Are Conveyancing Fees Tax Deductible?

When buying property in the UK, you pay for the basic conveyancing fees and other disbursement fees. You also have to meet the legal fees charged by your property solicitor.

The legal fees and taxes you pay become part of the conveyancing or home purchase and are therefore non-taxable. In some cases, the legal fees are added to the cost of buying the property or subtracted from the home’s selling price. 

If you buy a business premise or rental property, the closing costs are depreciated as part of the selling price. Title fees and conveyancing cost is not treated as a separate deduction in the year they are paid.  

When buying property, you are most likely to be charged a separate conveyancing fee. These fees are excluded when calculating loss or gains in the sale of the property.

Defining conveyancing 

In legal terms, conveyancing is the process of buying or selling property. When the authority requires that you pay a fee for the transfer of title or to record the transfer, this conveyancing fee is simply excluded from the gain when the property is sold. This applied to rental property, residential, and business-use property.

If the conveyance fee is an additional service charge that a broker levies, it is considered closing costs.

Conveyancing fees when selling property 

In most cases, a buyer has no burden of conveyancing. Conveyancing fees are mainly considered the responsibility of a seller in this case. Therefore, a seller can add the closing costs when calculating the adjusted basis or subtract them from the selling price as settlement fees. 

Also See: When Do I have To Pay Conveyancing Fees

Before the property is sold to a buyer, there is no itemized or separate deduction for conveyancing fees. It is not possible to subtract the conveyancing fee as a settlement charge if you add the fee to the adjusted basis. 

Conveyancing fees when buying property 

When buying property, you should include the closing costs on an adjustable basis. This way, you reduce your capital gains when you sell the property later. When you own the property, you cannot take an itemized deduction or deduct fees as expenses against the rental income.

Also See: Who Pays The Conveyancing Fees? The Buyer Or The Seller?

In most cases, the conveyancing fees are usually charged to the seller, who is responsible for filling the change in ownership documents through the estate agent. You should consult your real estate broker if you are charged a conveyancing fee when buying property to clarify the nature of the expenses.

Also See: What are conveyancing fees buying and selling?

What is Stamp Duty Land Tax (SDLT)?

Stamp Duty Land Tax was enacted in 2003 and later revised in 2014 and 2015. According to this tax, you pay tax depending on the value of the property or land. It is applicable in England and Northern Ireland with different specifications if you own land or property in Wales or Scotland.

If you are a self-builder, you will pay SDLT on the land, not the build costs. This tax applies mainly to most sales on land or property transfers.

As of April 2016, those buying a second property in the UK, including buy-to-let property, will pay an additional 3% on top of the applicable standard rate.

Related: How To Renegotiate A House Offer After Your Survey

The stamp duty tax on buy-to-let is a new property tax on second homes. This tax will see you paying more on the SDLT rate, so you will most likely be spending more on your next holiday home or investment. It means buy-to-let can be a good investment. 

Second home stamp duty is charged using a tiered system as with the normal stamp duty. It means you pay an additional 3% on the first £125,000 and another 5% for any values that fall within £125,001 to £250,000.

You will have to pay a higher rate when buying a second property in Wales and Scotland. Scotland and Wales have different tax rates when buying your second property or investment.

When do you pay the basic stamp duty?

When buying any second property under £40,000 in the UK, you are supposed to pay the basic stamp duty. All mobile homes, caravans, and houseboats are exempt from additional stamp duty. When purchasing your main residence, you benefit from SDLT relief for any purchase of up to £300,000. 

For any purchases of below £300,000, no stamp duty land tax is payable, but for any purchase between £300,000 and £500,000, you are charged a flat rate of 5% on balance above £300,000.

Buying a home in Remortgage? Do You Need Conveyancing Solicitors To Remortgage?

Another relief or exemption to SDLT comes when you buy a second property but intend to sell your current home, which means you end up with one property. If you want this relief to apply in this case, you have to sell your current property in the next 18 months. When buying property with the help of a real estate broker, they can advise you on how this process works.

Stamp duty when replacing home?

When you have a share in another property or own another property, you don’t have to pay stamp duty when replacing your main residence. You don’t have to pay this high rate of stamp duty. However, if you buy a new main residence before selling the old one, you have to pay a higher rate of stamp duty. You can reclaim the difference later once you sell the property.

If you exchange contracts and sell the property within 3 years, you are free to claim a refund from the HMRC. The HMRC will be refunding you the 3% tax you have paid.

Related: Conveyancing Help For First Time Buyers

Can you avoid paying stamp duty?

The UK average price for buying a house is £254,624, which means it is impossible to avoid paying the stamp duty when purchasing your first or second home. However, in some cases, the SDLT is negated when the transfer of property falls under a gift.

If the property you buy is close to the bottom of the SDLT threshold, you should try to negotiate the price and bring it under the threshold as much as possible.

In other circumstances, for instance, if you own a property jointly and want to transfer it due to divorce, you can transfer some of the property’s value to the other party, reducing the liability.

Who should pay the stamp duty?

In the UK, the property buyer pays the stamp duty when conveyancing. The buyer’s property solicitor will take care of the stamp duty transactions.

The stamp duty returns are supposed to be paid and submitted in less than 30 days of completion. Late returns on the stamp duty payment will attract a penalty on the property buyer.

Income tax on UK property 

When buying property in the UK as a non-resident British, you enjoy an income-tax-free personal allowance. Furthermore, landlords can deduct costs before tax is calculated and payable, including profits and mortgage interests.

A personal tax-free allowance decreases by £1 for every £2; adjusted net income is above £100,000. This means your allowance is nil if you have an income of £125,000 and above.

The income tax for landlords 

Until the UK’s 2016/2017 tax year, landlords could deduct allowable costs and mortgage interest from the rental income before calculating tax liability. The tax relief has been restricted to the basic income tax rate since April 2020 and is currently at 20%. 

Tax relief will be given to landlords as a reduction in the tax reliability instead of a reduction in taxable rental income.

These changes started taking effect in April 2017, and right now, no landlords can receive more than 20% tax relief. Landlords owning furnished properties in the UK have lost the right to claim up to 10% of rent earned going towards wear and tear costs and therefore should not be taxed. As of April 2016, new landlords have only deducted costs that they have incurred.

Before a tax bill is calculated, a landlord can deduct allowable expenses. Some of the deductions include:

  • Maintenance costs
  • Mortgage interest costs 
  • Utility bills
  • Insurance premiums 
  • Council tax, where applicable 
  • Letting agent fees 

Capital Gains Tax (CGT) for UK expats 

Capital Gains Tax is levied on gains when you sell or dispose of a property. The gains are calculated by the difference in sale value from the initial purchase value.

When selling your property, the sale value will be the property’s sale price. If no sale value is provided, the authorities will use the expected market value of the property to calculate the gains. 

This will usually apply when you decide to give the property away, sell it at a reduced cost, or simply pass it to your family or friend.

The market value of the property can also be used to calculate the original cost of the property. This is usually the case if the property was acquired before March 31st, 1982.

You can deduct the cost of improvements made on the property during the period of ownership before calculating the CGT. This cost may include building extensions, advice received, and other taxes incurred.

The total gains are calculated once the deductions are made. As a vendor, you must apply the tax relief and all allowances before calculating the CGT liability. 

When the total taxable gains and the income are way above the basic rate, the CGT is charged at 28%. Alternatively, it is charged at 18% if it is below the limit. The rate is 28% for personal representatives and trustees.

The cost of conveyancing in the UK

When you look forward to buying property in the UK, you may wonder how much this will cost you. Ideally, how much you spend on conveyancing fees depends on the types of property you’re buying and the disbursements involved.

A conveyancer will help you transfer property ownership from the seller to the buyer. When buying or selling a property, you need a property solicitor or a conveyancer to assist you and save you time. 

Also See: What Does a Conveyancer Do For The Seller?

When buying property, there are some conveyancing fees that you are supposed to meet, such as transfer of documents, registration fees, local authority searches, and many others.

There are different legal elements when buying a property, making the conveyancing process more complicated. 

A conveyancer will take care of legal elements in the buying process to save you time and money. Your conveyancers will advise you accordingly on the steps you should take to lower the cost of conveyancing and speed up the completion.

What does a conveyancer do?

What is involved in conveyancing is the transfer of legal ownership of property from one party to another. A conveyancer is a professional who plays this role in the conveyancing process. He handles all the legal transfers on your behalf.

When conveyancing for the first time, there are a lot of things you have to look into before paying your first deposit. For instance, your conveyancer or property solicitor will request for local authority search on the property to ensure there are no underlying issues that need to be sorted out before buying the property.

Also See: How Long Does Conveyancing Take With No Chain?

With a proper local authority search, you can flag off things like whether there is a way through the property and whether there are any enforcement notices and orders. If you are buying property close to a coal mining location, you need to do an environmental search on the property before you exchange any contracts with the property seller.

The property search results are useful because they make you consider whether you want to proceed with buying the property or you would like to negotiate with the seller on new terms. You can also ask your property solicitor to add some elements to the exchange contract depending on the issues that arose during the local authority search.

A conveyancer or property solicitor will complete the seller’s property information forms and the Fittings and Contents Form. If the conveyancer has any issues they feel should be addressed in the conveyancing process, they can make such queries on your behalf.

There are a lot of duties a conveyancer takes as soon as you instruct them. The conveyancer will take up all the details of the property chain, draft the contract, liaise with the mortgage lender, and ensure all the funds are in place and all documents are duly signed.

Which are the most common conveyancing costs?

The fees you pay for conveyancing when buying or selling the property fall into two main categories. The first category is the basic conveyancing fees the property solicitor charges for actual work. The amount you pay as a basic fee depends on many factors, such as the law firm’s location and the nature of the truncation.

Also See: No Sale No Fee Conveyancing Solicitors

The second category of payment is disbursements. These will cover all the payments the conveyancer must make to third parties on behalf of the buyer or seller. Some of the disbursements that can be involved when buying property include things like:

  • Land registration fees
  • Local authority searches; this will be checking on things like planning applications, restrictions, and others
  • Title Deeds copies
  • Bankruptcy search
  • Drainage search
  • Stamp Duty Land Tax (SDLT)
  • Transfer fees

How much will it cost me when conveyancing?

As discussed earlier, many factors are likely to determine how much you spend when conveyancing, for instance, the location of the law firms, the type of property you are buying, and the nature of the transaction.

The overall cost of conveyancing depends on the deal and whether you are selling or buying or doing both at a go. Generally, few legal elements are involved when selling property instead of buying.

The different disbursements in the conveyancing process will usually come with a wide range of fees you are supposed to meet. For instance, the SDLT tax will vary depending on how much you pay for the house; the other elements may also cost you more.

Your property solicitor must update you on all the disbursements as soon as they arise. Also, when getting a quote from your conveyancer, you should beware of everything included in the quote. Also, you should know when you will be required to pay to avoid delays that will cost you a lot.

Also See: Can I Buy A House Without A Deposit in the UK?

You should work with a property solicitor or conveyancer with vast experience in the type of property you buy and its location. This way, you will save time and money. Remember, the longer it takes to convey, the more money you are likely to spend in the entire process.

Final thoughts 

The conveyancing process is a bit lengthy and tedious. There is a lot of legal work that is involved in the process. Whether you are buying or selling property in the UK, it is, therefore, vital that you consult your property solicitor in advance about all the disbursements involved. You should also ask the conveyancer if there are any tax deductions and tax relief you are likely to enjoy when buying a first or second property.

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