Thinking of setting up a commercial property business?
Here are the tax implications of setting up a commercial property business.
Tax on commercial property business covers anything that HMRC doesn’t class as a ‘dwelling’ – ie a place where people live which is self-contained (so it doesn’t include hostels, hotels etc).
It can include anything from a piece of farmland to a factory, but as well as offices and shops.
Just as with residential property investing, holding commercial property for long-term gain is viewed by HMRC as an investment activity, not a trade. This means that, for individuals, any profit made when you sell the property is taxed as capital gains (CGT), not income. This can be an advantage:
- Individuals benefit from an Annual Exemption (currently £12,000). This can knock £2,400 off the CGT bill.
- The maximum rate of CGT payable on commercial property disposal is 20%. Compare this with the top rate of CGT ion a residential property which is 28%, and the top rate of income tax which is 45%.
What about income or expenses?
Income from the letting of the property – rents and lease premiums – are taxed as income, just as for residential property, so individuals will pay income tax on the profits.
The rules for claiming expenses for a commercial property business are broadly the same as for a residential property. There are a small number of technical differences on things such as capital allowances (tax allowances on equipment etc used in the business) which are more favourable for property businesses.
Here’s a quick summary of the main points to remember
- Expenditure in connection with the property – letting agents, management fees, ground rents and insurance etc – is allowable as an expense; however
- Repairs are deductible from the rent, but improvements only qualify for tax relief when the property is sold
- Expenditure incurred in running the property business will qualify for tax relief (things like marketing costs, motor expenses, office costs)
One of the biggest differences though is claiming tax relief on mortgage and loan interest. There is no restriction on this for commercial property investors.
Similarly, investors buying a commercial property have another advantage – the rates of Stamp Duty Land tax are considerably lower than for residential landlords. Firstly, the charge comes in from £150,000, not £125,000, and the top rate is 5%, not 12% – and there’s no 3% surcharge if you hold more than one property.
Note that the lower SDLT rates apply to mixed-use properties as well as fully-commercial, so a building which has a flat above a shop will qualify.
VAT on your income
One of the main differences between commercial and residential investing is that commercial properties can have VAT on the rental income. His can give an extra headache to the landlord in terms of the paperwork, but it can also be an advantage: running a VAT-registered business means you can claim the VAT back on any expenditure. This can make a significant difference if you’re faced with a large repair bill, for example.
Finally, commercial property can be held in certain types of pension scheme, subject to strict criteria, meaning that any income and capital gains will be tax-free while the property is in the pension fund.
If you are a property investor – commercial or residential – make sure you follow our Property Investing 101 series.