Rent from shops, offices and industrial units is taxed as property income in the same single property business as any residential lets, using the same expense rules. Three things change: interest on loans for commercial property is deducted in full rather than restricted to a basic rate tax reduction, capital allowances are available on plant, fixtures and new structures, and the landlord can opt to tax the building for VAT, which is not possible for homes.

Is commercial rent taxed in a different way?

Not at the top level. HMRC’s Property Income Manual at PIM1020 says all of a person’s UK property income forms one property business, so a shop and a buy to let flat owned by the same individual are pooled, and a loss on one is absorbed by the other. Expenses follow the same tests in PIM2005: wholly and exclusively for the business and not capital. Agent fees, insurance, repairs, legal costs of short lets, accountancy and business rates that the landlord pays are deducted in the usual way. Business rates are a bigger issue for commercial landlords because they fall on the owner when a unit is empty.

The differences lie in the detailed rules that were written with homes in mind. The rest of this page covers each one.

How is interest on a commercial property loan relieved?

For individuals, the restriction on finance costs only applies to a dwelling related loan. PIM2054 states that loans wholly for commercial properties are not affected, so interest, arrangement fees and other incidental costs of finance on a commercial mortgage are deducted in full when working out the profit. For a higher rate taxpayer that means relief at 40% rather than the 20% tax reduction available on residential loans in 2026 to 2027.

Where one loan funds both kinds of property, HMRC’s guidance requires a reasonable apportionment of the interest, with only the residential part restricted. A shop with a flat above, bought with a single mortgage, is the classic case: the part of the interest relating to the flat goes through the residential finance cost rules, and the rest is a normal deduction. Companies are unaffected either way, as PIM2054 confirms the restriction does not apply to them.

What capital allowances can a commercial landlord claim?

Section 35 of the Capital Allowances Act 2001 blocks plant and machinery allowances only for assets used in a dwelling house (CA23060). A commercial building is not a dwelling house, so a landlord who installs or buys plant in it, such as a lift or a heating system, can claim allowances. The Annual Investment Allowance gives a 100% deduction for up to £1 million of qualifying spending a year.

Fixtures in a building bought second hand need care. Section 187A of the Capital Allowances Act 2001 treats the buyer’s expenditure on fixtures as nil unless the pooling requirement is met, which in broad terms means a past owner who could claim must have pooled its expenditure. Where the seller has to bring a disposal value into account, the value also has to be fixed, normally by a joint section 198 election or a tribunal determination within two years. Our guide to section 198 elections explains how this is done on a sale.

The structures and buildings allowance is the other relief. GOV.UK explains that where all construction contracts were signed on or after 29 October 2018, a person can claim 3% a year of qualifying construction costs over 33 and one third years. The structure must be used for a qualifying activity, which includes a UK or overseas property business but excludes residential lettings, and the cost of the underlying site and any items qualifying as plant are excluded. See capital allowances for landlords and structures and buildings allowance.

What changes on the cash basis?

PIM1092 says the cash basis is the default for most individuals and partnerships with property receipts of £150,000 or less. Under it, capital allowances are not available except on cars, but PIM1095 explains that section 307B ITTOIA 2005 allows a deduction for depreciating assets installed in or fixed to a building that is not an ordinary residential property. The exceptions are the building itself and items such as walls, floors, ceilings, doors, windows, stairs, waste disposal, drainage and lift shafts. So a new air conditioning system in a let office is deducted when paid, while new windows are not.

What about furniture and appliances?

Replacement of domestic items relief only applies to a property business that lets a dwelling house (PIM3210), so it does not help a commercial landlord. Equipment provided with a commercial letting is dealt with through capital allowances, or the cash basis deduction, instead.

How are lease premiums taxed?

Commercial leases are more likely to involve a premium. PIM1205 explains that when a landlord grants a lease of 50 years or less for a premium, part of the premium is taxed as property income in the year the lease is granted. The taxable part is the premium multiplied by 50 minus Y, divided by 50, where Y is the number of complete years of the lease other than the first. HMRC’s example is a 25 year lease granted for a £30,000 premium: £15,600 is property income and the rest falls within Capital Gains Tax. See lease premiums.

How does VAT work on commercial lettings?

VAT Notice 742A explains that sales, leases and rentals of buildings are normally exempt. That suits a landlord whose tenants cannot recover VAT, but it means VAT on the landlord’s own costs, such as a refurbishment, cannot be recovered. A commercial landlord can choose to opt to tax the building. Once opted, rents and any sale are normally standard rated and the landlord can normally recover VAT incurred on the property, but must register for VAT if taxable supplies exceed the registration threshold, currently £90,000.

The option has no effect on buildings designed or adapted for use as dwellings, which is why residential landlords cannot use it. Where a building is partly commercial and partly residential, such as a shop with a flat above, paragraph 3.10 of Notice 742A requires the supply to be apportioned on a fair and reasonable basis. The detail is in our guides to the option to tax and VAT on commercial property.

Who pays business rates when a unit is empty?

In England, empty property relief removes business rates on an empty property for three months from when it becomes empty. Industrial premises such as warehouses get a further three months, and listed buildings and those with a rateable value under £2,900 are exempt until reoccupied. After that the owner usually pays full rates. Rates paid by the landlord during a void are a running cost of the business, and our guide to empty property costs between lets explains when void costs can be claimed.

How does this compare in numbers?

Illustration only. Mark, a higher rate taxpayer, owns a shop and a separate flat, each with its own interest only loan costing £6,000 a year. Rent is £18,000 from the shop and £12,000 from the flat, and other allowable expenses are £2,000 on each.

Shop Flat
Rent £18,000 £12,000
Other expenses £2,000 £2,000
Interest deducted from profit £6,000 Nil
Contribution to taxable profit £10,000 £10,000
Tax reduction for interest Not applicable £1,200 (20% of £6,000)

Both properties sit in one business with a taxable profit of £20,000. The shop interest saves tax at 40%, which is £2,400, while the flat interest gives a £1,200 reduction, subject to the limits in the finance cost rules.

What mistakes come up most often?

  • Applying the residential interest restriction to a commercial loan, or failing to apportion a mixed loan.
  • Buying a commercial building without agreeing the fixtures position, so the buyer’s allowances are lost under section 187A.
  • Claiming the structures and buildings allowance on the cost of the site or on a flat above a shop.
  • Opting to tax without considering whether the tenants can recover VAT, or forgetting that an option covers the whole building, not just the floor you own.
  • Claiming replacement of domestic items relief on equipment in a commercial unit.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.