Friend buying house with finance - declaration of trust

economic

Tom99 wrote: »

[FONT=Verdana, sans-serif]No its not that straight forward its the Deed of Trust which is setting out how proceeds will be split on sale.

[/FONT] [FONT=Verdana, sans-serif]A simple 33.3%/66.6% split say would really only apply if there was no mortgage and the house was bought outright say A £100K and B £200k

[/FONT] [FONT=Verdana, sans-serif]Where there is a mortgage things get more complicated.

[/FONT] [FONT=Verdana, sans-serif]Using the above example where the mortgage is split 50/50, the mortgage is buying 66.66% of the property and partner A is buying 33.33%

[/FONT] [FONT=Verdana, sans-serif]Therefore partner A is buying 33.33% + 66.66%/2 = 66.66%

[/FONT] [FONT=Verdana, sans-serif]Partner B is buying only what is supported by their half of the mortgage, 66.66%/2 = 33.33%

[/FONT] [FONT=Verdana, sans-serif]But it would be very wrong to say ownership is a straight A=66.66% and B=33.33%

[/FONT] [FONT=Verdana, sans-serif]If the house had to be sold on Day 2 when it was still only worth £300k and the mortgage £200k there would be £100k left which should all go to A and nothing to B.

[/FONT] [FONT=Verdana, sans-serif]10 years on and now the house is worth £600k and the mortgage reduced to £100k so there is £500k left after the sale.

[/FONT] [FONT=Verdana, sans-serif]Using the formula I outlined above the split would be as follows:

[/FONT] [FONT=Verdana, sans-serif]A: 33.33% x £600K = £200k plus (600-200-100)/2 = £150K TOTAL = £350K

[/FONT] [FONT=Verdana, sans-serif]B: (600-200-100)/2 = £150K

[/FONT] [FONT=Verdana, sans-serif]So you can see whilst on Day 2 partner B would get nothing by year 10 when the 50% of the mortgage they are supporting has had a 100% price increase and been partly paid off they will receive a good deal more.[/FONT]

Hi there

Sorry to bring this up again after so long! I had a quick question - since the property will be owned as tenants in common, wouldn't my friend NEED to have a share split defined? In which case what would it be as per your example? Of course as you said its not that simple and the share split is actually dynamic - it changes over time. So if my friend owns it as tenants in common, can he just not have a set share split defined but then isn't it a requirement for there to be an explicit share split?

Tom99

economic wrote: »

Hi there

Sorry to bring this up again after so long! I had a quick question - since the property will be owned as tenants in common, wouldn't my friend NEED to have a share split defined? In which case what would it be as per your example? Of course as you said its not that simple and the share split is actually dynamic - it changes over time. So if my friend owns it as tenants in common, can he just not have a set share split defined but then isn't it a requirement for there to be an explicit share split?

[FONT=Verdana, sans-serif]Yes the DOT needs to define the explicit split of net sale proceeds but that does not have to be a simple 50/50, 60/40, 10/90 or whatever. That would only apply if the property was being bought outright with no mortgage and each partner was paying say 60/40 etc.

[/FONT] [FONT=Verdana, sans-serif]In cases like yours where there is unequal deposits and the mortgage is shared either 50/50 or some other ratio then the DOT will specify the two part formula I outlined above or something similar.

[/FONT] [FONT=Verdana, sans-serif]As far as the legal title at the land registry was concerned it will m[FONT=Verdana, sans-serif]erely be noted that the property is held as tenants in common and a restriction added to the title to [/FONT][FONT=Verdana, sans-serif]indicate that such a deed of trust exists and therefore cause a lender, buyer or indeed owner to take note.

[/FONT][/FONT] [FONT=Verdana, sans-serif][FONT=Verdana, sans-serif]The deed of trust itself is a separate document signed and witness by both parties (and kept safe!) which sets out how the proceeds of any sale in the future will be split.

[/FONT][/FONT] [FONT=Verdana, sans-serif][FONT=Verdana, sans-serif]It will contain words exactly like I set out above or something similar, there is usually more than one way of expressing a two part formula but getting to the same result.

[/FONT][/FONT] [FONT=Verdana, sans-serif]So just to repeat what the DOT might actually say:

[/FONT] [FONT=Verdana, sans-serif]"NOW THIS DEED WITNESSES as follows:
The parties hereto declare that they hold the Property on a trust of land to the parties herewith DELCARE that they hold the property and the proceeds of sale (after discharging the mortgage and deducting there-from the costs of sale) and the net rents and profits until sale UPON TRUST for themselves as Tenants in Common[/FONT]
[FONT=Verdana, sans-serif]
(a) as to 33.33% of the gross sale price of the Property less costs and fees for
Partner A absolutely together with half of the remainder and[/FONT]
[FONT=Verdana, sans-serif]
(b) as to half of the remainder as above for Partner B absolutely"

[/FONT] [FONT=Verdana, sans-serif]Obviously the %age which go into part a and b of the above formula will depend on how the deposit and the mortgage repayment is to be provided and paid for. In the above example the mortgage is being split 50/50 but that is just an example.

[/FONT] [FONT=Verdana, sans-serif]This two part formula is dynamic and the share of the net proceeds each party will get will vary over time as the mortgage is paid off and the house increases in value.

[/FONT] [FONT=Verdana, sans-serif]What is the price of the property involved including fees, how much are each of them putting in as a deposit and how are the going to share the mortgage repayments? That information will determine the %ages in the above formula? [/FONT]

SDLT_Geek

Thanks Tom99 for the excellent (and patient!) explanations.

economic

Tom99 wrote: »

[FONT=Verdana, sans-serif]

[/FONT] [FONT=Verdana, sans-serif]What is the price of the property involved including fees, how much are each of them putting in as a deposit and how are the going to share the mortgage repayments? That information will determine the %ages in the above formula? [/FONT]

Thanks Tom, this is really really helpful - if i could thank you 10x i would!

The property price my friend says is 400k. Not sure how much stamp and solicitor/surveyor fees will be. The plan is for my friend to put in all of the deposit which amounts to 200k and for the couple to split all other costs 50/50. So the DOT would be like how you have stated it except the property price and mortgage amounts are different (and therefore the % would be 50% instead of 33%). Is this fair? There is an new issue that has come up recently with them:

My friend's fiance now wants not have to pay for any costs but to instead put that money towards the deposit of the house and have a corresponding equity stake legally. She expected my friend to have to pay all the costs instead. Of course my friend is not very happy, i think it was more pressure from the fiance's parents as they don't like the money to go wasted. Obviously this is not fair on my friend at all. do you have any suggestions what i should advice to my friend?

Pixie5740

Any advice? How about don't get married because once they've been married for a while and children are involved this DoT will be pointless.

If they are insisting on the DoT then neither of what they are proposing is fair i.e. all her money goes on the costs of buying or none of her money goes on the costs of buying. Paying the SDLT, solicitors fees, surveys etc 50/50 would be more fair and then whatever money she has left could also contribute towards the deposit.

economic

Pixie5740 wrote: »

Any advice? How about don't get married because once they've been married for a while and children are involved this DoT will be pointless.

If they are insisting on the DoT then neither of what they are proposing is fair i.e. all her money goes on the costs of buying or none of her money goes on the costs of buying. Paying the SDLT, solicitors fees, surveys etc 50/50 would be more fair and then whatever money she has left could also contribute towards the deposit.

I never said the fiance would have to put all her money towards costs. Just that she should pay 50% of the costs. Then whatever she has left can be put towards the deposit and DoT reflecting this accordingly.

My friend is only worried now given he has a large sum of money and the fiance has very little relatively. Once they have kids etc he wouldn't care at all by then. Its a short term protection of his assets he is concerned about in case of separation etc.

Pixie5740

You said that your friend's plan was to put in all of the deposit and split the costs 50/50. :huh:

Tom99

economic wrote: »

Thanks Tom, this is really really helpful - if i could thank you 10x i would!

The property price my friend says is 400k. Not sure how much stamp and solicitor/surveyor fees will be. The plan is for my friend to put in all of the deposit which amounts to 200k and for the couple to split all other costs 50/50. So the DOT would be like how you have stated it except the property price and mortgage amounts are different (and therefore the % would be 50% instead of 33%). Is this fair? There is an new issue that has come up recently with them:

My friend's fiance now wants not have to pay for any costs but to instead put that money towards the deposit of the house and have a corresponding equity stake legally. She expected my friend to have to pay all the costs instead. Of course my friend is not very happy, i think it was more pressure from the fiance's parents as they don't like the money to go wasted. Obviously this is not fair on my friend at all. do you have any suggestions what i should advice to my friend?

[FONT=Verdana, sans-serif]Let assume the costs are £30k so total cost is £430k

[/FONT] [FONT=Verdana, sans-serif]Of which your friend is putting in £215K, fiance £15k and mortgage £200k.

[/FONT] [FONT=Verdana, sans-serif]Therefore you friend is buying 46.5% ((215-15)/430) more of the property than fiance, so on sale:

[/FONT]

• [FONT=Verdana, sans-serif]46.5% of gross sale price to friend plus 50% of remainder[/FONT]
• [FONT=Verdana, sans-serif]50% of remainder to fiance[/FONT]

[FONT=Verdana, sans-serif]
Or if you think it sounds fairer but it will mean the same result:

[/FONT]

• [FONT=Verdana, sans-serif]50% of gross sale price to friend[/FONT]
• [FONT=Verdana, sans-serif]3.5% of gross sale price to fiance[/FONT]
• [FONT=Verdana, sans-serif]Remainder split 50/50[/FONT]

timbo29_2

Comms69 wrote: »

FGS they're getting married and he's pulling this nonsense.... why even bother getting engaged?!

I think it is a sensible idea to get a DoT.
He knows that he will stay with her the right reasons, and not just because he is worried about loosing cash if he dumps her.

You never really know someone until you live with them.

Tom99

economic wrote: »

I never said the fiance would have to put all her money towards costs. Just that she should pay 50% of the costs. Then whatever she has left can be put towards the deposit and DoT reflecting this accordingly.

My friend is only worried now given he has a large sum of money and the fiance has very little relatively. Once they have kids etc he wouldn't care at all by then. Its a short term protection of his assets he is concerned about in case of separation etc.

[FONT=Verdana, sans-serif]Given the great disparity in deposit I would think a DOT, with appropriate %ages, is essential here. After all you friend is buying half the house outright and unfortunately, despite all good intentions on both sides when they set out, many couples will end up separating.

[/FONT] [FONT=Verdana, sans-serif]Whatever the exact %ages which end up in the DOT the fiance is getting quite a good deal as they will be occupying half a house but only buying 26.75%
.[/FONT]
[FONT=Verdana, sans-serif]Under my above example of £430k split 215/15/200, when the mortgage is paid off the couple will own the property:

[/FONT] [FONT=Verdana, sans-serif]Friend – 73.25%[/FONT]
[FONT=Verdana, sans-serif]Fiance – 26.75%

[/FONT] [FONT=Verdana, sans-serif]That makes the fiance's share sound much better but unfortunately you can't just stick those %ages in the DOT as a straight 73.25%/26.75% share. But I suppose you could wangle them in using a slightly different wording, for example:

[/FONT] “[FONT=Verdana, sans-serif]On a sale the net proceeds after deduction sale costs and mortgage will be split:[/FONT]
[FONT=Verdana, sans-serif]Friend – 73.25%*(Gross sale price less costs of sale) less 50% of mortgage outstanding.[/FONT]
[FONT=Verdana, sans-serif]Fiance – 26.75%*(Gross sale price less costs of sale) less 50% of mortgage outstanding.”

[/FONT] [FONT=Verdana, sans-serif]That may make it sound more palatable but the result will be exactly the same as before ie the fiance will get nothing back if the house is sold after a week, but get 26.75% if sold once the mortgage is paid off.

[/FONT] [FONT=Verdana, sans-serif]Whatever formula they decide upon, they should test it out with a few scenarios to see it works correctly in each situation e.g.:

[/FONT]

• [FONT=Verdana, sans-serif]A sale after one week with no price growth and no mortgage reduction[/FONT]
• [FONT=Verdana, sans-serif]A sale after 5 years with say 20% price growth and say £30k mortgage reduction[/FONT]
• [FONT=Verdana, sans-serif]A sale after 20 years with say 100% price growth and mortgage paid off.[/FONT]