Property Investment – Key differences between Residential Investment v Commercial Investment

At Gilson Gray, we’re increasingly being approached by investors looking to transact for the first time in commercial property. Often, would-be investors already have some exposure to the property market and frequently own one or more Buy to Let (BTL) properties.

For many the pivot from BTL to commercial is the result of cumulative impact of successive tax changes and increased regulation.

From a tax perspective, those changes specific to BTL investment include the replacement of Mortgage Interest Tax Relief with a 20% Tax Credit, the replacement of Wear and Tear Allowance with the more restrictive Replacement of Domestic Items Relief, increases in Land and Buildings Transaction Tax Additional Dwelling Supplement (in Scotland) and increases in the Stamp Duty Land Tax Surcharge and abolition of Multiple Dwellings Relief (in England).

From a regulatory perspective developments have included (in Scotland) the introduction of the Scottish Landlord Register, increased tenant protections under the Private Residential Tenancy legislation and the interim imposition of rent caps during the Cost of Living crisis.

While we find prospective investors generally come to us with an appreciation of the variances between BTL and commercial investment, there are considerations when investing in commercial property which can present potential problems to the unwary:

VAT

This is a complex and technical area. Similar to residential property as a general rule the sale or lease of commercial property will be exempt from VAT. However, commercial property owners can opt to charge VAT when selling or leasing their property. If they do so, they must charge VAT on all supplies they make relating to that property. They are also then able to recover VAT charged to them on any costs relating to that property. When purchasing commercial property it is important to understand at the outset whether or not the seller has opted to charge VAT.

Transfer of a Going Concern (TOGC)

If a commercial property being purchased is capable of being run as a property rental business (which will generally be the case if it is being sold with existing tenants in occupation) and the buyer intends to carry on the same type of business, the transaction may be classed as a TOGC. This means (notwithstanding the seller may have opted to charge VAT on the property) the transaction is outwith the scope of VAT and so no VAT will be payable. However, for TOGC conditions to be met, the buyer must mirror the seller’s VAT position by the date of transfer. This means that if the seller is registered for VAT and has opted to charge VAT on the property, the buyer must do likewise and the notification of the option to charge VAT must be received by HMRC by the date of transfer.

Licensing

Depending on the type of commercial property being purchased there may be a requirement for additional licences.  These could relate for example to the sale of alcohol, operation of gambling machines, outside seating areas or use as a retail pharmacy. It is important to ensure the relevant licences are in place and to understand whether these are held by the seller or existing tenant and what happens to the licences at the end of the lease.

Capital Allowances

Capital Allowances are a tax relief that can be claimed for certain qualifying items in a commercial property that were either installed by the seller or inherited by the seller when they purchased the property. The items can include, lifts, heating systems, plumbing, air conditioning, three phase electric, flooring, suspended ceilings, doors, bathrooms, toilets and kitchens. Basically, anything that would remain in in the building if it were tipped upside down. Depending on the type of commercial property the benefit of Capital Allowances can be significant and the relief can be transferred from the seller to the buyer subject to certain conditions being met. As a buyer it is important, to secure the benefit of Capital Allowances, that the issue is addressed as early as possible in the transaction.

Lease Obligations

With BTL properties, the investor will remain responsible for ensuring the property meets minimum repairing standards and is fit for habitation. However, with commercial properties all repairing obligations will generally be imposed on the tenant under a “full repairing and insuring” lease. The value of a commercial investment will often depend on the extent to which such obligations are successfully passed on to the tenant. It is therefore imperative, before committing to a commercial investment, that a detailed review of the lease terms is undertaken and the respective obligations of landlord and tenant well understood. It is also important that compliance with these obligations is carefully monitored throughout the term of the lease.

The Gilson Gray Real Estate Team have a wealth of experience acting for investors across all types of commercial property. If you are an experienced commercial property investor or looking to make your first commercial property acquisition do please do get in contact to discuss your requirements.

The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.