Birketts' Susan Young previously authored an article ('Untangling trusts') on the concept of a 'trust' in the context of estate planning and wills. But did you know that a 'trust' can also apply to property ownership more broadly?
Where two or more people buy a property, a trust is automatically imposed upon them without them having to do anything. The legal owners, therefore, hold the property on trust, and so are trustees. Usually the owners hold the property on trust for themselves (whether in equal or unequal shares), but they might also hold a share in the property on trust for someone else. The people who stand to benefit from the trust are known as the beneficiaries, who have the right to occupy the property and receive the net sale proceeds when the property is sold.
It is partly for this reason that your conveyancer will ask whether you wish to hold the property as 'tenants in common' or 'joint tenants'. A joint tenancy means that the beneficiaries own the property in equal shares, whereas a 'tenancy in common' can be in either equal or unequal shares. Therefore, if you do not wish to own the property in equal shares, you will need to choose a 'tenancy in common'.
Frequently, the respective shares in the property are declared at the time you buy the property and are set out in the transfer form that you sign. There is a panel in this form (panel 10) which contains three tick-box options from which you can select:
10) Declaration of trust. The transferee is more than one person and:
- they are to hold the property on trust for themselves as joint tenants
- they are to hold the property on trust for themselves as tenants in common in equal shares
- they are to hold the property on trust: [in some other way].
If you want to the hold the property in unequal shares, you should consider opting for the third box and stating the quantum of the different shares.
Whatever you choose, ticking one of these boxes will take effect as an express 'declaration of trust'. A 'declaration of trust' does not have to be contained in a separate standalone document, as you might think; this rather unassuming tick box panel has the same legal effect. An 'express declaration of trust' is usually binding. This means that subsequent changes in your relationship, such as who pays for what, are very unlikely to change your respective shares in the property, as previously declared in the transfer form.
Aside from 'express trusts', such as those referred to above, it is also possible to create other types of property trusts. For example, a 'common intention constructive trust' can be created without even the need to document or sign anything. This type of trust, put very simply, may be created where both parties intended to share the property, but where they did not document this formally.
You should, therefore, give careful consideration to your options when buying a property, and take legal advice if you are at all unsure - and if you already own a property, or live in a property owned by someone else, remember that you might be a trustee and/or a beneficiary of that property!
What are property trusts?
There is an important distinction between legal ownership and beneficial ownership when it comes to property. While the legal owners go 'on the deeds' or the Land Registry title, it is the beneficial owners who are entitled to share in the equity in the property. The legal owners and the beneficial owners may not necessarily be the same people. The legal owners hold the property (i.e. the equity) on trust for the beneficial owners under a property trust. If, for example, a couple buy a property together as 'joint tenants', they (as the legal owners) will hold the property on trust for themselves as the beneficial owners. In this sense, they each wear two hats: one in their capacity as a trustee; and one in their capacity as a beneficiary.
How does a property trust get created? Is the property trust created automatically?
A property trust is created automatically when two or more people buy a property together, without them having to do anything in particular. A property trust can also be created in writing - most commonly this happens at the time of purchase when filling out the transfer (or 'TR1') form. Finally, a property trust can be created informally as a result of the actions of the people involved, for example, things said between them or their financial conduct, such as making financial contributions towards the purchase price or mortgage.
How do I declare what percentage of the property each person is entitled to under the trust?
You can specify what the shares are in an express declaration of trust, either at the time of purchasing the property (for example, as part of the transfer form or in a standalone declaration) or at any time thereafter. If you did not do this and the shares in the property are unclear and disputed, any of the legal or beneficial owners can apply to court for a declaration as to what the shares in the property are.
Can I change the terms of the property trust?
Yes, for example, if you created an express declaration of trust when you purchased the property, stating that you held the property as joint tenants (i.e. in equal shares), but you later wish to change the shares so that you own the property unequally, this can be achieved. It is sensible to revisit the shares when significant changes arise in your circumstances, for instance, if one of you inherits some money and decides to use this to pay-off the mortgage. The most sensible way to achieve this is to enter into a deed, which you will both need to sign in the presence of an independent witness, to record your revised shares.
Can I stop a property trust from arising?
As aforementioned, property trusts can arise informally based on conversations or conduct such as financial contributions towards the purchase price, mortgage repayments or works to the property. Claims based on informal trusts such as these can be costly to litigate. Therefore, if you own a property and you have started to share occupation with someone who is not on the legal title (a new partner, for example), you may wish to ask that person to sign a document confirming that they do not have a beneficial interest in the property and do not intend to acquire any such interest, notwithstanding that they may be contributing financially towards property related expenditure. While not 'bullet proof', such evidence would be helpful later, were a claim against your property to be made.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.