Tax Breaks for Landlords Investing in Commercial Properties

Sarah Bradford highlights tax breaks available to landlords investing in commercial properties. 

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Would-be landlords have a number of decisions to make. Not only do they need to decide whether to operate as an unincorporated property business or a property company, but they also need to decide whether to invest in residential or commercial property.  

When it comes to the tax considerations, not all property is equal. This article looks at ‘pros’ and ‘cons’ of residential and commercial lettings. 

However, before doing so, there are some points to note. Firstly, the tax implications will also depend on whether the landlord is a sole trader or whether the business is operated through a company. Secondly, for 2025/26 and later tax years, furnished holiday lettings (FHLs) are treated in the same way for tax purposes as other residential lettings. The beneficial regime that previously applied to FHLs came to an end on 5 April 2025 and is not considered here. 

Relief for interest and finance costs 

The way in which relief is given for interest and finance costs depends on whether the landlord is operating as a sole trader or a company, and also on the type of property. 

Unincorporated landlords are not able to deduct interest and finance costs relating to residential properties in calculating their taxable profits. Instead, relief is given as a tax reduction equal to 20% of the lower of: 

• interest and finance costs; 

• property business profits; and 

• landlord’s adjusted net income. 

The tax reduction cannot create a tax repayment and if the landlord is unable to relieve the interest and finance costs in full in the year in which they are incurred, the unused amount is carried forward for relief in future tax years.  

This way of giving relief for interest and finance costs incurred by unincorporated landlords applies equally to FHLs from 6 April 2025 onwards. Previously, unincorporated landlords were able to deduct interest and finance costs in relation to FHLs in calculating their taxable rental profits. However, FHLs now are no different from other residential lets from a tax perspective. 

By contrast, an unincorporated landlord can deduct interest and finance costs in full in calculating their taxable profit where these relate to a commercial property. This means that where the landlord pays tax at the higher or additional rate, they will receive tax relief at that rate for interest and finance costs incurred in respect of commercial lettings, whereas relief for interest and finance costs in relation to residential lets is capped at 20%.  

A further benefit of commercial lets is that the associated interest and finance costs can be deducted in full in the year in which they are incurred, even if this creates a loss. The loss can be carried forward and set against future profits of the same property rental business. 

Where a landlord’s unincorporated property business comprises both residential and commercial lets or mixed-use properties, it is important to identify the type of letting to which the interest and finance costs relate so relief can be given in the correct manner.  

The interest rate restriction for residential lettings only applies to unincorporated businesses. Where the property rental business is operated through a company, relief for interest and finance costs in respect of both residential and commercial lettings is given by way of deduction, securing relief at the rate at which the company pays corporation tax, which depending on the level of its profits is between 19% and 25%. 

Capital gains 

For unincorporated landlords from 30 October 2024 onwards, capital gains arising on the disposal of residential and commercial properties are now taxed at the same rate – 18% where income and gains fall within the basic rate band and 24% once the basic rate band has been used up. However, residential property gains must be reported to HMRC within 60 days of the date of the disposal and the associated capital gains tax (CGT) paid within the same time frame.  

By contrast, the CGT payable on a chargeable gain on a commercial property does not need to be paid until 31 January after the end of the tax year in which the disposal occurred. This provides the landlord with a cashflow benefit and the opportunity to invest the funds which will be used to pay the tax in the interim. 

For 2024/25 and earlier tax years, landlords disposing of FHLs were able to benefit from a range of CGT relief. However, following the end of the FHL regime, these are no longer available (other than under transitional provisions where the FHL business ceased prior to 6 April 2025). 

Where the business is operated through a company, gains arising on disposal of residential and commercial properties are charged to corporation tax and payable on the normal due date of nine months and one day after the end of the tax year. 

SDLT rates 

Stamp duty land tax (SDLT) is payable on the purchase of a property in England and Northern Ireland (NB land and building transaction tax applies in Scotland, and land transaction tax applies in Wales, but this article focuses on SDLT rates). The rates depend on whether the property is residential or non-residential. The non-residential rates also apply to mixed-use properties.  

Where the purchaser is an individual, a supplement of 5% applies to second and subsequent residential properties unless the purchaser is exchanging their main residence.  

The rates applying from 1 April 2025 onwards are shown in the tables below. 

Residential rates 

Non-residential rates  

On a £500,000 property, if an individual already has a residential property, the SDLT hit will be £40,500. By contrast, SDLT of £14,500 is payable on the purchase of a commercial property for £500,000. Consequently, there is an SDLT saving of £26,000 from opting for a commercial property. 

Where the business is run through a company, the residential property supplement does not apply. However, as the non-residential rates are lower, there are still savings to be had from opting for a commercial property. 

Annual tax on enveloped dwellings 

It can be expensive for companies to own residential properties if they are not excluded from the scope of the annual tax on enveloped dwellings (ATED).  

The ATED charge does not apply if the property is let to a third party on a commercial basis, is being developed by a property developer or is held as stock for the sole purpose of resale. If the property is worth £500,000 or more and is not excluded, the ATED will apply. For 2025/26, the charge ranges from £4,450 on properties valued at between £500,000 and £1m to £292,350 on properties valued at £20m and above. 

The charge does not apply to commercial properties or to residential properties owned by an individual. 

Capital allowances 

Plant and machinery capital allowances are not available in respect of residential lettings, irrespective of whether the landlord is an individual or a company. However, where the property is a commercial property, plant and machinery capital allowances are available. Landlords can secure full relief in the year of purchase by claiming annual investment allowance where the £1m annual limit has not been used up.  

Corporate landlords can benefit from full expensing on new and unused assets that would otherwise qualify for main rate writing down allowances without limit – useful if the AIA limit has been reached. Commercial properties can also benefit from capital allowances on integral features and from structures and buildings allowances.  

Practical tip  

Unincorporated landlords could consider investing in commercial property rather than residential property to take advantage of the tax break on offer.