UK commercial property – Tax for the foreign investor
Insight

Foreign investment into the UK residential property market has been treated as something of a soft target for tax revenue by recent UK governments. In contrast, the UK commercial property market has been largely unaffected by many of these changes.
The UK commercial property tax regime compares favourably to its residential counterpart. This briefing summarises the main UK property taxes for foreign investors to consider at the point of purchase, during ownership, and on eventual disposal.
At purchase – Stamp Duty Land Tax (SDLT) and Value Added Tax (VAT)
SDLT
SDLT applies to properties purchased in England and Northern Ireland. Scotland and Wales have introduced their own property purchase taxes which are similar, but not identical, to SDLT.
SDLT is paid by the buyer on the purchase price for a wholly commercial property (including any VAT paid) at the following rates:
Amount of purchase price | SDLT rate |
Up to £150,000 | 0% |
Between £150,000 and £250,000 | 2% |
More than £250,000 | 5% |
For example, a £1m commercial property purchase would have:
The total sum SDLT payable would be £39,500. |
VAT
By default, most commercial property transactions, whether a freehold or leasehold purchase, or the grant of a lease, are exempt from VAT. However, in the UK VAT is charged at 20% on the purchase price of property if the person selling it has “opted to tax”. Exercising an option to tax takes a property out of the main VAT exemption and makes any supply of it standard rated for VAT at 20%. Further information on opting to tax can be found here; in summary, a property owner may opt to tax a commercial property if they incur substantive expenditure on it, so that they can recover VAT payable on those expenses.
However, even if a property owner has opted to tax in this way, the supply of a commercial property will not be subject to any UK VAT if it constitutes the transfer of a going concern (TOGC). Further information on how TOGC treatment works can be found in our briefing note here
If, for any reason, VAT is chargeable on the supply of a property, an investment buyer may be able to recover that VAT by registering for VAT and opting the property to tax. While this can be complex, the net cost to the buyer in such a case would be limited to the carrying cost of funding the VAT on the purchase until it is recovered from HM Revenue and Customs.
During the ownership period – Income Tax and Corporation Tax
UK tax is charged on rents received from UK properties, wherever the owner is resident.
If the property is held by an individual or trust, the income tax rates in force at the time are applicable. Currently the highest rate (charged on annual income over £150,000) is 45%. Companies will be subject to UK corporation tax on their UK rental income instead of income tax and the main rate of corporation tax is currently 25%.
A tenant paying rent to a non-UK tax resident (individual or company), or an agent who collects rents on a non-resident landlord’s behalf, is required to deduct and account for a 20% withholding tax on rents. Any such withholding can be offset against the owner’s total UK income or corporation tax liability. However, this withholding tax liability can often be avoided by applying to HMRC to make use of the Non-Resident Landlord Scheme, which improves a property owner’s cash-flow.
Tax on rents will be calculated after deducting allowable expenses. The most significant of these is likely to be finance costs. Interest on loans to acquire a property can be deducted from income, but if it is payable to a related party then it needs to be at an arm’s length rate. The amount of borrowing must not exceed what could have been borrowed from an unrelated party such as a bank.
The tax-deductibility of finance costs can also be limited by complex UK corporate interest restriction tax rules. The aim of these rules is to restrict a group’s tax deductions for interest expense and other financing costs to an amount which is commensurate with its activities taxed in the UK, taking account of the amount the group borrows from third parties.
On disposal – Capital Gains Tax (CGT) or Corporation Tax
UK tax is generally charged on all gains made on disposals of UK properties, wherever the owner is resident. Tax is also charged on disposals of substantial interests (broadly, 25% or more) in “property rich” vehicles – that is, entities that derive at least 75% of their gross asset value from UK land. Further guidance on these rules from when they were first introduced can be found here.
If the property is held by an individual or trust, the CGT rates in force at the time are applicable. Currently, the highest CGT rate for property transactions is 24%. Companies will be subject to UK corporation tax on their UK property gains instead of CGT at a main rate of 25%.
Certain purchase and sale costs and capital expenditure relating to the property can be tax-deductible. In addition, specific rules around calculating taxable gains apply to commercial property, including a default “rebasing” of their value in April 2019. This means that, if a foreign owner of a UK commercial property acquired their property before April 2019, they can choose to calculate any gain on disposal by reference to the property’s value in April 2019, rather than the date they actually acquired it (as is normally the case).
A specific regime, known as the “transactions in land” rules, can counteract claims that a development or dealing trade in UK property is subject to lower rates of CGT instead of income tax. Very broadly, the effect of these rules is to tax disposal proceeds as income (and therefore potentially subject to higher rates of income tax) if the owner has developed the property for resale at a profit, or if they have used the property as stock of a trade (such as property dealing, or “flipping”).
Individual ownership | Company ownership | |
Rental income | Up to 45% | Up to 25% |
Disposal gains | Up to 24% | Up to 25% |
On death - Inheritance Tax (IHT)
Unlike UK residential property, which can be subject to IHT regardless of whether it is held directly or indirectly, UK commercial property can still be protected from IHT for those who are outside the territorial scope of the tax. Very broadly, from 6 April 2025 this can include individuals who have not been tax resident in the UK for 10 years and further information about these rules can be found here.
UK commercial properties can be protected from IHT in this way if the owner holds the property indirectly through a non-UK vehicle. However, these rules can be complex and may be changed in the future. Care should therefore be taken around this sort of structuring, particularly given the interplay with the other taxes mentioned in this briefing.
Time to reevaluate the tax position?
While this briefing summarises some of the main tax considerations foreign investors should have in mind when considering a UK commercial property investment, the UK tax regime is complex. In all cases, bespoke tax advice is critical and, in light of some of the more recent changes covered in this briefing, investors who already hold UK property may also wish to re-evaluate their position to assess their exposure to unnecessary tax or tax risk.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2024