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Is Commercial Property a Viable Alternative to Residential for Landlords?
Author: Carl Shave - Director
Updated on December 14th, 2017

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The recent stamp duty changes and other shifts in the residential property investment market of late have left some small investors in a daze. Against a backdrop of such seismic changes, investors who had been making good returns in the buy-to-let residential property market for years are now unsure what to do with money that is doing just about nothing in the bank.

Perhaps the commercial property market is a potential route for investors who no longer have confidence in buy-to-let property investments?

Recent Changes in the Residential Buy-to-Let Sector

Mr Osborne has taken a concerted swipe at residential buy-to-let landlords with numerous changes that have been introduced to chip away at their returns.

  • Stamp duty – The changes announced in the Spending Review and Autumn Statement mean the stamp duty paid on the purchase of a buy-to-let property costing £250,000 has jumped from £2,500 to £10,000. If you want to buy a residential investment property, you will now have to factor in an extra 3% up-front in stamp duty.
  • Mortgage interest tax relief – There is also a reduction in the level of tax relief landlords can offset against their rental income from their buy-to-let mortgage interest payments. . These come into force in April 2017 and will be phased in over a 3-year period.
  • Wear and tear allowance – As if that wasn’t enough, there’s also the removal of the automatic 10% wear and tear allowance. This allowed landlords to apply a flat 10% tax-reduction to their rental income to pay for the upkeep of furnishings. Instead, landlords will now only be able to claim for the expenses they actually incur.
  • Capital gains tax – The final nail in the coffin is a capital gains tax grab. While capital gains tax on other investments has fallen to 10% at the basic rate and 20% for the higher rate, the capital gains tax on buy-to-let property will remain at 18% and 28% respectively.

How Does Commercial Property Compare?

The stamp duty on commercial properties and mixed properties has actually changed to favour small investors. Under the new rules, the first £150,000 of any commercial property investment is exempt from stamp duty, regardless of the value of the property. Investors are only taxed a percentage of the balance exceeding this amount.

Compared to the old commercial stamp duty rules, anyone investing up to £1.05million will now make a saving. When compared to the rate rises in the residential sector, these savings become even greater.

The Many Differences Between the Two Sectors

There are plenty of other factors that investors more accustomed to the residential market will have to consider.

Although higher returns could be possible from a commercial property, the initial down payment and associated legal fees will usually be greater. Rent is also usually paid quarterly, and in advance, and leases tend to be over a longer term. The tenant is also typically liable for repairing, maintaining and insuring the property.

However, unlike the booming private rented sector, tenants can be harder to find. This depends largely on the area you choose to invest in. While some high streets may be thriving, there will also be plenty of others that aren’t.

If you’re considering a residential or commercial property investment, we can provide you with the expert mortgage advice you need. For more information, please get in touch with our team.

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