Funding a purchase and protecting investments in property

When it comes to the methods of funding a purchase, the vast majority of people purchase with a combination of a mortgage and cash deposit or cash only. The big question is where does that cash deposit come from?

Something that solicitors must look at in some depth as part of their anti-money laundering obligations is the source of the client’s wealth and the source of the client’s funds. From this perspective we are the Government’s police force in the prevention of money laundering.

Source of wealth

A client’s source of wealth is the origin of all financial assets of the client potentially over their lifetime.

• How and why did the individual acquire their overall assets, property, investments? 
• Does the client’s occupation match up to their financial position? 

The solicitor dealing with the property transaction may ask for copies of pay slips to ascertain whether the client’s earnings are sufficient to have been able to save the proposed deposit amount.

The source of the client’s funds is the origin of the money that is being used for the specific transaction in hand. The solicitor must ascertain that the funds being used are legally obtained and, on this basis, will usually require copies of bank statements and a paper trail of funds into the client’s specific account.

Where might this money come from?

There are many different sources such as gifts from family, proceeds of a previous property sale, divorce settlement or buy out, investments, savings, inheritance, loan secured against other property to name but a few. 

When the funding is coming from a third party or where two parties are buying a property but with unequal deposits being paid into that purchase, it is sensible to look at ways to protect the investment of each party or the third party.

For example where X and Y are purchasing a property jointly but Y’s parents are contributing a £100,000.00 deposit, Y’s parents may be happy for that money to be used in the purchase of a property but should X and Y go their separate ways in future, Y’s parents wish to ensure that Y retains the benefit of the £100,000.00 investment. The most secure way for Y’s parents to protect that investment would be to become a joint owner with X and Y. They would then need to be involved with all matters such as future mortgages /sales etc. Sometimes this is not possible or desirable.

Quite often where a property is being purchased with a cash deposit and mortgage the registered owners of the property must also be the borrowers under the mortgage. A mortgage lender may not accept the parents as a joint borrower due to their age. It also may just not be desirable to the parents to be that involved in their child’s purchase. In circumstances such as these then a Declaration of Trust may be the most appropriate way forward. 

Declaration of Trust

A Declaration of Trust can set out what happens if the property is sold in the future and is supported by a restriction being placed on the registered title which alerts any party acting that there may be a beneficial interest sitting behind the legal interest which must be dealt with on any transaction. The Declaration of Trust is particularly useful if the parties fall out. It can ring-fence an initial amount to be repaid to the owner who brought the sum into the transaction (using our earlier example – in this case Y). Alternatively, it can be expressed as a percentage and therefore go down as well as up in terms of percentage interest in the property as opposed to a specific cash sum.

An alternative way to protect an interest would be for Y’s parents to place a legal charge against the property. This would have the effect of securing monies to be repaid to Y’s parents but often High Street lenders will not approve this. Most lenders would require their mortgage interest to be repaid first before any other charges but also base their lending decisions on the equity in the property and so are not always content with monies being repaid to third parties when considering whether to lend in the first instance.

A Declaration of Trust can be set up at any time although it is recommended that where a party in the process of purchasing a property the Declaration is set up and put in place prior to exchange of Contracts. Once the property has been purchased then there is no incentive for the party not bringing the larger some of money to the transaction to enter into the deed. It is worth noting that should the parties who own the property marry, then any matrimonial proceedings down the line will override any pre-existing Declaration of Trust, although the content of the Declaration of Trust may be considered. 

For further information concerning Declarations of Trust or Cohabitation agreements please speak to a member of our Family Team.

How Pinney Talfourd can help

If you wish to discuss this topic further, please do not hesitate to contact a member of Residential Property team.