Michael Lansdell from Lansdell & Rose Chartered Accountants talks this month about 3 tax benefits of commercial property investment.
Commercial property is proving a triple win for many investors, as a means to diversify portfolios, whilst benefiting from several tax breaks. The recent Budget announced a new SDLT system to benefit many commercial purchases. With changes also to tax relief on buy-to-let mortgage interest, commercial has some new advantages.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
Stamp Duty Land Tax benefit (1)
The Budget on 16 March announced a change in the SDLT system for commercial property.
In the same way there was a SDLT reform on residential property in 2014, a similar system has been adopted for commercial, from 17 April 2016.
Instead of the “slab system”, where the value of the property is taxed according to the band it fits into, a tiered approach is now being introduced.
Effectively, this means that only the proportion of the property value that sits within each band is taxed at the relevant percentage.
This table shows the new bands and percentages:
Band | % SDLT |
---|---|
£0 – £150,000 | 0% |
£150.001 – £250,000 | 2% |
£250,000+ | 5% |
For example, if a property is valued at £275,000, then £250,000 will be taxed at 2% and just 25,000 at 5%.
All but those purchasing commercial property over the value of £1.05 million will save tax.
Stamp Duty Land Tax benefit (2)
Apart from the revised SDLT system, there is a related benefit for investors.
From April 2016, there will be a SDLT surcharge of 3% for residential buy-to-lets, making the prospect of residential property investment significantly more expensive.
For example, SDLT on a buy-to-let property worth £250,000 would cost £2,500 in SDLT until April 2016. However after this date, it will cost £10,000 (!), taking into account the extra 3%, which applies to all but primary residences.
Investing in commercial property avoids the extra SDLT surcharge, as does property that is part residential and part commercial.
This table shows savings for properties valued at £125,000, £250,000 and £500,000 comparing buy-to-let (B2L) and commercial property investment.
Property Value | Tax rate | SDLT - Residential | SDLT - TOTAL - B2L (+3%) | SDLT - Commercial | SAVINGS - Commercial vs B2L |
---|---|---|---|---|---|
£125,000 | 0% | £0 | £3,750 | £0 | £3,750 |
£250,000 | 2% | £2,500 | £10,000 | £2,500 | £7,500 |
£500,000 | 5% | £15,000 | £30,000 | £15,000 | £15,000 |
Lansdell & Rose are specialist medical and dental accountants with a key focus on tax planning for healthcare professionals.
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Claim full tax relief on mortgage interest
A third tax benefit for commercial property investment relates to claiming tax relief on the mortgage interest.
From April 2017, the rules are changing for residential property buy-to-let tax relief. Mortgage interest can be claimed as a tax-deductible expense, reducing rental profits and tax thereon. This tax relief currently can be claimed at the same percentage as the income is taxed, so, basic rate (20%), higher rate (40%) or top rate (45%).
The new rules state that tax relief can only be claimed at basic rate (20%) and this will be “phased-in” from 2017 until 2020.
Read more: Buy-to-let investors face cuts in tax relief
This change will only affect higher-rate and top-rate tax payers, however, many doctors and dentists fall into these higher rate tax bands, so there is a high chance the new rules will affect the tax due on rental profits.
Commercial property is excluded from these new rules so full tax relief can continue to be claimed at the maximum percentage rate.
Read more: Running a buy-to-let through a limited company
Commercial property investment pros v cons
In summary, the 3 tax benefits just discussed are:
- New SDLT system, highly likely to save you tax from the current system
- SDLT 3% surcharge does not apply to commercial property
- Maximum tax relief can be claimed on mortgage interest
As with all investments though, the pros need to be balanced with the cons.
Commercial property transactions are generally are more complex than that of residential. An accountant and solicitor will be essential to assist with the transaction, and a financial adviser will be able to help ensure the most competitive commercial loan.
Read more from Michael
- Inheritance tax update
- How financial forecasting can save you tax
- How the new dividend rules affect you