Commercial Versus Residential Property


Simon Misiewicz

6th January 2017

Advice on commercial and residential property investment from Optimise Accountants

The residential property experts at Optimise Accountants are focusing on some recent news on this blog post, to highlight the Pros and Cons of changes for property investors across the UK.

The last 18 months have brought some unexpected bad news for the residential property investment sector.

First there was the announcement of the cap on mortgage interest relief and the abolishment of the wear and tear allowance in last year’s Summer Budget, then in November came the announcement of the 3% stamp duty surcharge on buy-to-let properties. I have been advising property investors on this.

But for commercial property investors, the past year has been much more positive in terms of government changes, and the number of new property investor clients coming on board with us backs this up.

In this year’s Budget the government replaced the old ‘slab-based’ system of stamp duty for commercial property with a ‘banding’ system, which essentially means that anyone buying a property worth less than £1 million will pay less stamp duty.

The government also raised the threshold for business rates relief to £12,000, which means that from next April small businesses with a rateable value of £12,000 or less (as calculated by the Valuation Office Agency) will be exempt from business rates. The threshold for higher business rates will also be increased from £18,000 to £51,000.

This is important as when a building is empty, the property’s owner becomes liable for these rates, something which in the past has proven costly for some commercial investors.

Another huge bonus for commercial property investors is that from April this year, permitted development rights allowing offices to be converted into residential dwellings became permanent.

Many of my clients are also considering dipping their toe in the commercial property waters and are seeking my advice, not just as their tax adviser, but also as someone who has invested in both types of property over the years. I can assist and advise in both residential and commercial property investment.

With this in mind, I’ve put together some information on the main differences between residential and property investment for our property investment blog readers below.

The hassle factor

While residential property is typically let on a six-month or 12-month Assured Shorthold Tenancy, commercial leases can range from one to 20 years, according to our property investment research.

Commercial tenants usually fit out the properties themselves with whatever their business needs, so they are unlikely to want to move premises on a regular basis due to the high cost involved.

With residential investments landlords are responsible for putting right any issues that tenants have with the property. Commercial tenancies usually have self-maintenance leases, which means that tenants pick up the bill for any maintenance work within the building.

All of these factors mean there’s usually less for commercial property owners to take care of — as an investor who holds both residential and commercial properties, I can safely say that the demands on my time are certainly lower for commercial properties. Get in touch with me directly here to discuss this.


Residential property is only empty, in my opinion, if it is in a poor condition or is priced too high.

However, if you lose one tenant, then 100% of that property’s income is gone, whereas there may be multiple tenants in a commercial building.

However, commercial properties are more difficult to rent out, whereas population growth and a shortage of housing in the UK mean that it is relatively easy to find replacement tenants for a residential property.

In particular, commercial properties can be harder to rent out during an economic downturn, and there’s always the chance that a business will fail and your tenants will shut up shop, so do your regional research.


Interest rates for commercial property are generally higher than buy-to-let mortgages, although the marketplace is changing as more lenders enter the commercial lending space on the back of the recent surge in limited company lending, and many predict interest rates will come close to aligning in future.

Generally, the LTVs available for commercial lending have been lower than those for residential property. However, buy-to-let lenders across the marketplace are increasing the amount of rent required to access higher LTVs on residential property and there’s talk of the government demanding tighter underwriting standards, which could further lower the LTVs available on residential property.

Determining the value of a commercial property is much more difficult than determining the value of a residential property. For commercial premises, there are many variables that will factor into its valuation.

These include its size, location, current use, lease length of tenant, income and facilities, among other things. Get in touch with me or my commercial property team here to find out how we can help you.

Return on investment

One thing that has often deterred investors from making the switch from residential to commercial property investment is the fact that the growth enjoyed by the former has typically far outpaced the latter.

It’s fair to say that generally capital growth has been lower for commercial properties than for residential properties, but there are always exceptions – by picking your location wisely you can sometimes match, or even beat, the returns of residential property, particularly if you buy a building that is able to be converted into residential accommodation at a later stage via the permitted development rights mentioned above.


While residential properties will be subject to the mortgage interest relief restrictions from next year, commercial properties will still be able to deduct all financing costs from their earnings before calculating profit. I’m confident that the commercial property sector will remain robust in coming months.

In light of the changes to the way commercial stamp duty is calculated, there is now a significant stamp duty saving to be made when purchasing commercial property rather than residential property.

For example, if you purchase a residential property worth £400,000 as a buy-to-let you’ll be hit with a £22,000 stamp duty bill. If, however, you buy a £400,000 commercial building, you’ll pay just £9,500.

This applies even to mixed use premises such as buildings where there is a shop below and a flat above.

One of the other big tax advantages commercial property has is that it can be purchased inside a Self-Invested Personal Pension (SIPP) – by buying property within a SIPP your earnings and capital growth will be tax-free, although you’ll have to pay tax when you withdraw the funds in future.

You can take the first 25% of any pension pot tax-free, then the remainder will be taxed at your income tax rate at the time.

As you can see, commercial property requires a different approach to residential property, but given the current tax advantages it now has, it’s an area worth exploring, particularly for those in higher tax bands.

To find out more about profitable commercial property investment, and how our team of commercial property specialists and expert property tax accountants can advise further on allowable costs to offset against property income, please feel free to get in touch here.

Book a call to see how we can help you.