A significant number of law firms have become dependent on interest earned on client money. If the government takes that income away, some practices will face a genuine threat to their survival. Others will remain perfectly viable but lose a very useful addition to partner profits.
The distinction matters. When valuing a law firm, it is important to separate sustainable trading profit from income that depends on interest rates, the amount of money held in client account and government policy.
The latest NatWest Legal Benchmarking Report, reported in the Law Society Gazette, provides a useful warning. Of the 112 firms taking part, half said that interest profits accounted for between 5% and 28% of profit per equity partner during 2025-26. The survey also found that median profit per equity partner increased by just 2% in 2026, compared with 23% in 2025.
Interest income is becoming less valuable as base rates fall and firms pass more interest to clients. However, it remains a substantial part of the financial model for many practices.
What Jonathan Fagan Business Brokers Sees in Law Firm Valuations
Ten-Percent Legal Recruitment is part of the Ten-Percent Group, which also includes specialist law firm sales and valuation service Jonathan Fagan Business Brokers. Its experience of carrying out law firm valuations supports the concern raised by the survey.
Over the last four years, Jonathan Fagan Business Brokers has examined a significant number of property law firms whose apparent profitability has depended heavily on interest from client account balances. In some cases, the interest has made the difference between a healthy-looking profit and a business that is close to break-even. In others, removing it would reveal a loss-making underlying practice.
This is particularly relevant to conveyancing firms. They may hold substantial sums of client money, even if each transaction is completed relatively quickly. When interest rates increased after years at exceptionally low levels, the total return across a busy conveyancing department became considerable.
There is nothing improper about a law firm receiving interest, provided it complies with the SRA Accounts Rules and pays clients a fair sum where required. The valuation issue is whether that interest should be treated as part of the firm’s maintainable profit.
Interest Has Not Always Been Keeping Firms Alive
It would be wrong to suggest that every firm receiving substantial interest income is dependent on it.
The firm’s valuation work has also included profitable practices where client account interest has simply provided an excellent additional return. Some owners have used the extra income to make substantial pension contributions before retirement. Others have used it to counterbalance professional indemnity insurance premiums, which rose sharply in the years following lockdown and have more recently started to ease.
For these firms, losing the interest would be unwelcome, but it would not threaten the business. The partners would lose a valuable benefit rather than their practice.
The key question is therefore not how much interest a firm receives. It is what the firm’s accounts would look like without it.
How Client Account Interest Affects a Law Firm Valuation
A buyer will usually want to understand the practice’s core profitability before relying on client account interest. Interest rates can change, transaction volumes can fall and the rules governing the income can be altered.
Where a firm is preparing for sale, Jonathan Fagan Business Brokers recommends calculating:
- the operating profit before client account interest;
- the proportion of partner drawings or pension contributions funded by interest;
- the effect of a partial or complete loss of the income;
- whether current fees cover the true cost of the work; and
- whether staffing and overheads remain sustainable without interest.
A firm with strong underlying fee income and sensible margins should still attract buyers. A practice whose profit disappears when interest is removed is likely to face tougher due diligence, a reduced valuation and a smaller pool of potential purchasers.
This does not necessarily make the firm unsaleable. It does mean that the owners need to address the issue early rather than allowing a buyer to discover it halfway through negotiations.
Will Conveyancing Fees Increase?
The government may find that removing client account interest has an unintended consequence: higher prices for consumers.
Nearly one in three respondents to the NatWest survey believed that an interest on lawyers’ client accounts scheme would increase the cost of legal services. That is entirely plausible.
Conveyancing has been subject to intense price competition for many years. Some firms have been able to keep fees lower because interest income supported their overall margin. If that income disappears, they will have to increase prices, reduce costs or stop undertaking work that is no longer commercially viable.
The effect may be particularly noticeable among smaller and regional conveyancing practices. These firms cannot always spread compliance, staffing and technology costs across several departments. A loss of interest income could therefore feed directly into higher conveyancing charges.
A Genuine Risk for Some and a Lost Perk for Others
Will law firms fail if client account interest is removed? Yes, some probably will. Property practices that have relied on the income to cover weak trading margins are the most exposed.
However, many other firms will not fail. Their owners will simply lose a particularly good source of additional profit that has funded higher drawings, pension contributions or expensive PII premiums.
For law firm owners considering a sale, merger or retirement, the safest approach is to understand the position now. A valuation based on core trading performance provides a much clearer picture than one supported by income that may be reduced by falling rates or removed through government intervention.
Ten-Percent Legal Recruitment has worked with law firms across the UK since 2000. Through the wider Ten-Percent Group, firm owners can also access specialist sale, merger and valuation advice from Jonathan Fagan Business Brokers.
Jonathan Fagan Business Brokers provides independent law firm valuations, supports owners considering a sale or merger, and maintains an updated list of law firms for sale. For a confidential discussion about the value and saleability of your practice, please contact Jonathan Fagan Business Brokers.
