Section 24 does not apply to commercial property. A commercial landlord deducts mortgage interest in full against rental profit, at their marginal rate, while a residential landlord is limited to a basic-rate tax credit on the same borrowing. That is the whole answer to the headline question, but it is also where most people stop and then make expensive mistakes, because the rule does not turn on whether your lettings look like a business. It turns on a narrower thing: whether the property is residential.
Get that distinction wrong and a portfolio you think sits outside Section 24 can be partly inside it, with the residential slice quietly losing relief. This guide sets out exactly where the line falls, how mixed-use buildings are split, and the capital allowances, VAT and capital gains differences that follow once you are on the commercial side of it.
Why Section 24 does not touch commercial property
Section 24 of the Finance (No. 2) Act 2015 inserted what is now ITTOIA 2005 s.272A and the basic-rate relief mechanism in s.274A. The restriction was deliberately confined to finance costs relating to a dwelling-house within a property business. Borrowing on non-residential premises was never in scope, so the ordinary rule survives: interest incurred wholly and exclusively for the rental business is an allowable deduction in computing profit.
The common misconception is that the dividing line is business versus investment, that somehow active commercial letting earns full relief while passive residential investment is penalised. It is not. A buy-to-let landlord running fifteen properties full time is still inside Section 24; a passive investor with a single shop let on a long lease is outside it. The only test that matters is residential versus non-residential. We see the business-versus-investment framing repeated constantly, and it leads people to assume serviced apartments or actively managed short lets escape the restriction. They do not.
The practical consequence is real money. A higher-rate landlord paying £200,000 of interest on a commercial portfolio deducts the full £200,000 before tax. The same borrower on residential property gets a 20% credit, currently worth £40,000 against the tax bill, regardless of the rate they actually pay on the income above it. On a geared portfolio that difference compounds year after year, which is why the relief position alone changes whether leverage makes sense.
What counts as commercial, and what trips people up
HMRC treats premises used wholly for business purposes as non-residential. In practice that covers:
- Offices and office suites
- Retail units, shops and shopping centres
- Warehouses, light industrial and storage units
- Pubs, restaurants and leisure premises run as a trade or let to an operator
- Land let for commercial use, and certain agricultural buildings
A single office let to one business tenant qualifies in full. The size of the portfolio is irrelevant; the use of the premises is everything. The harder cases are the ones that look commercial but are not:
- Furnished holiday lets. The FHL regime was abolished from 6 April 2025 by Finance Act 2025 Schedule 5. Former FHL property is now ordinary residential letting, so Section 24 applies and the previously full interest deduction has been cut back to a basic-rate credit. This is the single biggest reclassification trap of the last two years.
- Serviced apartments and aparthotels. Active management, cleaning and short stays do not make a dwelling commercial. Unless the operation is a genuine hotel-style trade, the underlying lettings remain residential for finance-cost purposes.
- HMOs. A house in multiple occupation is residential however intensively it is run. Section 24 applies in the normal way.
- Student accommodation. Purpose-built or converted student housing is residential for the structures and buildings allowance and generally for income tax, despite its business-like operation.
If you are unsure whether a let is genuinely non-residential, that question is worth settling before you file, not after an enquiry. A specialist property accountant will pin the classification down against the actual use and lease terms.
Mixed-use property: where the residential part comes back inside Section 24
Mixed-use buildings are the real battleground. A flat over a shop, or a parade with retail below and flats above, is part residential and part commercial, and the two parts are taxed differently. You cannot deduct the whole finance cost in full and you cannot restrict the whole of it to a credit. You apportion.
The finance cost is split between the non-residential part, which keeps full deduction, and the residential part, which is dragged inside Section 24 and restricted to a basic-rate credit. The apportionment is normally done on one of two bases:
- Floor area · the proportion of usable square footage that is residential versus commercial.
- Rental or rateable value · the proportion of the building's value or income attributable to each part.
Whichever basis you choose, apply it consistently across finance costs, repairs and other shared expenses, and keep the working. HMRC will accept a reasonable, evidenced method; what it will not accept is a convenient split with no basis behind it.
Worked example: a shop with two flats above
Take a building bought with a £600,000 commercial mortgage, £30,000 of annual interest, where the ground-floor shop is 40% of the floor area and rental value and the two flats above make up the remaining 60%.
| Element | Share | Interest | Relief treatment |
|---|---|---|---|
| Ground-floor shop (non-residential) | 40% | £12,000 | Fully deductible against rental profit |
| Two flats above (residential) | 60% | £18,000 | Section 24: basic-rate credit only (20%, 22% from April 2027) |
For a higher-rate landlord, the £12,000 commercial slice saves £4,800 in tax (40%), while the £18,000 residential slice produces a credit of £3,600 (20%) against a notional liability of £7,200, a £3,600 shortfall compared with full relief. The same building, two completely different relief outcomes, decided entirely by which part of the floor plan the borrowing sits over. If you treated the whole thing as commercial you would over-claim on the residential 60% and expose yourself to penalties. The mechanics of the residential credit itself are covered in our guide to calculating the Section 24 tax credit step by step.
Commercial versus residential: the differences at a glance
Section 24 is the headline, but it sits inside a wider set of differences. The table below summarises how the two are taxed across the points that actually move the numbers. No part of it is a recommendation; the right structure depends on your specific position.
| Tax point | Commercial (non-residential) | Residential |
|---|---|---|
| Mortgage interest relief | Fully deductible at marginal rate | Section 24 basic-rate credit only (20%, 22% from April 2027) |
| Income tax rates on rental profit | Main rates: 20% / 40% / 45% | Separate property rates from 6 April 2027: 22% / 42% / 47% |
| Capital allowances on plant | Broad claim base (Part 2 CAA 2001) | Barred inside the dwelling-house (s.35), except common parts |
| Structures and Buildings Allowance | Available (3% straight line) | Excluded for residential use (s.270CF) |
| VAT | Option to tax available; can recover input VAT | Exempt; no recovery |
| SDLT on purchase | Non-residential rates; no 5% surcharge | Residential rates plus 5% additional-dwelling surcharge |
| CGT on disposal | 18% / 24% (TCGA 1992 s.1H) | 18% / 24% (TCGA 1992 s.1H) |
| Local charge | Business rates (deductible) | Council tax |
Capital allowances: the relief residential landlords cannot reach
Beyond interest, the biggest structural advantage of commercial property is capital allowances. Plant and machinery in a commercial building qualifies under Part 2 of CAA 2001, whereas CAA 2001 s.35 bars plant allowances inside a dwelling-house for an ordinary residential let, with a narrow exception for genuine common parts of a multi-let block.
On commercial premises the claim base typically includes:
- Main-pool plant written down at 14% a year on a reducing balance, cut from 18% from April 2026 by Finance Act 2026 section 28.
- Integral features and long-life assets (heating, air conditioning, electrical and lighting systems, lifts) in the special-rate pool at 6%.
- The Annual Investment Allowance, a 100% write-off on up to £1,000,000 of qualifying expenditure in the year, now a permanent cap.
- The Structures and Buildings Allowance at 3% straight line on the construction or acquisition cost of the structure (subject to an allowance statement and the 29 October 2018 construction-date gate).
The make-or-break mechanism on a second-hand commercial purchase is the fixtures regime. The buyer's right to claim on fixtures already in the building generally depends on a CAA 2001 s.198 election agreed with the seller within two years of completion, and on the fixtures having been pooled by a past owner. Miss the election window and the allowances can be lost for good. The detail is in our guide to claiming fixtures on a commercial purchase and the s.198 election, and the broader picture in what you can claim in capital allowances on commercial property.
VAT, business rates and the option to tax
Most commercial lettings are VAT-exempt by default, but the landlord can make an option to tax, which turns rents and a future sale standard-rated and unlocks recovery of input VAT on the purchase, refurbishment and running costs. It is a genuine cash-flow lever on a building that needs significant works, but it is a decision with consequences: it can deter VAT-sensitive tenants (such as small financial or charitable occupiers who cannot recover VAT), and it generally binds for 20 years. Residential lettings have no equivalent; they are exempt with no recovery.
Commercial premises also pay business rates rather than council tax. Rates are usually higher, but they are a deductible expense of the rental business, whereas council tax on a residential let is borne by whoever the tenancy makes liable.
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The April 2027 rates and why the gap is widening
From 6 April 2027 the UK introduces separate property income tax rates of 22% basic, 42% higher and 47% additional. These are enacted, not proposed: Finance Act 2026 section 7 received Royal Assent on 18 March 2026, and the rates apply to residential property income across England, Wales and Northern Ireland (only Scotland is carved out for 2027/28, because Scottish non-savings income rates are already devolved). Commercial rental profit is unaffected and continues at the main income tax rates of 20%, 40% and 45%.
Two points are routinely misreported, so to be precise. First, the rates apply to Wales as well as England and Northern Ireland; the Welsh power to set its own property income rates is a future Finance Act 2026 provision not in force for 2027/28, so for now Wales follows the 22/42/47 rates. Second, the Section 24 credit rises to 22% in step with the new basic rate, so no new basic-rate wedge opens for residential landlords. The practical effect of 2027 is a flat 2-percentage-point increase on net residential rental profit, not a step-change in the finance-cost penalty. We cover the residential side in full in our guide to the April 2027 property tax rates and Section 24.
For the commercial-versus-residential comparison the effect is simply that the income-tax gap between the two widens by 2 points across every band, on top of the Section 24 difference that already favoured commercial property.
Capital gains tax: the advantage that has gone
Commercial property used to enjoy a lower CGT rate on disposal. That is no longer true. Since 30 October 2024 non-residential gains are charged at the same 18% and 24% rates as residential gains under TCGA 1992 s.1H: 18% to the extent any basic-rate band is unused, 24% above it. The annual exempt amount is £3,000 for both 2025/26 and 2026/27. Business Asset Disposal Relief does not apply to a straightforward investment letting, commercial or residential.
So on the way in and during ownership commercial property is more tax-efficient (full interest relief, capital allowances, main income tax rates), but on the way out the CGT treatment is now identical. Anyone modelling a switch into commercial property purely on a historic CGT rate advantage is working from out-of-date numbers; the difference is documented in how CGT on commercial property differs from residential.
Making Tax Digital: commercial rents count too
MTD for Income Tax is live and phasing in by income level: from 6 April 2026 for sole traders and landlords with combined self-employment and property income over £50,000, from 6 April 2027 over £30,000, and from 6 April 2028 over £20,000. Commercial rents count towards the qualifying-income threshold exactly as residential rents do, and a landlord with both types aggregates them when testing whether they are in scope. Once in, you keep digital records and file quarterly updates through compatible software. Mixed portfolios should not assume the commercial element is exempt; it is the combined figure that decides timing.
Incorporation: a different calculation for commercial property
Because a personal commercial landlord already deducts interest in full, the central tax driver behind residential incorporation, escaping Section 24, simply does not exist for commercial property. The incorporation question therefore turns on different factors: the 19% to 25% Corporation Tax position against personal income tax rates, profit extraction, succession planning, and the SDLT and CGT cost of moving an existing property into a company. The headline saving that pushes residential portfolios towards a company is largely absent here, which usually makes the case weaker, not stronger. The framework for testing it is set out in our complete guide to the buy-to-let limited company.
Where commercial landlords most often need advice
The recurring problems we are asked to fix are predictable, and all of them flow from the residential-versus-non-residential boundary rather than from Section 24 itself:
- Mixed-use apportionment done by guesswork, or not at all, leaving the residential slice incorrectly relieved.
- Former FHL property still treated as if interest were fully deductible, post-abolition.
- Capital allowances and the s.198 fixtures election overlooked on a commercial purchase, with the two-year window missed.
- An option to tax made (or not made) without modelling the effect on tenant demand and the eventual sale.
- SDLT mixed-use treatment claimed on a purchase that is, on the facts, residential.
Commercial property is more tax-efficient than residential to hold on a geared basis, and Section 24 is a large part of why. But the advantages sit alongside genuine complexity, and the cost of getting the classification or the apportionment wrong is real. If you hold or are buying commercial or mixed-use property, it is worth having the boundary, the allowances and the VAT position settled before you commit, not reconstructed under enquiry afterwards.