Tax Breaks for Landlords Investing in Commercial Properties
Investing in property continues to be an attractive option for landlords seeking steady income and capital growth. However, when it comes to tax, not all properties are created equal. If you’re considering adding to your portfolio or starting out as a landlord, understanding the tax advantages of commercial properties compared to residential lets can help you make smarter investment decisions.
Residential vs Commercial Property: Key Tax Differences
Whether you operate as an individual (sole trader) or through a company significantly affects your tax position. It’s also important to note that from the 2025/26 tax year onwards, furnished holiday lettings (FHLs) are taxed like other residential lettings, the once-beneficial regime for FHLs ended in April 2025.
Interest and Finance Cost Relief
For unincorporated landlords (sole traders):
Residential properties: You cannot deduct mortgage interest and related finance costs directly from rental profits. Instead, relief is given as a 20% tax credit on the lower of your interest paid, property profits, or adjusted net income. Any unused relief can be carried forward but cannot generate a tax repayment.
Commercial properties: You can deduct all interest and finance costs in full when calculating taxable profits, even if this creates a loss. Losses can be carried forward against future profits. That means if you pay higher-rate tax, relief is available at that higher rate for commercial property interest — a key advantage.
If your property business includes both commercial and residential lets, it’s crucial to separate out interest costs correctly for tax purposes.
For companies operating property businesses, both residential and commercial interest costs are deductible in full at the corporation tax rate (between 19% and 25% depending on profits), so no restriction applies.
Capital Gains Tax (CGT) Treatment
From October 30, 2024:
Gains on residential and commercial properties held by unincorporated landlords are taxed at the same rates: 18% (basic rate) and 24% (higher/additional rate).
The timing for paying CGT differs: residential property gains must be reported and paid within 60 days of disposal, while commercial property gains have until 31 January following the tax year end to pay, offering a cashflow advantage.
Companies pay corporation tax on gains from disposals of either property type, due nine months and one day after the year-end.
Stamp Duty Land Tax (SDLT) Savings
SDLT rates differ significantly between residential and commercial properties , The SDLT amount payable on a £500,000 purchase is:
Residential equates to £40,500
Commercial is only £14,500
Opting for commercial property can save a typical individual purchaser approximately £26,000 in SDLT on a £500,000 property.
For companies, there is no additional 5% surcharge on residential properties, but SDLT on commercial properties remains cheaper, making commercial investment tax-efficient.
Additional Taxes and Allowances
Annual Tax on Enveloped Dwellings (ATED): Companies owning residential properties valued above £500,000 may face this costly annual charge unless the property is let on a commercial basis or exempt for development/stock purposes. ATED does not apply to commercial properties or residential properties owned by individuals.
Capital Allowances: Unlike residential properties, commercial landlords can claim capital allowances on plant, machinery, integral features, and structures. This means you can often claim full relief for qualifying expenditure in the year of purchase (subject to a £1 million annual investment allowance), reducing tax bills.
Practical Takeaway
For unincorporated landlords, investing in commercial property can provide substantial tax advantages, including:
Full deduction of finance costs at your marginal tax rate
Later CGT payment deadlines preserving cashflow
Lower SDLT on purchase
Access to capital allowances not available on residential lets
Avoiding ATED charges applicable to many corporate residential landlords
If you’re weighing whether to start or grow your property portfolio in 2025/26, carefully consider commercial property investment as a tax-smart strategy. If you want help, then book a meeting here.
