Declaration of Trust – how to split the proceeds when the house is sold?

macs123

A relative of mine and their partner are buying their first home. They’re buying as tenants in common and they want to do a declaration of trust to take into account the unequal contributions they are paying towards the deposit, and also to take into account future changes in the value of the house. I’ve found these details, written by a financial advisor in one of the main UK newspapers, and it advises how to do exactly what they want to do:

“after paying off the outstanding mortgage with the sale proceeds, you would get whatever percentage of the purchase price your original contribution to the cash deposit represented when you bought the property.

So if you put £1,500 towards a house costing £100,000, your percentage share would be 1.5% and your partner’s contribution of £8,500 would be 8.5%. If you sold the house for £150,000, your share would now be worth £2,250 (1.5% of £150,000) and your partner’s £12,750. After deducting these amounts from what was left of the sale proceeds and clearing the mortgage, whatever remained would be split down the middle”

Their house is costing £200,000, one of them is paying £90,000 towards the deposit and the other is paying £10,000 towards the deposit. The mortgage they are taking out, and will pay 50/50, is for £100,000. So in their case, when they sell, I think the calculation in their declaration of trust, to split the net proceeds, should be:

For the one who put in £90,000

45% of selling price, plus 50% of the following

(net proceeds minus 50% of selling price)

For the one who put in £10,000

5% of selling price, plus 50% of the following

(net proceeds minus 50% of selling price)

They’ve asked their solicitor to put this into the declaration of trust, but she doesn’t seem to agree and keeps putting something different, that produces a different split.

Does anyone have any advice or experience of how to do this please?

Myci85

There are lots of different ways of doing it, and you'll probably easily find past threads on the topic to give you (them) some ideas.

We simply put in ours that we would each get back the deposit we put in, and any equity above that once the mortgage was paid off would be split down the middle as sharing mortgage payments 50:50.

GDB2222

You need to test your formula by working through it with example calculations for different increases or decreases in house values.

For example if the property value drops by 50% the selling price will only just cover the mortgage, yet your formula awards money to both of the owners that won’t exist. Yes, I know that a 50% drop is extremely unlikely but the formula should work in all circumstances.

I am not surprised that the solicitor is not prepared to implement what you have written.

Albermarle

Personally I would say that as long as something is in place, I would not be arguing over the small print, as the general idea ( I presume) is that they stay together anyway.

macs123

https://forums.moneysavingexpert.com/discussion/comment/81882398#Comment_81882398

Thanks for pointing that out. We've looked at different increases/decreases in value, and now that you've pointed it out, also where there isn't enough equity for them to get anything, and the calculation gives negative results in those cases, and their combined shares will equal 0 if the equity is 0 - so in reality they would get nothing, as there isn't anything to share out, which makes sense.

The solicitor wants to say that they get back, in the first instance, exactly what they each paid in as a fixed amount in pounds, but this doesn't allow for any decrease in value whatsoever. What they would like is as per the description by the financial advisor (in my original post), but we're just not sure what the best way to implement this is, i.e. what to put into the declaration of trust to achieve this.

Exodi

macs123
They’ve asked their solicitor to put this into the declaration of trust, but she doesn’t seem to agree and keeps putting something different, that produces a different split.

Unsurprising, I encountered a similar issue. My solicitor suggested that having a calculation that is complicated could cause ambiguity, which opens up room for differences in interpretation.

I'm pretty clued up in this area but I found your wording a complicated way of expressing your intentions. Someone who isn't as au-fait with Maths may well find it confusing. If you were determined to go ahead with your formula, it would be easier to achieve in subclauses (e.g. return the deposits, then split the equity)

e.g. Now this deed witnesseth as follows:

1. [statement about A&B declaring their intention as TIC]
2. On the future sale of the property the following shares will be applied:
Party A: 50%
Party B: 50%
3. Before the sale proceeds are divided, party A will receive [X] and party B will receive [Y]. These sums
represent the deposits by provided by A & B to acquire the property
4. All mortgage/utility/service/etc costs will be joint

That said it's still not on a solid foundation, because the first stage/deposit returns are based on the gross sales value. If you have a negative equity situation, you're trying to to return money that doesn't exist. This is why people suggest trialling several situations to ensure all are happy with the outcome.

Despite that, in reality solicitors will just want to keep it as simple as possible, they will likely suggest you keep the amounts static (e.g. define party's A contribution as £90k, B as £10k) and split the rest evenly (though this still has the issue in negative equity scenarios).

Ultimately it's not necessarily for us to propose logarithmic equity time weighted algorithms, it will be what you're able to work out with the solicitor.

silvercar

if they are paying the mortgage equally, there is an argument that the one with the lower deposit gradually increases their share, and vice versa, in acknowledgment that they are jointly paying the mortgage and maintenance.

Exodi

https://forums.moneysavingexpert.com/discussion/comment/81882866#Comment_81882866

The OP's suggestion technically does that (though it's a bit convoluted).

Day zero:

Party A: (0.45*200)+(0.5*((200-100)-(0.5*200))) = 90 (90% of the net proceeds)
Party B: (0.05*200)+(0.5*((200-100)-(0.5*200))) = 10 (10% of the net proceeds)

Day X (e.g. house has appreciated to £250k, mortgage has reduced to £75k, legal fees of £5k):

Party A: (0.45*250)+(0.5*((250-75-5)-(0.5*250))) = 135 (~80% of the net proceeds)
Party B: (0.05*250)+(0.5*((250-75-5)-(0.5*250))) = 35 (~20% of the net proceeds)

silvercar

If I was paying only a small % of the deposit but a large mortgage contribution, I would want that reflected in the distribution eg

A deposit: 5% of total value
B deposit 25%
Mortgage 70% paid equally.

I'd want a split 40/ 60. Problem comes when you want to factor into the split how long the mortgage has been paid. eg if the split occurred 6 months after the purchase or 36 years!

Maybe there needs to be 4 elements - deposit of A, deposit of B, equity gained by paying the mortgage, equity gained by HPI.

macs123

https://forums.moneysavingexpert.com/discussion/comment/81883418#Comment_81883418

The calculation we came up with does take into consideration the amount of capital that each person has paid off the mortgage. It also gives each person back their original contribution plus the same % increase as the % increase in the house value, and also the same % increase to the value of the original mortgage amount split equally between them.

I will explain that again with numbers, to make it a bit clearer.

If we have

A deposit: 5% of total value

B deposit 25%

Mortgage 70% paid equally

and house originally cost 200K (A deposit 10K, B deposit 50K, mortgage 140K).

After a number of years the house value has gone up by 20% and they have paid off 40K off the mortgage (so house value 240K and mortgage outstanding 100K).

The outcome that my relatives are after (using the figures in this example) is that each of them get back their original deposit plus the 20% increase to it – in this example, for A this will be12K and for B this will be 60K. They also each get back half of the amount that they have jointly paid off the mortgage – in this example for A it will be 20K and for B it will be 20K. They also each get back half of the 20% increase in the part of the house that was bought with the mortgage, which was originally 140K so has increased by 28K, so for A this is14K and for B this is 14K. So from the total net proceeds this gives A a total of 46K (12K+20K+14K) and B a total of 94K (60K+20K+14H).

Also, in this example, once the mortgage has been totally repaid then the split of the equity will be for A 40% and for B 60%, as you’ve said.

I know this is a very long winded way of describing it, but I thought I would write it all out to show that (in my opinion, at least) it is fair and neither one of them is disadvantaged regardless of how much mortgage they have jointly paid off, or how much house prices go up or down (to a certain extent anyway, because if prices go down too much there won’t be enough money to split, and then the person who put in more is likely lose extra to cover any shortfall).

Using the calculation in my original post:

Person A: 5% of 240K + ((140K-(5% of 240K+25% of 240K))/2) = 46K

Person B: 25% of 240K + ((140K-(5% of 240K+25% of 240K))/2) = 94K

The article by the financial advisor, in my original post, puts it into words in quite a simple and succinct way. To summarise, it says: work out the % of each person’s contribution to the original purchase price, then from the net proceeds give each of them back that same % of the selling price, and whatever is left of the net proceeds gets split equally between them.

That description, to me, seems quite simple and fair. What we are having trouble with is coming up with a suitable calculation that their solicitor can understand and is happy with.