Declaration Of Trust

delluver

Hi folks,

My partner and I are thinking about taking a loan out with my parents to buy a property as "tennants in common". Does anyone know how would this be shown in a declaration of trust? Ideally my partner and I would like it written up so that my parents are entitled to a fixed sum out of the sale proceeds with all the balance being payable to us – this way we benefit off all the potential increase in value (and also bear the risk of the potential reduction in value) whilst their share is fixed irrespective of the property value. I am wondering how my partner's and my share be would shown say for instance if I was putting forward £43K and he was putting in £10k, the rest being the fixed sum from my parents (loan) and the house was to be bought for £148k. I'm baffelled to say the least, any input would be great.

Thanks!

Debt_Free_Chick

I would expect your parents' share to be shown as £95k and the balance of the value of the property to be split 81% to you and 19% to your partner.

However ... are your parents happy just to get £95k back? Afterall, they will be shelling out more than that as they have to pay interest on the loan. Depending on the term, they could be paying out more than £100k in total, simply to get back £95k in the future. Seems odd that they would agree

Also, if the value of the property decreases, your parents would get 100% of their equity back and you and your partner would take the full hit on the fall in value. For example, if the value fell to £125k your parents would get back £95k. You would then get 81% of the remainder - which is £24.3k and your partner would get £5.7k, which is his 19% share.

Robert_Sterling

Debt_Free_Chick wrote:

However ... are your parents happy just to get £95k back? Afterall, they will be shelling out more than that as they have to pay interest on the loan.

That is what parents would want to do in many cases.

Debt_Free_Chick

Robert_Sterling wrote:

That is what parents would want to do in many cases.

Fair enough, but delluver posted "I would like it written up so that my parents are entitled to a fixed sum" ...... not clear whether the parents are in agreement with this

delluver

Debt_Free_Chick wrote:

I would expect your parents' share to be shown as £95k and the balance of the value of the property to be split 81% to you and 19% to your partner.

However ... are your parents happy just to get £95k back? Afterall, they will be shelling out more than that as they have to pay interest on the loan. Depending on the term, they could be paying out more than £100k in total, simply to get back £95k in the future. Seems odd that they would agree

Also, if the value of the property decreases, your parents would get 100% of their equity back and you and your partner would take the full hit on the fall in value. For example, if the value fell to £125k your parents would get back £95k. You would then get 81% of the remainder - which is £24.3k and your partner would get £5.7k, which is his 19% share.

It will be a cash loan paid back monthly - with interest that we've already agreed on, so the terms will be based on an everyday mortgage. When has a mortgage company ever had a share in the end value when sold? Well my last mortgage lender didn't didn't. Yes, just like a mortgage if the property value falls, no matter what you still have to pay the full loan. We accept this like many others that take out a mortgage. My partner and I will be sharing all the fees that buying a house involves.

Bossyboots

delluver wrote:

It will be a cash loan paid back monthly - with interest that we've already agreed on, so just like an everyday mortgage. When has a mortgage company ever had a share in the end value when sold? Well my last mortgage lender didn't didn't. Yes, just like a mortgage if the property value falls, no matter what you still have to pay the full loan. We accept this like many others that take out a mortgage.

Your parents need to protect their interest then by having a loan agreement drawn up between you and your partner and then registering it as a charge on your property. This will state the amount loaned and the repayment agreed. It should include a proviso for paying off the loan if the property is sold - just like an ordinary mortgage. By placing a charge on the property, they are protected against you and your partner selling it and disappearing (and don't say that won't happen, families are the worst for falling out and you should be ensuring that your parents' money is totally secure) as you will not be able to sell with the charge registered until they sign a release form. Your declaration of trust will then only need to concern you and your partner and your shares in the property.

delluver

Bossyboots wrote:

Your parents need to protect their interest then by having a loan agreement drawn up between you and your partner and then registering it as a charge on your property. This will state the amount loaned and the repayment agreed. It should include a proviso for paying off the loan if the property is sold - just like an ordinary mortgage. By placing a charge on the property, they are protected against you and your partner selling it and disappearing (and don't say that won't happen, families are the worst for falling out and you should be ensuring that your parents' money is totally secure) as you will not be able to sell with the charge registered until they sign a release form. Your declaration of trust will then only need to concern you and your partner and your shares in the property.

This is what a declaration of trust is for surely. The declaration will draw up our shares and their cash entitlement if there was to be a sale. The rest of it - mortgage statements etc will be drawn up outside of this.

delluver

Robert_Sterling wrote:

That is what parents would want to do in many cases.

Mine wouldn't - they're tight. Hehe. Well, they will probably expect to buy into a percentage of the house making on the the end value, on top of a loan. In which case in the long run, assuming property prices won't fall it would be cheaper to go with a lender. This is why I'm finding out as much as I can about a declaration which can avoid this.

Bossyboots

delluver wrote:

This is what a declaration of trust is for surely. The declaration will draw up our shares and their cash entitlement if there was to be a sale. The rest of it - mortgage statements etc will be drawn up outside of this.

Your parents won't be on the house deeds. You could sell at any time and run off with the money, trust deed or not. Their protection comes from charging your property under the umbrella of a separate agreement relating to the loan.

If they are buying a percentage of the property, then they would be on the trust deed but that does not appear to be your objective. Therefore, your best route would be as I have described which will set out the sum loaned, amount to be repaid, when and how and protect their investment without actually owning any part of the property. This protects you as well from any financial mismanagement they may get into later on as if, for example, they became bankrupt, as part owners of your house they would have an additional asset.

delluver

Bossyboots wrote:

Your parents won't be on the house deeds. You could sell at any time and run off with the money, trust deed or not. Their protection comes from charging your property under the umbrella of a separate agreement relating to the loan.

If they are buying a percentage of the property, then they would be on the trust deed but that does not appear to be your objective. Therefore, your best route would be as I have described which will set out the sum loaned, amount to be repaid, when and how and protect their investment without actually owning any part of the property. This protects you as well from any financial mismanagement they may get into later on as if, for example, they became bankrupt, as part owners of your house they would have an additional asset.

Surely if the declaration shows we owe them 95k then that's what they will get back. Otherwise what's the point of a declaration of trust if you can just tear it up at the end of the day and it's meaningless?

http://www.questbrook.co.uk/trust.htm

We want to avoid seperate papers and I thought the best way would be to have a declaration of trust written up (trust deed) to show a fixed sum to one party and then the balance divided in agreed percentages.

Debt_Free_Chick

delluver wrote:

Surely if the declaration shows we owe them 95k then that's what they will get back. Otherwise what's the point of a declaration of trust if you can just tear it up at the end of the day and it's meaningless?

http://www.questbrook.co.uk/trust.htm

Yes - the trust deed will show how the equity is split. It's just that, a formal document which shows that, when the house is sold, who gets what.

We want to avoid seperate papers and I thought the best way would be to have a declaration of trust written up (trust deed) to show a fixed sum to one party and then the balance divided in agreed percentages.

What the trust deed doesn't do is to give your parents any security. You want to think of it like a mortgage? Well, a mortgage company would have a charge over the property and this would be registered at the Land Registry. Anyone buying the property would see that the mortgage company has a legal interest in the property. In addition, the property cannot be sold without the consent of those who have a charge.

So, for your parents to have the same rights as a mortgage company, they should also have a charge over the property. This way, they need to agree to you selling the house and that pretty much guarantees that will actually get their money back. Without the charge, you could sell the house and run off with all the equity. Your parents would be left clutching a piece of paper that proves you owe them £95k, but they would have no way of actually getting their hands on the money.

The trust deed is only an agreement as to the split of the equity but gives your parents no way of actually getting the money. The charge over the property does.

HTH