Declaration of Trust mistake made by solicitor 7 years ago?

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10:09 AM, 23rd December 2022, About 2 years ago 15

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We need some suggestions as to which way we should go next with a mistake made by a solicitor.

Until recently, we owned 2 rental properties, in addition to our own home. I am a higher-rate taxpayer, and my wife is a stay-at-home mum, working a few hours part-time. It made financial sense to have a Declaration of Trust drawn up, to split the ownership and income of both rental properties from joint tenants to tenants in common – with 99% in favour of my wife, and 1% to me. This also reflected the actual ownership. The first flat was owned by my wife before we met (which later was changed to joint tenants when we lived there together), and the second bought by releasing equity from that first flat (again, this was initially owned as joint tenants).

The Declaration of Trust was drawn up by a solicitor in October 2015. It specifically states that properties will be held jointly as trustees and will hold the proceeds of the sale as tenants in common with a 1% share to me and 99% share to my wife. After we signed the declarations, they were returned to the solicitor. They prepared and sent us back a copy of Form 17 to send to HMRC, which we promptly sent along with copies of the Declarations of Trust. The solicitor wrote in their letter that they would register the Declarations with a restriction on the titles with the Land Registry. From that point on, rental income was split 99/1, in accordance with the declaration. In our eyes, everything had been taken care of.

We recently sold one of the flats in November, as like many other landlords we are looking to exit. We used a different firm for the conveyancing. I asked the conveyancing solicitor for their copy of the title after we completed. I had mentioned to them at the very start of the conveyancing process that we had a Declaration of Trust in place. They never said or queried anything about the title, so I took it that all was in order. To my horror, there did not appear to be any restriction about the Declaration of Trust – I spoke to the Land Registry to check and they confirmed that no restriction was ever registered with them, and as far as they were concerned the properties will still owned 50/50 as joint tenants.

I chased the solicitor firm that drew up the Declarations of Trust. After a month of badgering them, they have confirmed that the restrictions were never registered, and have admitted that they are at fault for not doing this. Their solution is to try and inform the Land Registry and have it registered now. I have lost all faith and trust in this firm now, and I feel as though they are looking out for themselves and not us.

This has left me with a number of predicaments:

1. Is the Declaration of Trust still valid from October 2015, even though it was not registered? Do we pay capital gains tax at 99/1 or 50/50 on the sold flat? Going forward, do we split the income 50/50 for the remaining rental?

2. When I spoke to the Land Registry, they said that they could not back-date any restrictions, and they cannot put a restriction on the sold property. If the solicitor registers the restriction now for the remaining flat, will we have to pay the 3% stamp duty surcharge on the 49% transferred?

3. I am worried that I have not paid enough tax. Should I have paid tax on a 50% share of the rental income rather than the 1% I paid? What is the best way of letting HMRC know? We have always tried to do things properly, and have always paid tax when it is due. This is not our doing.

4. The mistake made by the solicitor was over 7 years ago, but only became apparent to us a month ago. If we suffer financial losses, are we too late to make a claim against them? Ideally, I want to ensure we are not out of pocket now, or in the future.

Any suggestions are welcome, this situation is making me feel sick. We don’t know who to turn to for advice.

Thank you.

David

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Comments

Susan Bradley

13:53 PM, 23rd December 2022, About 2 years ago

It might come as a surprise but it is no business of the Land Registry to record beneficial interests, though they may incidentally be recorded in some document noted on the register for another purpose. Records of trusts should be kept separately.
The Land Registration Act 2002 expressly provides that interests under trusts cannot be noted on the register. See sectionhttps://www.legislation.gov.uk/ukpga/2002/9/section/33
and this explanatory note https://www.legislation.gov.uk/ukpga/2002/9/notes/division/4/4/1/2#:~:text=Section%2033%3A%20Excluded%20interests&te.
I only know about this due to personal experience in that we thought we had a Trust but it turns out it was a Deed of Trust in our case which is totally different and as a result our life was far easier because HMRC were not involved. The average person has no idea that these things a different entities.

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David Houghton

14:19 PM, 23rd December 2022, About 2 years ago

Reply to the comment left by Troubled landlord at 23/12/2022 - 11:43
It will be 6 years as it's a contractual matter not a tortious one. The clock will start when you actually incur a loss, (you probably won't) and is subject to the 15 year backstop. There was a trust deed signed, the purpose of the registration is to ensure correct ownership is recorded and enforceable. So I would not worry about the HMRC too much.

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Blodwyn

14:28 PM, 23rd December 2022, About 2 years ago

I suggest you do some research (that means don't ask an estate agent!) to locate a decent professional indemnity firm (where are you located?).
This not a matter for the bog-standard family conveyancer down the the road.
Ask them to notify your original solicitors of a claim against them for the costs of putting the situation right (rectification) if possible from the time of the mistake? Your first solicitors will refer the matter to their professional indemnity (PI) Insurers who will liaise with your new (claiming) solicitors to agree the best outcome.
You are fortified by the initial admission of liability, however much the PI Insurers may hate it.. They are not really prejudiced?
Remember, you want matters rectified, you won't buy a swish holiday with compensation!

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CMS

22:35 PM, 23rd December 2022, About 2 years ago

Hi, to be honest what the land registry believe the position to be is neither here nor there to be honest.

In practice, as your previous solicitor mentioned, once a declaration of trust has been entered into the solicitor should enter a form A restriction on the legal title to the property to show that there is a trust in place affecting the property - there are other reasons but I will not bore you with them.

So far as I am aware, provided that the declaration of trust was completed by your solicitor then the property is held by the registered owner in accordance with that declaration of trust. The fact that the solicitor failed to register the Form A restriction means that potentially the parties to the trust have less protection for their interest in the property (eg if there was one registered owner who had entered into a declaration of trust saying they hold the property for themselves and one other person. Without the Form A restriction the registered owner could dispose the property without appointing a second trustee or without the solicitor acting realising that someone else was entitled to part of the sale proceeds).

I honestly don't think you have to worry about the Form A restriction not having been registered in this situation. Provided the declaration of trust was completed, which you should check immediately, then I think the legal position is exactly how you intended it to be at the time the declaration of trust was completed.

Turning to the worst case scenario, if the declaration of trust was not completed, i think that you will still have a very strong case to show to the HMRC that the property was, from the time the signed declaration of trust was returned to the solicitor, that the property was held 99%/1%. Accounts showing the rental income split etc supported by stat dec's signed by you and a letter from the solicitor explaining how the error came about should satisfy them.

Check if the declaration was actually completed by the solicitor before you panic. Hope it works out ok. Best, Charles

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Amanda

15:44 PM, 27th December 2022, About 2 years ago

Reply to the comment left by CMS at 23/12/2022 - 22:35
Agree with the advice given. The property register reflects the legal owners- the trustees ( which HAS to be a joint tenancy). A restriction is to offer some protection for the beneficial owners ( if they are not also the trustees). The land register is not intended to reflect the beneficial ownership . The fact that no restriction is registered does not affect the beneficial ownership which is in the trust deed. If the declaration of trust is in writing and signed by you both it is valid and enforceable. The trust starts from the date in the declaration. You have evidence of the declaration of trust and have been dealing with the property correctly in accordance with the declaration. Nothing to be concerned about. The solicitors dealing with the sale do not have to advise you on the CGT position. That is the role of an accountant.

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