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Legal and professional fees and property transactions

We are often asked to explain if the professional fees you pay, associated with a property transaction, are a tax allowable deduction.

The straight-forward answer is yes, they are, but it is necessary to consider the reason for which a property is purchased to determine which taxes are reduced by such payments.

Simplistically, if you buy a property with the intention to retain it and generate an income from letting the property, then any legal or other professional charges associated with the management of the property will be an allowable deduction. Any legal or other professional charges linked to the purchase or sale of a rental property will not be a deduction for income tax purposes but will be an allowable deduction for capital gains tax purposes when the property is sold.

Alternatively, if you buy and sell properties as a building developer, then all legal and professional charges associated with the purchase, development and sale of such properties will be a deduction for income tax or corporation tax.

HMRC confirm this in their business income manual:

Where taxable trade receipts would arise in respect of the sale of a property, the legal and professional fees incurred in the acquisition, development and sale of the property (including the cost of temporary mortgages or advances) should be allowed as deductions, but should be taken into account in any valuation of the land as trading stock.

The final sentence is worth further comment. Any development work in progress at the end of a trading year needs to be accounted for as stock or work in progress, and the value attributed to such work in progress needs to include the legal or professional fees associated with its purchase or development. This does not deny tax relief; it merely postpones it until the developed property is sold.

Could readers who are still confused by these issues and in need of further clarification and advice, please call.