What is the difference between commercial and residential property tax?

Understand the key differences between commercial and residential property tax in the UK. Learn how each type is taxed, what reliefs apply, and how ownership affects your liabilities.

Commercial and residential properties are taxed very differently in the UK. Whether you are buying, selling, or renting property, the tax rules depend on how the property is classified and what it is used for. Understanding these differences is essential for investors, landlords, and developers to plan effectively and avoid unexpected tax costs.

This article explains how commercial and residential properties are treated for Stamp Duty, Capital Gains Tax, Income Tax, VAT, and Business Rates, and how ownership structure can influence the total tax you pay.

Defining commercial and residential property

Before exploring the tax differences, it is important to understand how HMRC distinguishes between the two.

  • Residential property includes houses, flats, and any buildings suitable for use as a dwelling, as well as associated land such as gardens or driveways.

  • Commercial property includes offices, shops, factories, warehouses, pubs, and land that is not suitable for residential use. It also covers mixed-use buildings, such as a shop with flats above, where part of the property has a commercial element.

The classification affects how tax is calculated at every stage of ownership.

Stamp Duty Land Tax (SDLT) differences

Stamp Duty Land Tax applies when you buy property or land in England and Northern Ireland. Scotland and Wales have their own versions (Land and Buildings Transaction Tax and Land Transaction Tax).

Residential property:

  • SDLT rates are higher than for commercial property.

  • There is a 3% surcharge for additional properties, such as second homes or buy-to-let investments.

  • For individual buyers, SDLT is based on price bands ranging from 0% to 12%.

Commercial property:

  • SDLT rates are lower, with bands ranging from 0% to 5%.

  • There is no 3% surcharge on commercial or mixed-use properties.

  • SDLT is charged on the purchase price or the lease premium and annual rent for leasehold properties.

For example, buying a £500,000 residential property as a second home attracts much higher SDLT than buying a £500,000 office building.

Income Tax and Corporation Tax on rental income

If you rent out property, the way your income is taxed depends on whether it is residential or commercial and whether you own it personally or through a company.

Residential property income:

  • Individuals pay Income Tax on rental profits at 20%, 40%, or 45%, depending on their tax band.

  • Mortgage interest relief is restricted for individuals, replaced by a 20% basic rate tax credit.

  • Companies pay Corporation Tax on profits at 19% or 25%, depending on their size.

  • Certain expenses, such as repairs and management costs, are deductible, but improvements must be capitalised.

Commercial property income:

  • Rental income is treated as trading or investment income, depending on the business structure.

  • Companies can deduct full mortgage interest as a business expense.

  • Lease premiums and rent received are taxable as income.

  • If you operate as an individual, the income is declared under property income on your Self Assessment return.

Commercial landlords often find tax planning simpler through limited company ownership, as they can claim wider expense deductions and recover VAT in some cases.

Capital Gains Tax (CGT) when selling property

When you sell property for more than you paid, you may have to pay Capital Gains Tax. The rate and available reliefs depend on the property type.

Residential property:

  • Individuals pay CGT at 18% (basic rate) or 24% (higher rate) on the taxable gain.

  • Each person has an annual CGT allowance of £3,000 (2024/25).

  • You can deduct allowable costs such as legal fees, stamp duty, and capital improvements.

  • If the property was your main home, you may qualify for Private Residence Relief, which can exempt most or all of the gain.

Commercial property:

  • Individuals pay CGT at 10% (basic rate) or 20% (higher rate).

  • Companies pay Corporation Tax on gains at 19% or 25%.

  • Certain reliefs such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) may apply if the property is part of a trading business.

Because the CGT rates for commercial property are lower, selling a commercial building often results in a smaller tax bill than selling a residential investment property of the same value.

VAT treatment

VAT can be a key difference between commercial and residential property transactions.

Residential property:

  • Most residential property transactions are exempt from VAT.

  • Developers selling new-build homes can usually zero-rate the sale, allowing them to reclaim VAT on construction costs.

  • Landlords renting residential property cannot charge VAT on rent or reclaim VAT on expenses.

Commercial property:

  • The sale or lease of commercial property is generally exempt from VAT unless the owner chooses to opt to tax.

  • Once opted, VAT (usually at 20%) must be charged on rent or sale, but the owner can reclaim VAT on associated costs.

  • Newly built commercial properties are automatically standard-rated for VAT when first sold or let.

VAT planning is particularly important for developers and investors managing mixed-use properties or high-value transactions.

Business Rates versus Council Tax

Properties used for business purposes are subject to Business Rates, while residential properties are subject to Council Tax.

Business Rates:

  • Apply to offices, shops, warehouses, and other commercial premises.

  • Calculated based on the property’s rateable value and the multiplier set by the local authority.

  • Some small businesses qualify for Small Business Rate Relief.

Council Tax:

  • Applies to residential properties, including buy-to-lets and second homes.

  • Based on property value bands set by the local council.

  • Usually paid by the tenant, although landlords must pay when a property is empty.

Inheritance Tax (IHT) differences

Both commercial and residential properties form part of your estate for Inheritance Tax purposes, but commercial property used in a trading business can qualify for Business Property Relief (BPR), reducing or eliminating the tax liability.

Residential properties held purely for investment do not qualify for this relief, meaning the full market value is usually subject to IHT at 40% above the nil-rate band.

Ownership structure and tax efficiency

How you own property has a major impact on the total tax you pay.

  • Individuals may face higher Income Tax and CGT rates but benefit from personal allowances and reliefs.

  • Companies can access lower Corporation Tax rates and reclaim VAT but must pay further tax when profits are withdrawn as dividends.

  • Partnerships and LLPs offer flexibility for joint ownership and profit sharing but still follow the same underlying property tax rules.

Choosing the right ownership structure depends on your income level, long-term goals, and whether you plan to hold or trade property.

Mixed-use properties

Mixed-use properties contain both residential and commercial elements. Examples include buildings with a shop on the ground floor and flats above.

For tax purposes:

  • SDLT is calculated using commercial rates for the entire property, which can reduce the total payable tax.

  • VAT may be charged on the commercial element if the landlord has opted to tax, but the residential part remains exempt.

  • Income and expense allocations must be split accurately between residential and commercial components.

Proper apportionment ensures compliance and prevents overpaying or underpaying tax.

Record keeping and reporting

Regardless of property type, accurate record keeping is vital. You should maintain records of:

  • Purchase and sale documents.

  • Rent receipts and expense invoices.

  • Mortgage and interest statements.

  • Repairs, maintenance, and improvement costs.

  • VAT elections and correspondence.

HMRC requires property owners to keep records for at least five years after the end of the tax year, or six years for companies.

Professional advice and planning

The tax differences between commercial and residential property can be significant, and small mistakes can lead to large liabilities. Working with an accountant who specialises in property taxation helps you:

  • Identify the most tax-efficient structure.

  • Claim all available reliefs and deductions.

  • Handle VAT, SDLT, and Business Rates correctly.

  • Plan for future property sales or succession.

The bottom line

Commercial and residential properties may look similar on the surface, but their tax treatments are completely different. Residential properties attract higher Stamp Duty and stricter limits on mortgage interest relief, while commercial properties are often more VAT- and expense-friendly but subject to Business Rates.

Understanding these differences helps landlords, investors, and developers make informed decisions and structure their portfolios efficiently. With professional advice and good record keeping, you can manage your property tax obligations confidently and minimise unnecessary costs.