Rogers & Norton News

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Who do you trust?

Wednesday, October 12, 2016

As property prices continue to rise and the chances of getting on the property ladder are ever more difficult, the younger generation find themselves increasingly relying on financial support from parents.  However, very few people take steps to protect their assets when they have loaned or gifted money.  Either because no one has explained the implications or else everyone is in such a rush to buy a home they leave this as something to think about at a later date.

What does a declaration of trust do?

A declaration of trust provides for people to own property differently to the title recorded at the land registry.  If prepared and entered into correctly it is a legally binding document.  It can allow an owner not protected by being a registered owner of a property at the land registry to become an owner (in equity) and be protected as such.

When might it be useful?

Miss A is purchasing her first home with the benefit of a mortgage. Her parents are gifting a deposit on the basis that they will share any ‘profit’ made on the property and that the funds will be protected from any third party interests in the property save for any mortgage. The registered owner on the title deeds of the property will be Miss A.  However, Miss A and her parents will protect their financial positions by way of a declaration of trust.

Mrs B and Mr C are both contributing to buying a home together but Mr C is still an owner of a different property with an existing mortgage.  The existing lender will not consent to his release and the new lender will not permit him to be on the mortgage or the legal title.

In these circumstances creating a declaration of trust protects any financial investment he has contributed and provides a legal basis for him to own the property in equity also known as a beneficial interest, whilst Mrs B is registered as the legal owner and the sole mortgagee.

NB – If acting for the mortgage lender then their permission would be required to create the deed.  Within the deed it would be declared that the financial interest in the property is held in accordance with the contribution made by the Mr B and Mrs C, and the percentage of proceeds of sale due to each subject to the mortgage.

Mr D and Mrs E are buying a property together, but are providing different contributions to the purchase price.  They wish their contributions to be reflected in a legal document.  Mr E is to own 60% and Mrs E is own 40%.  Upon sale they will get a respective share of the net proceeds.  A declaration of trust can easily record each person’s contribution and therefore the proportions of the financial interest due to them on sale.

It is also important to consider Insolvency issues and how a Declaration of Trust could be set aside should you be made bankrupt.  Quite often, no consideration is given in relation to the transaction, or the transferor receives a consideration that is significantly less than the value of the consideration provided by the debtor, or enters into a marriage or the formation of a civil relationship as consideration.  Parties must be aware of Section 423 of the Insolvency Act 1986 which applies to individuals and companies, and is of application whether or not there is a formal insolvency.  The section allows the court to unscramble transactions entered into at an undervalue with the purpose of putting assets beyond the reach of creditors or of otherwise prejudicing the interests of such people.  An application may be made by the insolvency practitioner in charge of the insolvency or, with the permission of the court, by a victim of the transaction.   A court faced with an application under s 423 of the Insolvency Act 1986 has to consider, first, whether the transaction was at an undervalue and, secondly, the purpose of the transaction.  There is no restriction on the amount of time which may have elapsed since the transaction.  Putting assets out of the reach of a creditor or creditors must have been the purpose behind the transaction, not merely the result of it.

We successfully opposed an attempt to set aside a Declaration as we have documentary evidence to support the financial payments made in relation to the purchase of several properties, a clear paper and audit trail and records is important to defend any such attempt to set aside the Declaration of Trust.

Kerry Rowell, Head of The Family Department comments “Rogers & Norton have one of the busiest conveyancing departments in the region.  We come across the above situations on a daily basis.   As an experienced family solicitor I know how few people take the necessary steps to protect their interests in these circumstances and regret it later.  Both because they fail to protect their investments and the costs involved in resolving them after the event.  If you are making one of the largest financial investments in your life then ensuring that your investment is protected is essential.”