Commercial property tax in the UK is not residential property tax with different keywords. The SDLT bands are different, the VAT regime is different, capital allowances are different, ATED doesn’t apply, Section 24 doesn’t apply, and the corporation tax position of holding companies follows its own rules. For owner-occupiers, investors, developers and international buyers, getting this wrong is genuinely expensive — frequently into six and seven figures over the life of an asset.
Quick answer: Commercial property in the UK is subject to SDLT at progressive rates capped at 5% (vs up to 17% for company-held residential), VAT at 20% if the property is opted to tax (otherwise exempt), capital allowances on plant and integral features (typically 20–40% of fit-out cost), corporation tax of 19–25% on rental profits, and CGT at 10/20% (individuals) or corporation tax (companies) on disposals. ATED does NOT apply. Section 24 does NOT apply. The big planning levers are option to tax, capital allowances and OpCo/PropCo structuring.
This guide pulls the entire commercial property tax position into one place. It covers the 2026/27 tax year and walks through the main taxes that apply to UK commercial property: SDLT, VAT and option to tax, capital allowances, corporation tax, CGT, lease tax, and the position for non-resident investors. For each area, you’ll see the rates, the planning points and worked examples.
Where deeper analysis exists, we’ve split it into companion cluster articles — so you can read the full picture here or jump straight to whichever issue matters most for your situation.
The big picture: how commercial property tax differs from residential
Before diving into the detail, it helps to understand why commercial property tax is genuinely a different discipline. Four structural differences shape everything else:
| Area | Residential | Commercial |
|---|---|---|
| SDLT (top rate) | Up to 17% (corporate >£500k) | 5% (above £250k) |
| VAT on rents | Exempt (no recovery) | Exempt OR 20% (if opted to tax — recovery possible) |
| Section 24 (mortgage interest) | Applies to individuals | Does NOT apply |
| ATED | Applies above £500k corporate-held | Does NOT apply |
| Capital allowances | Limited (fittings only in FHL, now abolished) | Plant & machinery + SBA (3%) on construction |
| CGT rate (individual) | 18% / 24% | 10% / 20% |
| 60-day CGT reporting | Required | Not required (Self Assessment) |
Almost every line in that table is a planning lever. The shape of a commercial transaction can swing one way or another by hundreds of thousands of pounds depending on how these are handled.
1SDLT on commercial property
SDLT on non-residential and mixed-use property uses three progressive bands. They apply to freehold purchases and to the premium element of new leases:
| Band | Purchase price | Rate |
|---|---|---|
| Nil rate | £0 – £150,000 | 0% |
| Lower band | £150,001 – £250,000 | 2% |
| Top band | Above £250,000 | 5% |
Worked example: £1.5m office freehold
A company buys an office freehold for £1.5m. The SDLT calculation is:
- £0 on the first £150,000 (nil rate)
- £2,000 on the £100,000 between £150,001 and £250,000 (2%)
- £62,500 on the £1,250,000 above £250,000 (5%)
- Total SDLT: £64,500 — an effective rate of 4.3%
Compare this to a £1.5m residential acquisition by the same company. Above £500k, the flat 17% corporate rate applies — a tax bill of around £255,000. That’s a £190,000 swing on the same purchase price, driven entirely by use classification.
💡 Mixed-use treatment
A property with genuine non-residential elements (e.g. a shop with a flat above, or commercial premises with ancillary storage) can sometimes qualify for the commercial SDLT bands rather than the higher residential rates. HMRC scrutinises mixed-use claims aggressively — the commercial element must be more than nominal. Documenting the position before exchange is essential.
SDLT on commercial leases
SDLT on a new commercial lease has two components: SDLT on any lease premium paid (using the standard commercial bands above), and SDLT on the Net Present Value (NPV) of rents over the lease term.
The NPV is calculated using HMRC’s 3.5% discount rate. SDLT on NPV is 0% up to £150,000, 1% above. So a 10-year lease at £100,000 pa generates an NPV of around £830,000, of which £680,000 sits above the £150,000 threshold — producing roughly £6,800 SDLT just on the rent element.
Lease variations, surrenders, regears and lease extensions each have their own SDLT consequences. A poorly-structured regear can trigger SDLT as if it were a new lease. For SDLT on residential acquisitions, including the 5% additional dwellings surcharge and corporate flat rate, see our SDLT planning guide.
Modelling a commercial acquisition?
We model SDLT, VAT, capital allowances, holding structure and exit position before completion. Fixed-fee, CTA-led.
2VAT and option to tax
VAT on commercial property is where most expensive mistakes happen. By default, commercial property transactions are exempt from VAT — sale proceeds and rents are not standard-rated. But the owner can elect to make a property opted to tax, converting the supply into a standard-rated (20%) one. The trade-off is recovery of input VAT.
Why opt to tax?
If you don’t opt to tax, you can’t recover the VAT on acquisition, construction, refurbishment, professional fees or running costs. On a £2m acquisition that’s £400k of irrecoverable VAT. On a £500k refurbishment that’s £100k.
If you do opt to tax, you can recover all that input VAT — but you must charge 20% VAT on rents and on any future sale. For tenants who are themselves VAT-registered businesses, this is just a cash-flow issue (they recover the VAT). For tenants who are VAT-exempt (banks, insurers, healthcare, charities, schools, residential users), it’s a real cost — and they’ll negotiate harder, or refuse to lease.
Decision framework
| Situation | Usually opt to tax? |
|---|---|
| New build commercial, VAT-registered tenants | Yes — recovery on build cost matters |
| Refurbishment with significant VAT spend | Yes — recovery on works |
| Existing property, no major spend planned | Maybe — depends on tenant mix and exit plan |
| Tenants are exempt (banks, charities, healthcare) | Usually no — kills lettability |
| Residential conversion planned | No — disapplication anyway |
⚠️ The 20-year rule
An option to tax is essentially irrevocable for 20 years (with very limited exceptions including the 6-month cooling-off period). Once made, you cannot easily reverse it. This is not a decision to make without proper modelling, particularly where tenant composition might change.
Capital Goods Scheme — the 10-year shadow
For commercial property and refurbishment works above £250,000 (excluding VAT), the Capital Goods Scheme (CGS) tracks VAT recovery over a 10-year adjustment period. If the use of the property changes during that window (e.g. an exempt tenant moves in where previously a taxable tenant was in place), recovered VAT is partially clawed back.
The CGS is a frequent trap on acquisitions: the buyer inherits the seller’s remaining adjustment period and must continue tracking and adjusting. Pre-acquisition due diligence on CGS status is essential and often missed.
For a full deep-dive on option to tax decisions, see our VAT and Option to Tax guide.
3Capital allowances on commercial property
Capital allowances are the corporation tax equivalent of depreciation for tax purposes. They reduce the taxable profit of a business that incurs qualifying capital expenditure. For commercial property, three streams matter:
Plant and machinery allowances (P&M)
The big one. Within any commercial building there is “plant and machinery” — heating, ventilation, electrical systems, lifts, hot water systems, sanitary fittings, fire safety equipment, integral features (electrical, cold-water, lighting, lifts, escalators). These attract:
- Annual Investment Allowance (AIA) — 100% relief on the first £1 million per year (combined with Full Expensing for new general plant)
- Full Expensing — 100% first-year allowance on new (not second-hand) main-pool plant, unlimited
- 50% first-year allowance — on new special-rate pool plant (long-life and integral features)
- Writing-down allowances — 18% main pool, 6% special rate pool, on the reducing balance
On a new commercial fit-out, 20–40% of total cost typically qualifies as P&M. On a £1m office fit-out, that’s £200–400k of immediate corporation tax deductions — worth £40–100k of corporation tax saved at the 19–25% rate.
Structures and Buildings Allowance (SBA)
SBA gives 3% per year straight-line relief on the construction cost of non-residential buildings (offices, factories, warehouses, retail). It applies to the actual building element — not land, not P&M (which is claimed separately). A £5m new build with £4m of construction cost generates £120k/year of SBA, or £30k of corporation tax saved per year at the 25% rate.
The Section 198 election trap
On a second-hand commercial property purchase, the seller has historically claimed allowances on the P&M. To preserve the buyer’s ability to claim, a Section 198 election must usually be signed at completion — fixing the value of the P&M for transfer. Without it, the buyer can lose access to a six-figure (or larger) allowance pool. This is one of the most common — and most expensive — oversights on commercial acquisitions.
For the full mechanics, see our Capital Allowances on Commercial Property guide.
4Corporation tax on commercial rental income
A UK company holding commercial property pays corporation tax on its net rental income at the main rate. For 2026/27:
| Profit band | Corporation tax rate |
|---|---|
| £0 – £50,000 | 19% |
| £50,001 – £250,000 | Marginal relief (26.5% effective) |
| Above £250,000 | 25% |
Importantly, mortgage interest IS fully deductible for commercial property companies (unlike Section 24 for individual residential landlords). Other deductible expenses include repairs, agent fees, insurance, professional fees, capital allowances and management costs.
Associated companies divide the £50k and £250k thresholds. So a group with 4 associated property companies splits the £250k threshold four ways — each company hits the 25% rate from £62,500 of profit.
5CGT and corporation tax on commercial disposals
For individuals, gains on commercial property are taxed at the standard CGT rates — not the higher residential rates. For comparison, see our CGT on residential property disposals guide, which covers the 18%/24% rates, the 60-day reporting rule and Private Residence Relief.
| Asset | Basic rate | Higher rate |
|---|---|---|
| Commercial property | 10% | 20% |
| Residential property (for comparison) | 18% | 24% |
The 60-day CGT reporting rule does NOT apply to commercial property — gains are reported via the next Self Assessment return.
Business Asset Disposal Relief (BADR)
Where commercial property is used in your own trading business, BADR may apply on disposal: a 18% flat rate up to a £1m lifetime limit. Strict conditions apply — the property must have been used in the trade and held for at least 2 years.
Substantial Shareholdings Exemption (SSE)
When commercial property is held in a subsidiary company and the company shares are sold (rather than the property itself), SSE can exempt the entire gain — provided both the seller and the target company are broadly trading entities, with 10%+ holding for 12 continuous months in the last 6 years. This is heavily used in commercial property restructuring before a trade sale.
Rollover Relief
Gains on the sale of business assets (including commercial property used in a trade) can be deferred when the proceeds are reinvested in new qualifying business assets within 3 years. The gain rolls over into the new asset’s base cost.
6OpCo/PropCo structuring
One of the most common questions from owner-managed businesses is: “should we put the trading business and the property into the same company, or separate them?”
The OpCo/PropCo structure separates them. OpCo runs the trade. PropCo holds the property. OpCo pays market rent to PropCo. Both companies are usually under common ownership.
✓ Benefits of OpCo/PropCo
Ring-fences property from trading risk. Easier to sell the trade without the property. SSAS pension can buy the property (rent becomes pension contributions). IHT planning easier on property element. Sale of property without disturbing trade.
✗ Drawbacks
Initial SDLT cost on transfer (no group relief if not yet a group). Loss of BADR on the property element when company is sold. Transfer pricing risk on intra-group rents. Additional company filings and admin.
The economics are highly fact-specific. A £2m property with 15+ year hold and a likely future business sale points strongly to OpCo/PropCo. A £400k premises owned by a 60-year-old founder approaching exit with no children inheriting the business points differently. Model before structuring.
The OpCo/PropCo decision shares some logic with the residential portfolio incorporation question — both involve the same SDLT-on-transfer trade-off. If you also hold residential property, our guide to incorporating a property portfolio covers Section 162 incorporation relief in detail.
7Non-resident commercial property investors
Since April 2019, non-resident investors are within the scope of UK tax on commercial property gains. Since April 2020, non-resident corporate landlords moved into UK corporation tax (replacing the previous income tax regime).
The Non-Resident Landlord Scheme applies to commercial rents collected via UK agents — although companies can apply to receive gross. Treaty positions matter: many double tax treaties allocate primary taxing rights on rental income to the situs country (UK in this case), but withholding rates and credits vary.
Disposals of “UK property-rich” entities (companies where 75%+ of value derives from UK land) by non-residents are also within the UK CGT net.
📋 Key takeaways
- Commercial property tax is structurally different from residential — Section 24 and ATED don’t apply, SDLT is capped at 5%, but the option to tax and capital allowances rules add complexity
- Option to tax is a 20-year, near-irrevocable decision — model it before committing, especially with regard to tenant mix
- Capital allowances on commercial property are frequently underclaimed — 20–40% of fit-out cost typically qualifies as plant and machinery
- Section 198 elections at completion are critical to preserve allowance pools on second-hand acquisitions
- OpCo/PropCo structuring works well for many owner-managed businesses, but the SDLT cost on transfer and loss of BADR on the property need careful modelling
- Substantial Shareholdings Exemption can exempt entire gains on share sales of property-rich subsidiaries — heavily used in pre-disposal restructuring
Frequently asked questions
What SDLT rate applies on commercial property?
0% on the first £150,000, 2% on £150,001–£250,000, and 5% above £250,000 — for both freehold and the premium element of leases. The 17% flat residential rate does NOT apply to commercial property. SDLT on lease rents is calculated separately using the Net Present Value method.
Should I opt to tax my commercial property?
Usually yes if significant VAT has been or will be incurred and your tenants are VAT-registered businesses. Usually no if tenants are exempt (banks, insurers, healthcare, charities, residential). The decision is near-irrevocable for 20 years, so it should never be made without modelling the tenant mix and refurbishment programme.
What capital allowances can I claim on a commercial building?
Three streams: plant and machinery (heating, ventilation, electrical, lifts, integral features — typically 20–40% of fit-out cost), Structures and Buildings Allowance (3% straight-line on construction cost), and AIA/Full Expensing for new plant. On acquisition, a Section 198 election is essential to preserve the claim.
Does ATED apply to commercial property?
No. ATED applies only to residential property worth over £500,000 held by companies. The 17% flat SDLT rate also does not apply to commercial property. This is one reason mixed-use classification matters — a genuinely mixed-use property escapes both regimes.
What is an OpCo/PropCo structure?
A two-company structure where the trading business (OpCo) is separated from the property it occupies (PropCo). OpCo pays market rent to PropCo. Benefits include ring-fencing property from trading risk, easier exit, and SSAS pension structuring. Drawbacks include SDLT on transfer and loss of BADR on the property element.
Does Section 24 apply to commercial property?
No. The Section 24 mortgage interest restriction applies only to residential property held by individuals. Commercial property landlords (individuals and companies) can deduct mortgage interest in full against rental income.
What CGT rate applies on commercial property disposals?
Individuals pay 10% (basic rate) or 20% (higher rate) on commercial property gains — lower than the 18%/24% residential rates. Companies pay corporation tax on the chargeable gain. BADR may apply at 18% for qualifying business disposals. The 60-day reporting rule does NOT apply to commercial property.
📚 Related reading
- Non-Resident UK Property Tax — Commercial property owned from abroad has different VAT, ATED and CGT considerations.
- Offshore Accounting & Outsourcing Guide — For mid-market property owners, bookkeeping and finance admin can sit offshore at substantial savings.