Commercial Mortgage Tax Relief and Allowances
Understanding the **tax implications** of commercial property ownership is essential for maximising returns and structuring your finance efficiently. Unlike residential property, where recent tax changes have restricted mortgage interest relief, commercial property retains significant tax advantages that make it an attractive asset class.
This guide from **Commercial Mortgages Broker** covers the key tax reliefs and allowances available to commercial property owners in the UK. Always consult a qualified tax adviser for guidance specific to your circumstances.
Mortgage Interest Tax Relief
The most significant ongoing tax benefit for commercial property owners is the ability to deduct **mortgage interest** from rental income before calculating tax.
How Interest Deductibility Works
**For commercial property**, mortgage interest remains fully deductible against rental income, regardless of whether you own the property personally or through a company. This is a crucial distinction from residential buy-to-let, where Section 24 of the Finance Act 2015 replaced full interest deduction with a basic rate tax credit.
Example: Interest Deduction Impact
| Without Mortgage | With £500k Mortgage at 5% | |
|---|---|---|
| Annual rent received | £80,000 | £80,000 |
| Mortgage interest | £0 | -£25,000 |
| Taxable rental profit | £80,000 | £55,000 |
| Tax at 40% (higher rate) | £32,000 | £22,000 |
| Tax saving from interest | - | £10,000 |
The mortgage interest of £25,000 reduces the taxable profit by the same amount, saving £10,000 in tax for a higher-rate taxpayer.
Interest-Only vs Repayment
On an **interest-only** [commercial mortgage](/services/commercial-mortgages), 100% of each monthly payment is deductible. On a **repayment mortgage**, only the interest element is deductible, not the capital repayment portion. This is one of the key reasons [interest-only structures](/knowledge-hub/interest-only-commercial-mortgages) are popular for commercial property.
Arrangement Fees and Finance Costs
Other finance-related costs that are typically deductible include:
- Mortgage arrangement fees (usually spread over the term of the loan)
- Broker fees
- Valuation fees incurred as part of the lending process
- Legal fees relating to the mortgage (not the property purchase)
**Key Takeaway:** Commercial property mortgage interest is fully tax-deductible, unlike residential buy-to-let. This makes commercial property one of the most tax-efficient leveraged investments available in the UK.
Capital Allowances
**Capital allowances** enable commercial property owners to claim tax relief on qualifying expenditure within the building. This is one of the most valuable but often overlooked tax benefits of commercial property ownership.
What Qualifies for Capital Allowances?
Capital allowances are available on certain items that are integral to or within the building, but not the building structure itself:
**Plant and machinery (general pool - 18% writing down allowance):**
- Heating and ventilation systems (non-integral)
- Kitchen and catering equipment
- Furniture and fixtures
- Fire alarm and security systems
- Lifts and escalators
- Carpets and flooring (non-permanent)
**Integral features (special rate pool - 6% writing down allowance):**
- Electrical systems (including lighting)
- Cold water systems
- Heating, air conditioning and ventilation systems
- Lifts, escalators and moving walkways
- External solar shading
Annual Investment Allowance (AIA)
The **Annual Investment Allowance** provides 100% first-year relief on qualifying expenditure up to £1 million per year. This means the full cost of qualifying items can be deducted from taxable profits in the year of purchase.
For a commercial property purchase, a capital allowances survey may identify £50,000 to £500,000+ of qualifying expenditure within the purchase price, potentially generating significant tax savings in year one.
Structures and Buildings Allowance (SBA)
Introduced in 2018, the **Structures and Buildings Allowance** provides relief on the construction or renovation cost of commercial buildings at a rate of 3% per year on a straight-line basis.
- Available on new construction and renovation costs incurred after 29 October 2018
- Applies to the structural cost of the building (walls, floors, roofs, etc.)
- 3% per year means full relief over approximately 33.3 years
- Available to both owners and tenants who bear the construction cost
Capital Allowances on Purchase
When purchasing an existing commercial property, the buyer may be entitled to claim capital allowances on qualifying items included in the purchase price. This requires:
- A capital allowances survey by a specialist surveyor
- Agreement between buyer and seller on the allocation of the purchase price (via a Section 198 election)
- The seller must not have already claimed the allowances
**Key Takeaway:** A capital allowances survey should be considered for every commercial property purchase. The tax savings can be substantial and often cover the survey cost many times over.
Stamp Duty Land Tax (SDLT)
SDLT is payable on commercial property purchases in England and Northern Ireland (Scotland and Wales have their own equivalents: LBTT and LTT respectively).
Current SDLT Rates for Commercial Property
| Purchase Price Band | SDLT Rate |
|---|---|
| Up to £150,000 | 0% |
| £150,001 to £250,000 | 2% |
| Over £250,000 | 5% |
SDLT Calculation Example
For a commercial property purchased at £500,000:
- £0 - £150,000: 0% = £0
- £150,001 - £250,000: 2% = £2,000
- £250,001 - £500,000: 5% = £12,500
- Total SDLT: £14,500
Key SDLT Considerations
**No residential surcharge**: Unlike residential property, commercial purchases are not subject to the 3% additional rate surcharge, even when purchased by a company or an individual who owns other properties.
**Mixed-use properties**: Properties that combine commercial and residential elements (such as a shop with a flat above) are assessed at commercial SDLT rates, which are typically lower than residential rates for higher-value purchases.
**Multiple Dwellings Relief**: This has been abolished from June 2024, but commercial SDLT rates may still apply where there is a commercial element to a transaction.
**Transfer of going concern**: In certain circumstances, the transfer of a property as part of a going concern may not attract SDLT, though specialist advice is essential.
VAT on Commercial Property
**Value Added Tax** on commercial property is complex and can have a significant financial impact. Getting VAT wrong can be extremely costly.
When Is VAT Charged?
The sale or lease of commercial property is generally **exempt** from VAT. However, the seller or landlord may have "opted to tax" the property, which means VAT at 20% is charged on the sale price or rent.
Option to Tax
The **option to tax** is a decision by the property owner to charge VAT on the sale or letting of a commercial property. Reasons for opting to tax include:
- Input VAT recovery: Allows the owner to reclaim VAT on construction, renovation and professional costs
- Mandatory for new buildings: The first sale of a new commercial building (less than 3 years old) is always subject to VAT
Impact on Buyers
If VAT is charged on a purchase:
- VAT-registered buyers: Can reclaim the VAT as input tax (no net cost)
- Non-VAT-registered buyers: Must pay the 20% VAT as an additional cost, which cannot be reclaimed
For a £500,000 purchase with VAT, the total cost becomes £600,000. A non-VAT-registered buyer cannot recover the £100,000 VAT.
Transfer of Going Concern (TOGC)
If a commercial property is sold as a **Transfer of a Going Concern** (for example, a let property sold to a buyer who will continue letting it), the transaction may be outside the scope of VAT entirely. This avoids the need for the buyer to fund VAT on completion, even where the option to tax applies.
**Key Takeaway:** Always establish the VAT position of a commercial property before committing to purchase. Unexpected VAT can add 20% to the total cost and fundamentally change the viability of the investment.
Revenue vs Capital Expenditure
Understanding the distinction between **revenue** and **capital** expenditure affects when and how you can claim tax relief.
Revenue Expenditure (Immediately Deductible)
- Repairs and maintenance (restoring the property to its original condition)
- Insurance premiums
- Management fees
- Professional fees for routine matters
- Utility costs (if borne by the landlord)
Capital Expenditure (Not Immediately Deductible)
- Improvements and upgrades (enhancing beyond original condition)
- Extensions and alterations
- New fixtures and fittings
- Professional fees relating to capital works
Capital expenditure may qualify for capital allowances or be added to the base cost for CGT purposes, but it cannot be deducted from rental income in the year incurred.
Tax Planning Strategies
Structure Selection
Choosing between personal ownership and [company ownership](/knowledge-hub/spv-limited-company-commercial-mortgages) has significant tax implications. Key considerations include:
- Your current and expected marginal tax rate
- Whether you plan to reinvest profits or extract them
- Your long-term intentions for the property
- Estate planning objectives
Pension Purchase
Commercial property can be purchased through a **SSAS** (Small Self-Administered Scheme) or **SIPP** (Self-Invested Personal Pension). Benefits include:
- No CGT on disposal within the pension
- No Income Tax on rental income within the pension
- Pension contributions qualify for tax relief
- The property is protected from creditors
However, the property must be used for genuine commercial purposes (not residential), and the pension fund must be able to demonstrate the purchase is at arm's length.
Timing of Purchases and Disposals
Strategic timing can optimise your tax position:
- Year-end planning: Making capital expenditure before your year-end maximises first-year reliefs
- CGT annual exemption: Timing disposals to use the annual CGT exemption
- Multiple disposals: Spreading sales across tax years to manage CGT liability
How CMB Can Help
While we are mortgage brokers rather than tax advisers, our team understands how the tax position interacts with commercial property finance. We can ensure your mortgage structure complements your tax planning and refer you to specialist tax advisers within our professional network.
[Contact us](/contact) to discuss your commercial property finance requirements.
Frequently Asked Questions
Below are the most common questions we receive about commercial mortgage tax relief and allowances.
*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*