and in any event it may be adviseable or desireable to put the details in a separate, more comprehensive document.
- Trusts are a very complex area of law. Even though families frequently own property together, the law defining that ownership is classed as property law.
- Always take advice and take extra care when drafting a deed of trust.
More on trusts:
What goes into a deed of trust?
Jointly owned property and trusts of land
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If you would like to know how we can help you draft a deed or declaration of trust please contact us using the form below.