With tax changes on UK residential property for overseas investors and more red tape and responsibility on residential landlords, is this the time that overseas investors look to alternative property investments? One alternative is investing in commercial property – with less tax and more onus on the tenant, let us go through why commercial property might be a more attractive proposition for your next UK property investment
One of the biggest differences between commercial and residential property is the tenancy period and terms. Aside from the fact commercial property tenants are businesses, commercial tenancies are usually for a 10 or 15 year period, compared to a standard 6 or 12 month period in residential tenancies. Regardless of whether the tenant leaves or not during this period, they will be legally responsible for paying the rent for the whole lease duration.
Unlike in residential tenancies, if the tenant fallsinto arrears, the landlord is able to automaticallyre-enter the property and take possession. Additionally,provided the correct process is followed,any belongings of the tenant left behind can beretained together with the deposit (which is notrequired to be protected)
As with residential property, the onus is still on thelandlord to ensure the property is fit for use andmeets minimum energy efficiency standards.
However, unlike residential properties, commercialproperty can be let on a Fully Repairing and InsuringLease which puts the onus of any repairs andmaintenance on the tenant including returning theproperty back to its original state at the end of thetenancy. It is normal for tenants to fit out the propertywith white goods and furnishings. From experience,our commercial team dealt with an officebuilding where the tenant was even responsible forpaying for and replacing all the windows. In situationswhere there are multiple tenants in the sameproperty, for example, serviced offices, the landlordwill voluntarily take the responsibility of repairs andmaintenance which is usually reflected in the rentalprice.
As with residential property, the landlord must alsoensure the property is insured, however in mostleases the landlord is able to recover this cost fromthe tenant.
Stamp Duty Tax
By far the biggest difference and change over theyears between residential and commercial propertyis in Stamp Duty. If you have purchased a residentialproperty recently, you will be aware of the additional3% stamp duty on top of the current rates for secondhome buyers. In addition to this, the government hasrecently announced that from April 2021, all non-ukresidents purchasing UK property will face a further2% rate on top of the existing 3% already imposed. Thiswould mean on a typical property worth £200,000 anoverseas investor will pay £11,500 in stamp duty tax.
Residential property will now have four tiers of stampduty taxation: first time buyer rate, standard rate, higherrate and from April 2021 an overseas rate, with thetax falling the heaviest on buy-to-let overseas investors.
Commercial property is subject to different stamp dutytax rules (As shown in the table above) which, unlikeresidential tax, has remained untouched by governmentfor years. Take our £200,000 property above, ona commercial property you would pay just £1,000 instamp duty tax – a £10,500 saving! And if the propertywas equal to or below £150,000 you pay nothing at all!(Freehold commercial property)
Commercial rate stamp duty also applies to mixed useproperties, which are for example a retail shop with aresidential flat above.
Commercial property rental returns have generallyexceeded residential. Typically yields of 8%-10%are not uncommon and with tenants generallybeing responsible for maintenance, NET yieldsare not far off GROSS. Even Prime Central Londoncommercial property can see yields into 5%+bracket. In comparison, residential yields nowaverage between 3%-5% due to increasing propertyprices
Yields of 8%-10% are not uncommon incommercial property
Additionally, get a reputable stable tenant on along lease and preferably in a good location, andyou can expect to see an increase in the sale valueof your commercial property. Whereas traditionallyresidential properties which have a tenant“in-situ” can sometimes be more difficult to sell asyou are narrowing your buyer profile to investorswhich can in some cases decrease the value of theproperty.
With this in mind, you can see why many experiencedproperty investors have a commercial property portfolio.
If you want to know more about commercial property get in touch with us below