Declaration of Trust / Deed of Trust UK Property

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Buying a property is an exciting step – albeit a stressful one. Whilst some people can afford to buy a property alone, it is common for more than one party to be involved. Whether you are buying with a friend, moving in with a partner or receiving financial support from your parents, adding multiple individuals to a purchase can make it a lot more complex.

This is especially true where there is not a clear 50/50 financial split between the parties. Perhaps one person has a larger initial sum to invest, or another will be contributing more to the monthly mortgage repayments.

In these cases, it is important to have legal clarity around just how much each person owns. A Declaration of Trust – also known as a Deed of Trust – can help to avoid uncertainty and prevent disputes further down the line.

What is a Declaration of Trust?

In UK property law, a Declaration of Trust is a legal document stating that one person holds the property on trust for others.

Whilst there will be a registered owner of the property, the Deed of Trust establishes the true ownership and how it is divided between different parties. It sets out the financial arrangements between those with an interest in the property, for example in the case of cohabiting couples, joint tenants or tenants in common. It will specify exactly how much each person has invested and what each will get back if the property is sold or one person buys out another.

This clarification at the outset means that each party knows where they stand in terms of their initial or ongoing investment in the property. In a situation where parents are investing money into the property to enable child to afford the full deposit, the Declaration of Trust will set out how much money will be repaid and under what conditions.

When is a Declaration of Trust used?

Whether you are buying a property with someone else as co-owners, or receiving financial help from a third party, a Declaration of Trust is an essential document. Although the initial financial arrangements may be cordially agreed at the point of purchase, the long term financial picture may require more clarification:

What will happen if one person wishes to sell before another?

What if you split up with your partner – how will you ensure the property is split fairly between you?

Drawing up a Declaration of Trust sets clear boundaries that enable everyone to understand the agreed ownership position. It protects those who are investing more money from legal disputes if they expect to receive a larger portion of any future sale proceeds.

Why is a Declaration of Trust important for cohabiting couples?

Buying your first property with a partner can be a daunting commitment. It may make financial sense, but there is also an element of risk if things do not work out.

For example, what should happen if one party contributes a larger percentage of the deposit, but ongoing mortgage repayments will be split evenly? In this scenario, the Declaration of Trust may stipulate that when the property is sold, if the couple then wish to split their finances, they will each receive their initial deposit and then divide the remainder 50/50.

It may be the case that one of the couple’s parents are contributing a fixed sum to help raise enough for the deposit. In this instance, a Declaration of Trust could provide that those parents will receive that money back when the property comes to be sold, if the couple were to split up.

Considerations for joint tenants and for tenants in common

When buying a property with someone else, it is important to decide whether you wish to buy as “joint tenants” or as “tenants in common”. As joint tenants, each person owns the property as a whole, with neither party owning a specific share. Upon sale, the profit would be automatically split 50/50, regardless of each co-owners’ investment, and if one co-owner were to die, the entire property is automatically transferred to the survivor. This is a simple solution for a couple who wish to leave the property to the other upon death.

Conversely, as tenants in common, both parties own a specific portion of the property, as agreed between them. This may well be 50/50, but not necessarily. This arrangement provides more flexibility for complex situations, which may involve children from another marriage.

A Declaration of Trust is invaluable for both joint tenants and tenants in common. For joint tenants, it will set out how the joint tenancy can be severed, should the co-owners choose to go separate ways. And for tenants in common, it draws out exactly what investment each has made, what percentage of the property they therefore own, and how each will benefit from the sale of the property.   

How do I set up a Declaration of Trust?

Before setting up a Declaration of Trust, you will want to calculate the proportion of the property that will belong to each co-owner. Consider all the costs involved in the purchase and how these have been divided. Both parties must complete the Declaration of Trust, so it is vital you both agree on the particulars. The trust document will then be completed and dated on the date of completion of the property purchase. It will typically also be registered against the title of the property at the Land Registry, so that future buyers are aware of who the property truly belongs to (and to whom the sale price should be paid).

Financial disputes, especially over property ownership, can be complex and emotional, as well as being costly. By setting up a Declaration of Trust, each owner is therefore taking steps to protect their investment.

Share Purchase Agreement V Asset Purchase Agreement

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Whilst negotiating the sale of a company, one of the first decisions to be made is whether to go down a share purchase or an asset purchase route. These distinctly different transactions each have various pros or cons for both seller and buyer, and may greatly affect the length and complexity of the sale.  

The decision between share purchase agreement v asset purchase agreement will sometimes be affected by the sector and nature of the business – in some sectors asset purchases are more common, for example. Ultimately, however, it will depend on the positions and preferences of both buyer and seller. This article does not constitute legal advice, but lays out some of the key differences between the two approaches.

Share Purchase v Asset Purchase

A share purchase is where the entire company is purchased as one legal entity, incorporating all its assets and liabilities. The buyer effectively steps into the seller’s shoes and becomes the new owner of the existing company. In a share purchase, the shareholders are selling their shares of the business to the buyer and receive direct payment from the transaction.

An asset purchase is when the buyer purchases the assets of a company – such as real estate, physical assets and commercial contracts – whilst the liabilities remain in the original company. In this case it is the company, rather than its shareholders, who is the seller. The shareholders retain ownership of the now empty company. They then use the money from the sale to first repay any debt and subsequently withdraw profits from the sale, before (typically) liquidating the company. 

As a general rule, buyers prefer asset sales, since this gives them a greater element of control over the purchase. Sellers usually prefer share sales, owing to the simplicity of the transaction and generally preferable tax treatment.

What are the key differences?

Below are some key differences between a share purchase agreement and an asset purchase agreement:

Simplicity vs Control

In a share purchase, the buyer acquires all the assets and commercial contracts within one simple transaction. There is no danger of anything being left out or missed, and no need to negotiate over the values of each individual asset.

In contrast, asset purchases are more complex, but there is room for negotiation, affording both buyer and seller more control over the purchase. The buyer can pick and choose which assets or liabilities they wish to include or leave out, whilst the seller can negotiate a good price for assets of value. This is particularly attractive if the company being purchased is insolvent or in financial difficulties.

Risk and Liability

By buying the shares of a company, the buyer acquires all of the company’s liabilities – known or unknown – including any debt the company owes. The buyer therefore assumes the risk of purchase, while the sellers walk away free from ongoing responsibilities (subject to any warranties or indemnities given as part of the sale). In an asset purchase the buyer can avoid taking on liabilities, leaving these remaining in the company still owned by the original shareholders. This can result in a faster sale, with less risk of it falling through, since there is less due diligence required from the buyer.

Employment

With a share purchase, all employees remain employed by the business. Any ongoing or historic HR issues are passed to the new owner and they must go through the due process in the case of redundancies etc.

However, this has the advantage of avoiding TUPE regulations. If you are purchasing the assets only, you may be required to inform and consult with all employees about the sale. Not only does this slow down the sale, it also carries confidentiality issues and runs the risk that staff members may choose to leave before the completion of the sale, which could downgrade the value of the business. 

Tax

There are various tax implications for each purchase option. For example in an asset purchase tax may effectively have to be paid twice by the sellers, first by the company on the sale of the assets, and secondly by the shareholders on the eventual withdrawal of profits. In a sale share the seller can usually benefit from Entrepreneur’s relief. Furthermore, stamp duty on the purchase of shares (generally 0.5% of the purchase price) is likely to be less than the stamp duty of assets if there are significant property assets involved.

Transfer of Assets

In an asset purchase, different types of asset may require specific action. Purchase of real estate will involve individual conveyancing and property contracts and – as mentioned above – stamp duty payments. Similarly, IP may need new permits or licences in order to ensure the new company holds the legal title to each asset. GDPR requirements would also need to be monitored wherever transfer of data is involved.

A share purchase would automatically result in the buyer acquiring all the real estate, IP, contact lists etc. connected to the company, which will continue to exist as before, thus simplifying the process.

Commercial Contracts

When the shares of the company are purchased, all existing commercial contracts would automatically transfer to the new owner as part of the company (other than where the contracts contain specific clauses relating to a sale).

However, in an asset purchase, these would not automatically transfer. Each contract would need to be novated to the new company, subject to negotiation with each customer, landlord or supplier.  This could result in the loss of customers, or in less favourable terms with suppliers.

Share purchase agreement v asset purchase agreement

Choosing between a share purchase agreement v an asset purchase agreement will ultimately depend on the nature of the business in question, as well as on the strength of both buyer and seller’s positions.

Always seek legal advice before entering into a deal, to ensure the best option for yourself as either buyer or seller.