Daughters need for a declaration of trust, first home.

Rodders2409

Hello All,

I'm hoping, as always, that some of you fine people will be able to point me in the right direction.

My D is looking to buy her first home jointly with her BF. They've been a couple for two years and appreciate that its a big thing and want to go into it with the background actions / protections in place.

So the intended purchase and ongoing payments are ...

Property cost 400K
D provides deposit 100K
BF provides deposit 20K
Share 50/50 buying costs

Ongoing property financing / costs would be 
D - 30%
BF - 70%

I think we need a Declaration of Trust because we want to protect D's £100K investment, and any rate of growth, also the BF's, whilst also recognising the BFs greater investment in the ongoing financing of the property. Obviously, this is for worst case scenario kind of stuff.

Am I correct in thinking that one way would be to have the following in place...
D is granted 25% of any future sale, includes any growth.
Thereafter, she is only entitled to 30% of the remaining sale.

Is this normal or does it happen a different way?
Obviously there's no accounting for negative equity.

Many thanks.

CSI_Yorkshire

Rodders2409 said:

Am I correct in thinking that one way would be to have the following in place...
D is granted 25% of any future sale, includes any growth.
Thereafter, she is only entitled to 30% of the remaining sale.

Wouldn't that be D gets 25%, BF gets 5%, remaining value split 30:70?

Rodders2409

Thanks CSI...
Yes, absolutely....BF would get 5% is granted first to cover his 20K deposit and thereafter its a 30/70 split. 

RAS

They would be wise to do a deed of trust, as you suggest but there is no specific recognised formula.  They also need to recognise that the property could lose value and think how they would take responsibility for any shortfall.

MSE is riddled with cases where people split, have no deed of trust, and one party has made a larger contribution but the legal split will be 50:50. And others where the agreed split has not been formalised.

And agree how they might manage a breakup, or a change in the family circumstances if on of them was unable to contribute for long periods for ill-health or child care reasons.  In a breakup, will they both agree to keep paying in the short term and sell to tie in with the end of the fixed term, if neither can buy the other out? Or will they aim to sell and accept the ERP?

One of the old posters here had a formula that adjusted the split as the mortgage contribution of the partner paying less of the deposit increased their share.

DD and BF need to discuss, do they take out their deposit in value, or do they take it out as a percentage of the sale price, after sales costs? Neither is right or wrong. Do they them split the remaining equity in proportion to their contribution? If the value doesn't increase, BF will have paid a lot more interest than DD.

And if they were to have children, how do they tackle the family finances?

If I were DD I'd also want to know how someone on a much higher salary has so little saving? How are other living costs going to be split? We see quite a few cases where one party has high expectations of living standards which the other can only match by getting into debt.

And if you as parents are keen to protect this deposit because you are gifting it, as you fully comfortable that this is a gift, not a loan?

Exodi

I've set up a couple of declaration of trusts, the first was actually extremely similar circumstances to yours:

First thing I will say, is that the solicitors will plead with you to keep it as simple as possible. It is worthless if both parties can view the splits in different ways, and a layperson can not distinguish which is right.

So, on advice of my solicitor, my first declaration of trust was structured is as follows:

• The owners declare their Initial Contributions as fixed amount. E.g. The First owner paid £100K towards the costs of purchase. The Second owner paid £20k towards the costs of purchase.
• The owners declare their 'Expenditure', such as intended split of the mortgage costs. E.g. The Owners intend that the First Owner will pay 30% of the Mortgage Payments and the Second Owner will pay 70% of the Mortgage Payments.
• The respective owners shares shall by calculated by dividing the total of the Initial Contribution and the sums paid in respect of the Expenditure with the total.
• This split is then applied to the net proceeds of sale and its rents and profits.

E.g. if they were to break up the second they move in without paying the mortgage and the house is still worth £400k (and assuming we live in a dream world where there are no selling costs):

D : £100k+£0K = £100k (83.33%)
BF: £20k+£0k = £20k (16.67%)

Property (£400k) - Mortgage (£280k) = £120k proceeds, split 83.33% (£100k) & 16.67% (£20k).

If they broke up after one year, and let's say the mortgage was £1k a month and the house was now worth £420k:

D : £100k+£3.6k = £103.6k (78.48%
BF: £20k+£8.4k = £28.4k (21.52%)

Property (£420k) - Mortgage (let's say £272k because payment =/= principle) = £148k proceeds, split 78.48% (£116k) & 21.52% (£32k)

--- Numbers are rounded for the sake of the example, I wouldn't expect such generous rounding in reality when we're talking about thousand of pounds.

Now, on to the cons which I became aware of:

• Record keeping - if you are paying unequal shares towards the mortgage, and because payment will almost certainly be taken in one lump by direct debit, contributions to the mortgage will be commingled. You will need to keep a record of what contributions people make towards the mortgage and renovations and be able to prove them if challenged by the other party. 
• Non-positive splits - very important to consider, and not something that was appropriately protected against in my first DoT. You don't want the person with the 'lions share' of the split to inadvertently inherit the 'lions share' of any debt - but you can't have your cake and eat it. While one person 'in theory' might own 80% and be high-fiving all in sight if house price increases by £10k (as they would have made an easy ~£8k), you must remember it works both ways. If the house price decreases by £10k, they would also stand to lose more.. Likewise the person that owns the majority of the house, could see themselves effectively paying 80% of the selling costs.

I often found myself lost in thought about the morality of 'because I put more in, I should get more from house price changes, which are out of my control". I then unfortunately broke up with my partner.

My next DoT (with my now wife) was much simpler.

if you are considering a DoT like I describe above, please carefully consider the two points I made!

tacticalbanjo

One thing to be aware of that even with a declaration of trust, if they were to get married at a later date then split up the declaration of trust may be overlooked in a divorce settlement depending on the length of marriage and whether there were any children. 

I bought with my husband before we were married and his parents gifted us most of the deposit. I asked the solicitor about a declaration of trust to protect his deposit in event of a split. He asked when we were intending to get married and upon being told that we were marrying just months after completion told us not to bother for the above reasons.

Exodi

RAS said:

They would be wise to do a deed of trust, as you suggest but there is no specific recognised formula.  They also need to recognise that the property could lose value and think how they would take responsibility for any shortfall.

Wise words indeed, many DoT's on this forum usually only work if the price keeps going up.

While I'm sure the OP is keen for her daughter, who has 5x the intitial contribution, to gain 5x the amount from house prices increases, I'm sure they're less keen for their daughter to lose 5x the amount when the price goes down.

TheJP

What does your Daughter and her BF who are buying the property want to do? There is a lot of 'we' in your post, from past experience the 'we' often is a contributor to why it doesn't work out.

Rodders2409

As expected, wise words from you all, many thanks 👌

So...

The JP...you're bang on, and 'we' are trying desperately hard not to fiddle around or over stay our welcome with regards to our DD's life, I've seen first hand how that's nothing but counter productive 🙂. To answer your question, they just want to buy a decent first place together and live a chilled life before settling down, nothing more.

Exodi...thats a wonderfully detailed explanation, thanks for the time you've spent on it, I have a question or two.

I cant quite understand where the combined £10K comes from....£3.6 + £8.4
D : £100k+£3.6k = £103.6k (78.48%
BF: £20k+£8.4k = £28.4k (21.52%)

I understand pondering the morality of the "should I get more?" vs mitigation of risk if theres a reduction in value thinking that there must be a clever way of balancing the offset deposit and mortgage payments over time....but I reckon its too complicated. In the end I've just come to the conclusion of trying to do the fairest thing for both young people because that's what they are and we love both of them.

Also, my understanding is that its much harder to 'seperate' out of a mortgage than it is to get a divorce, in that mortgage companies don't care about any agreed splits in payment etc.. they just want the money. 

CSI_Yorkshire

Rodders2409 said:

I cant quite understand where the combined £10K comes from....£3.6 + £8.4
D : £100k+£3.6k = £103.6k (78.48%
BF: £20k+£8.4k = £28.4k (21.52%)

It's £12k - the 12 months of £1k assumed mortgage payments that they have made 30:70.

So that's now the split of how much each has 'spent' on the house.

Rodders2409

Thanks RAS,

The reason DD has a larger deposit is that I'm gifting her monies left to me following my dad's passing, and its the only way they'd be able to afford somewhere in London.

There are so many if's and but's that I'm not sure it's possible to mitigate against all of them, so I was simply looking to protect the deposit as best we can and be fair to BF as he'll be paying the lions share of mortgage given his salary. He should gain in the event of a separation, but not disproportionally....as neither should my DD.

I'm pretty sure it's a balancing act...