A Deed of Trust is a document used in property to determine how the financial responsibility is split between involved parties. This will typically be used by tenants in common, such as a couple owning a home jointly. The Deed of trust is written up alongside the purchase of the house. During this process, you will determine whether the property is a 50/50 split, or shared disproportionately between the parties.
In many circumstances, a Deed of Trust may reflect the investment into the property. For example, if a couple purchases a £200,000 property together, but one party has provided £150,000 and the other £50,000, then they might write a 75/25 split. When it comes to selling the house, this document would indicate the proportion of capital gains that should be divided between the owners.
Alternatively, if the property is purchased as an investment, a Deed of Trust can be used to influence the tax efficiency of the property. Continue reading this article to find out the full extent of the purpose and uses of a Deed of Trust.
What is a Deed of Trust?
A Deed of Trust is a legal document that will indicate how a property is held between joint owners. Purchasing a property can be considered a huge investment for many people. When making this investment with a partner, friend or family member, you’ll likely want to mutually agree on how this investment is legally considered on a number of occasions.
The Deed of Trust allows joint owners to lay out exactly how much equity is held in the property, how much investment was made by each party and what the percentage split is on a number of other factors. It can also be used to state how any profits or losses from the sale of the property will be allocated
This document is especially important to protect individual legal interests should things go wrong. It covers a range of circumstances that could hypothetically occur and the mutual agreements made for each instance. For example, if one party dies or wishes to sell their share, the deed will make it clear how this is to happen. It can also be used as evidence in the event of a legal dispute.
Uses of a Deed of Trust
There are a number of reasons why you might want to use a deed of trust when purchasing property with someone else. We’ll outline some of the most common uses here:
To define the split of the property in terms of equity and investment.
This deed is frequently used by couples who wish to buy property together without jeopardising their individual interests. It can also be used to reflect the investment made into a property by either party
For example, if one person has contributed more money towards the purchase of a property than the other, this deed will reflect that. Similarly, if the property is purchased as an investment and not as a home, the deed can be used to state how any profits or losses will be split.
To outline what will happen if one party dies or wishes to sell their share.
If one joint owner dies, the deed of trust will state what happens to their share in the property. This is especially important if the deceased person has outstanding debts attached to the property. The deed can also be used as evidence in court proceedings. Disputes can be settled much more quickly if all parties involved have access to evidence in the deed.
To influence the tax efficiency of the property.
When investing in property with intentions to make a financial gain, the deed of trust might state that any yearly profits will be split in a certain way. This can be useful for increasing the tax efficiency of your earnings, preventing the amount lost to taxes.
The clearest example of this can be described through a hypothetical scenario. Take an unemployed individual and their partner earning £50,000 purchasing a house to let. Whilst a larger investment might be made by the earner, the deed of trust could reflect that the individual only has a 10% share of the property. Therefore they would stay below a certain tax bracket, reducing their outgoings. The remaining 90% of the property would be held by the unemployed party. Their lower income would reduce the tax paid on the property revenue, due to their existing tax threshold.
This concept is far more complicated than the typical use of a Deed of trust. Working alongside a proficient conveyancing solicitor as well as a financial advisor would be in your best interest to complete the process successfully.
Purchasing a property together with a partner, family member or friend is a big investment. This investment relates to the property you purchase together, but also to the trust you hold with each other. Whilst it is not always positive to imagine the worst-case scenario, it can often be productive so that mutual agreements can be made ahead of time. This makes the process far simpler, should the unfortunate circumstances ever occur.
A Deed of Trust can be useful in several other instances. It can prove efficient for saving on buy-to-let properties and distribution of the funds after sale. Setting up a Deed of Trust is a simple solution to protect your investment and relationship. Get in touch with an experienced conveyancing solicitor to see how it could benefit your purchase.