Introduction

Following the end of the furnished holiday lettings (FHL) regime, income and expenses from all lets are aggregated to determine the overall profit or loss for a property rental business (subject to the profit for UK and non-UK lets being determined separately). Further, all residential lets are now equal from a tax perspective; the former benefits of FHLs are no longer available. However, commercial properties can offer some tax advantages to investors depending on whether the landlord is an individual or a company. We will take a look at the different taxes you need to consider for your property venture, and highlight the advantages available in respect of commercial lets. We will assume you will be an unincorporated business.

Land taxes

Stamp duty land tax (SDLT) is payable on the purchase of land in England and Northern Ireland. Land and buildings transaction tax applies in Scotland and land transaction tax applies in Wales. We will assume it’s SDLT for your client. For SDLT purposes, different rates apply to residential and non-residential properties. For mixed-use properties, such as a shop with a flat above it, SDLT is payable at the non-residential rates. A supplement, now set at 5%, applies on top of the residential rates where the purchaser will own more than one residential property after the purchase completes (excluding the exchange of a main residence).

Note. The supplement doesn’t apply to the non-residential rates, so there is an immediate tax break on purchase.

The non-residential rates are as follows:

 

Chargeable consideration	SDLT rate
Up to £150,000	Zero
The next £100,000 (£150,001 to £250,000)	2%
The remaining portion (above £250,000)	5%

 

Example. Suppose an investor is considering an investment property purchase for £500K. The 5% supplement applies to any residential purchase. If the investor opts for a residential property, the SDLT bill will be £40.5k. By contrast, if they chose a non-residential property, the SDLT bill is only £14.5k - a saving of £26k.

Remember that SDLT costs will also be relevant if you wish to incorporate a property business and transfer existing rental properties to the new company. The associated cost will be less for non-residential properties than for residential properties, which may make incorporation more viable for landlords letting commercial or mixed-use properties.

Interest relief

For unincorporated landlords, the way in which relief is given for interest and finance costs depends on whether or not the property is residential. For residential properties (which following the end of the special tax regime for FHLs now includes holiday lets), relief is given as a tax reduction equal to 20% of the lower of the:

• interest and finance costs
• property business profits
• landlord’s adjusted net income.

Where it is not possible to relieve the costs in full (as would be the case if the property business made a loss), the unrelieved costs are carried forward for relief in future years.

For mixed properties, an unincorporated landlord will need to apportion the interest and finance costs to the different parts of the property on a just and reasonable basis (such as relative value or floor space). Relief for the interest and finance costs relating to the residential part are given as a basic rate tax deduction, whereas those apportioned to the non-residential part can be deducted in working out the profit or loss for the unincorporated property business.

In contrast, for a commercial property, the interest and finance costs can be deducted in full in calculating the profit or loss for the property rental business. The deduction is not capped, even if this results in a loss. This means that relief is given at the landlord’s marginal rate of tax. A landlord will only receive relief for interest and finance costs incurred in relation to a residential let at 20%. However, where they are a higher or additional rate taxpayer, relief for interest and finance costs incurred in relation to a commercial property will be given at 40% or 45%, as applicable.

Note. Where an unincorporated landlord has a mixed portfolio, where possible, it will be beneficial for borrowings to be on commercial rather than residential properties, particularly where the landlord pays tax at the higher or additional rate, to maximise relief for the associated interest and finance costs.

Example. Alex pays tax at the additional rate of 45%. He wishes to invest in a property, and will be part financing the property with a mortgage of £200,000 on which interest is payable at the rate of 6% per annum, an annual interest cost of £6,000.If Alex invests in a residential property, he will receive relief for that interest in the form of a tax reduction of £1,200 (£6,000 @ 20%). However, if he invests in a commercial property, he will be able to deduct the interest of £6,000 in calculating his rental profit, receiving relief at his marginal rate of 45%. This is worth £2,700 to him.

Capital gains tax (CGT)

A landlord running an unincorporated property business will pay CGT on any gains arising on the disposal of an investment property. From 30 October 2024 onwards the CGT rates have been harmonised and the bill be the same regardless of whether the property is a residential or a commercial property; previously there was a saving for commercial property gains. However, residential property gains must be reported to HMRC within 60 days of completion and the tax on the gain paid within the same window. By contrast, a gain on the disposal of a commercial property is reported on the tax return due by 31 January after the end of the tax year. The CGT is payable by the same date.

The longer payment window for commercial property gains provides the landlord with a cash-flow advantage and the opportunity to earn interest, or other returns, on the money in the interim.

Example. Andy sells a residential property on 31 May 2025, realising a gain of £100,000. The gain must be reported by 30 July 2025 and the tax of £23,240 (24% (£100,000 - £3,000) paid by the same date. Bert realised a gain of £100,000 on the disposal of a commercial property on the same date. The tax is the same at £23,280, but it does not need to be paid until 31 January 2027, some 18 months later than for a residential property gain.

Capital allowances

Landlords letting residential property cannot claim plant and machinery capital allowances. Instead they are able to claim a deduction for the cost (on a like-for-like basis) of replacing domestic items. By contrast, landlords letting commercial property are able to claim plant and machinery capital allowances, and also those for integral features (such as electrical and cold water systems and air conditioning). They are also able to benefit from the structures and buildings allowance. This is very valuable.

Where the annual investment allowance is available, a landlord letting a commercial property will be able to claim 100% relief for qualifying expenditure on plant and machinery, giving immediate relief for the expenditure. This is not available where the expenditure relates to a residential let.