Commercial vs residential property investment: which is the best investment for high earners?

Property can play a valuable role in an investment portfolio. This asset class can provide both significant capital appreciation and a source of passive income, whilst helping to maintain a diversified portfolio.

However, as with all investments, investors should choose carefully. With property, there are many variables for investors to consider including asset prices, yields, taxes, depreciation, and maintenance requirements, and investments need to be aligned with one’s overall financial strategy.

Here, we compare commercial vs residential property investment. Is one better than the other for high earners?

Commercial property investments 

Commercial property is property that is used for business activities. It includes office buildings, shopping centres (retail), hotels, warehouses, hospitals, and more.

From an investment perspective, compared to a residential property investment, commercial property has many attractive qualities, including:

1. Higher yields – Commercial property yields (the income that the property generates) are typically higher than residential property yields.
2. Attractive leases – Leases are generally between three and 10 years and often have built-in rent increases.
3. Lack of maintenance – Maintenance is usually the responsibility of the tenants.
4. Ease of investment – Commercial property can be purchased through investment funds (in a pension or ISA).
5. The ability to diversify – Investors can diversify capital across different areas of the commercial property market easily.
6. Exposure to economic trends – Commercial property can provide exposure to powerful, long-term economic trends.
7. Tax-efficiency – Investments can be made within a self-invested personal pension (SIPP) or ISA.

On the downside, some forms of commercial property can be vulnerable to economic weakness. For example, in a recession, companies often downsize, resulting in less demand for office space. This can lead to lower property values and yields in this area of the commercial property market.

Residential property investments

Residential property is property that is used for residential purposes. It includes buy-to-let (BTL) property and second/holiday homes.

Advantages of investing in residential vs commercial property include:

• Tangibility – Residential property can be more tangible relative to commercial property owned via investment funds.
• Flexibility – If you purchase a residential property, you can choose to live in it, rent it out, or both.
• Personal use – You can get personal use out of a holiday home and enjoy it.
• Potential tax deductions – There are not many tax deductions available to buy-to-let landlords today. However, furnished holiday let (FHL) property owners are still entitled to many of the tax benefits that BTL landlords no longer receive.

The biggest disadvantage to owning residential property is that it tends to be time consuming and costly. With this form of property, owners need to find the right tenants, make decisions as to whether to furnish their properties, meet energy standards, perform electrical safety and gas safety checks, take care of repairs, and more.

Another major disadvantage of investing in residential property vs commercial property is that investors are subject to a range of taxes. Unlike commercial property, residential property cannot be bought for a SIPP or ISA. 

What taxes do property investors need to consider?  

When looking at commercial vs residential investments, it’s crucial that high earners think about tax planning.

The big advantage of commercial property is that it can be purchased inside a tax-efficient account. This means that gains and income from your property investments can potentially be tax-free.

Residential property, on the other hand, cannot be purchased within a tax-efficient account. This means that investors are subject to a range of taxes including:

• Stamp Duty – When you purchase a second home in the UK, you are usually required to pay a Stamp Duty surcharge of 3%.
• Income Tax – If you rent out a residential property on a long-term basis, you may be required to pay Income Tax on the rental income you receive.
• Capital Gains Tax (CGT) – If you sell a residential property for a profit, you may be required to pay CGT.
• Inheritance Tax (IHT) – Investing in residential property can potentially lead to an IHT liability in the future.

The best choice for high earners 

When comparing commercial vs residential investment, it’s clear that both have their advantages and disadvantages. The best type of property for you, therefore, will depend on your goals and objectives.

If you are looking for a property that you can get personal use out of, residential property may be the best option for you. However, if you are looking for a higher level of yield then commercial property may be your best bet.

When choosing between commercial vs residential investment, it’s generally a good idea to consult a financial planner. They will look at your circumstances and objectives and provide advice in relation to the best form of property for you.

How Bowmore can help

At Bowmore, we have decades of experience helping high earners invest their capital, whether it’s property, investments for a cash lump sum, portfolio diversification, or helping with tax-efficient investments.

To find out more about how we can help you with your investments, contact us here or call us on 01275 462 469.

• Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
• The Financial Conduct Authority does not regulate Estate Planning or Inheritance Tax Planning.
• Bowmore Financial Planning Ltd is not regulated to provide tax advice.
• The value of your investments can go down as well as up, so you could get back less than you invested.
• The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future.
• Past performance is not a guide to future performance.
• A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
• The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.