What Are the Tax Benefits of Buying Commercial Property?
As we enter a new era of property investment following the abolition of the Furnished Holiday Lettings (FHL) regime, many landlords are re-evaluating their portfolios. With residential tax rules now equalised, some clients are turning to commercial property in search of better returns—and more favourable tax treatment.
So, is commercial property the smart choice in 2025/26? Let’s explore the key tax benefits for unincorporated landlords, and how these differ from residential investments.
1. Lower Stamp Duty Land Tax (SDLT) on Purchase
When buying a property in England or Northern Ireland, SDLT rates differ significantly depending on whether the property is residential or non-residential.
For commercial property:
- You avoid the 5% SDLT surcharge that applies to second residential properties.
- You benefit from lower standard SDLT rates:
| Chargeable Consideration | SDLT Rate |
|---|---|
| Up to £150,000 | 0% |
| £150,001 – £250,000 | 2% |
| Over £250,000 | 5% |
Example:
If your client purchases a property worth £500,000:
- Residential: The SDLT (including 5% surcharge) = £40,500
- Commercial: The SDLT = £14,500
Tax saving = £26,000
📝 Merranti Tip: This also makes incorporating a commercial property business more tax-efficient, as SDLT charges on transfer are lower than with residential properties.
2. Full Interest Relief on Finance Costs
Under current rules:
- Residential landlords can only claim a 20% basic rate tax credit for mortgage interest.
- Commercial landlords, however, can deduct the full interest cost from their profits—at their marginal tax rate (e.g., 40% or 45%).
Example:
Alex is an additional rate taxpayer (45%) with £6,000 annual mortgage interest:
- On residential property, relief = £1,200 (20%)
- On commercial property, relief = £2,700 (45%)
That’s a £1,500 difference in tax relief—a significant gain for higher-rate taxpayers.
📝 Merranti Tip: For landlords with mixed portfolios, it’s wise to allocate borrowing to commercial property to maximise deductible finance costs.
3. More Lenient Capital Gains Tax (CGT) Deadlines
CGT rules were recently harmonised, so both residential and commercial properties are taxed at:
- 24% on gains above the annual exempt amount (£3,000 for 2025/26)
However, the reporting deadlines differ:
- Residential property: CGT must be reported and paid within 60 days of sale.
- Commercial property: CGT is paid via the self-assessment tax return, due by 31 January following the tax year.
Example:
Bert sells a commercial unit on 31 May 2025 with a £100,000 gain:
- CGT of £23,280 is due by 31 January 2027.
Compare that to Andy, who sells a residential property on the same day—he must pay the same CGT by 30 July 2025.
Merranti Tip: That 18-month delay gives landlords the opportunity to manage cash flow or earn interest before paying the tax.
4. Access to Capital Allowances
This is one of the biggest tax wins for commercial landlords.
While residential landlords can only claim relief for replacement of domestic items, commercial property landlords can access:
- Plant and machinery capital allowances
- Integral features (e.g. air conditioning, electrical systems)
- Structures and buildings allowance (SBA) – up to 3% of qualifying construction costs annually
- Annual Investment Allowance (AIA) – immediate 100% deduction on qualifying capital expenditure (up to £1m per year)
Example:
Your client spends £50,000 fitting out a shop with lighting and heating systems:
- If it’s a commercial let, they can claim 100% AIA relief in Year 1.
- If it’s a residential let, none of that spend qualifies.
📝 Merranti Tip: Don’t underestimate the benefit of upfront deductions—they can significantly reduce taxable profits in the early years of ownership.
5. Mixed-Use Properties and Flexibility
Some properties—like shops with flats above—are classified as mixed-use and benefit from:
- Non-residential SDLT rates (no 5% surcharge)
- Potential interest relief apportionment for the commercial portion
- Access to capital allowances on the non-residential elements
📝 Merranti Tip: Where possible, consider mixed-use property to diversify your tax relief and maintain portfolio flexibility.
Key Considerations Before Investing
Before rushing into a commercial property purchase, remind your client:
Tax benefits are only one part of the decision—the investment must make sense commercially.
Letting demand, maintenance costs, lease terms, and void periods may differ significantly from residential.
Financing may be more expensive or harder to obtain, particularly for start-ups or individual landlords.
Management and regulation can be more complex for commercial units compared to residential lets.
Final Thoughts: Is Commercial Property the Right Move?
There’s no doubt that from a tax standpoint, commercial property offers:
- Lower SDLT
- Full interest deductibility
- Access to capital allowances
- Longer CGT payment windows
Combined, these advantages make commercial property an increasingly attractive investment in the post-FHL landscape—particularly for higher-rate taxpayers and landlords with borrowing.
If your client is considering a commercial investment and needs tailored advice, get in touch with our property tax specialists at Merranti Accounting. We can help assess the numbers, navigate the rules, and ensure the tax advantages are fully realised.
