When individuals own a property jointly, whether with a spouse, family member, friend, or business partner, questions often arise about how the rental income should be divided. While joint ownership can be straightforward at the time of purchase, complications can emerge over time, particularly if one party contributes more to the deposit, mortgage, or running costs. A Declaration of Trust is a legal document that can provide clarity in these situations. It records each co-owner's financial interest in the property and, crucially, how rental income should be distributed. This blog will explain what a Declaration of Trust is, why it is important, how it relates to rental income, and the practical steps involved in creating one.
A Declaration of Trust is a legally binding document, usually drawn up by a solicitor, that sets out how the beneficial interest in a property is divided between owners. While the property title at the Land Registry shows the legal owners, the Declaration records the beneficial ownership - who is entitled to the economic benefits, such as sale proceeds and rental income.
In England and Wales, the document is often used where the legal ownership is held jointly, but the financial contributions of each party are unequal, or where the owners wish to formalise a particular income-sharing arrangement.
It is important to distinguish a Declaration of Trust from a tenancy agreement. A tenancy agreement governs the relationship between the landlord(s) and the tenant, whereas a Declaration of Trust governs the relationship between the co-owners of the property.
When rental income is involved, disputes can quickly arise if there is no written agreement. For example, one co-owner might assume income will be split equally, while another expects it to be divided according to how much each person paid towards the property.
A Declaration of Trust removes ambiguity by setting out:
- The proportion of ownership each party holds.
- How rental income will be shared between the owners.
- How property-related expenses will be covered.
- What happens if one owner wishes to sell their share.
This clarity is particularly valuable where:
- Owners are contributing unequally to mortgage repayments or property maintenance.
- One party is living in the property while the other is not.
- The property is held for investment purposes only.
In the UK, ownership arrangements can have tax implications. HMRC recognises that rental income is generally taxed in proportion to the beneficial interest in the property. For example, if a Declaration of Trust states that one party has a 70% interest, they will be liable for 70% of the rental income for tax purposes.
For married couples and civil partners, the default HMRC position is that income is split equally unless a Form 17 declaration is made, supported by evidence such as a Declaration of Trust.
Filing Form 17 allows the couple to be taxed according to their actual beneficial shares, which can sometimes be advantageous for tax planning.
It is essential to ensure that any Declaration of Trust is accurate and consistent with other legal documents and that HMRC is informed where required. Failure to align the paperwork with tax declarations can lead to penalties or disputes.
A Declaration of Trust should be tailored to the circumstances of the co-owners. While templates are available, they may not adequately capture the nuances of the arrangement or comply with current legal requirements. It is strongly recommended to use a solicitor experienced in property and trust law.
Typically, the process involves:
1. Discussing and agreeing the terms - The co-owners decide how the beneficial interest and rental income will be shared, who will manage the property, and how costs will be allocated.
2. Drafting the Declaration - The solicitor prepares the document to reflect the agreed terms, ensuring it is legally sound and enforceable.
3. Review and signing - Each party should review the draft, ideally with independent legal advice, before signing.
4. Retention of the document - The signed Declaration should be stored safely, with copies held by each owner and their solicitor.
A comprehensive Declaration of Trust for rental income should cover more than just the percentage split. It may include:
- How rental income is to be distributed (e.g., monthly or quarterly payments).
- How property-related expenses (mortgage, insurance, maintenance) will be shared.
- Procedures for decision-making about the property.
- What happens if one party wants to sell their share or exit the arrangement.
- Provisions for refinancing or changes in contribution levels.
By anticipating potential areas of disagreement, the Declaration can serve as a safeguard against future disputes.
A Declaration of Trust is particularly relevant for probate and estate law. If one co-owner dies, their beneficial interest will pass according to their will or, if there is no will, under the rules of intestacy. Without a Declaration of Trust, it may be unclear what the deceased's share actually was, leading to disputes between surviving owners and the estate.
By clearly defining ownership shares, a Declaration of Trust makes it easier for executors to administer the estate, reduces the risk of conflict, and ensures that beneficiaries receive what was intended. This is especially important in blended families or where co-owners are not related.
While a Declaration of Trust is a valuable tool, problems can occur if:
- The document is not kept up to date when circumstances change (e.g., further investments, sale of part of the property).
- It is inconsistent with other legal documents, such as wills, mortgage agreements, or company structures.
- It fails to account for tax implications, particularly for married couples and civil partners.
To avoid these issues:
- Review the Declaration regularly.
- Inform your solicitor of any changes in circumstances.
- Ensure all related documents are aligned.
- Take advice from a solicitor with expertise in both property and tax law.
A Declaration of Trust for rental income is a practical and legally sound way to set out the rights and responsibilities of property co-owners. By clarifying ownership shares, income distribution, and management responsibilities, it reduces the risk of disputes and ensures transparency for both legal and tax purposes.
Whether you are purchasing a property with a friend, investing with a business partner, or holding property with a family member, having a professionally drafted Declaration of Trust can save considerable stress and expense in the future.
In the context of probate and estate planning, it also provides clarity for executors and beneficiaries, helping to ensure that your intentions are respected after your death.
At Premier Solicitors, we specialise in property, probate, and estate law. Our experienced team can draft a clear and legally robust Declaration of Trust tailored to your circumstances, ensuring your rental income arrangements are protected and tax-compliant.
For more information, please call us on 01234 358 080 or visit our contact page to send an enquiry form.
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