Bridging loans for VAT

A VAT bridging loan works in the same way as standard bridging loans do, in that they are used as short term finance to cover the VAT element required for the purchase of commercial property.

Although VAT on commercial property can often be reclaimed from HMRC, it still needs to be paid in the first instance. A VAT bridging loan is a simple short term solution that allows you to pay 20% of the property’s total purchase price upfront.

VAT is usually not mentioned when prices are quoted, and it can therefore cause confusion over whether it needs to be paid at all. Below we will highlight the pitfalls of having to pay VAT on commercial property and explain how our VAT bridging loans can assist you.

What is a VAT bridging loan?

You do not have to pay VAT (value added tax) on a residential property so when it comes to buying commercial property, it is one key cost that is often over-looked.

As VAT stands at 20% of the total property value, this additional fee can be a significant financial burden for property developers and buyers alike. But, with a VAT bridge loan you can ensure that your property transaction completes as seamlessly as possible, by covering the upfront cost on your behalf.

As these types of bridging loans are of a smaller value and run for a shorter period of time, they are a favourable financial choice due to their highly flexible terms.

How do I know if I need to pay VAT on my commercial property?

As VAT is not always payable on commercial property transactions, it is difficult to know when this 20% fee is applicable. So that it does not catch you unawares, below we explain why and when you may have to pay.
VAT is applicable on the following-

  • Commercial properties that are less than 3 years old and sold as freehold.
  • Where a vendor or landlord has “Opted in” to tax. This means that a sale that would otherwise be exempt, becomes liable for VAT at the standard rate of 20%. By doing this, they must charge VAT on top of any rent that they receive, but in return they are able to recover VAT on any refurbishment or renovation costs relating to the property.

These days, almost all commercial property is continuously “opted in” to the VAT system, so that VAT costs can be recovered back from HMRC (however, this does take time!). Therefore, it is highly likely that the commercial property you are buying will be liable for VAT.

Although it is becoming increasingly rare, some commercial properties are not VAT elected which makes them exempt. Properties that are classed as a “Transfer of Going Concern”; which means that the property sold has tenants in place that will continue to rent upon transfer of ownership; is a good example of property that is excused from VAT.

Commercial property VAT bridging loans: how to reclaim

For many people, having to pay property VAT can be detrimental to their cash flow. And although in most instances, you can reclaim the cost in the usual way through HMRC, it typically takes between 45-120 days post payment.

A VAT bridging loan allows you peace of mind and the ability to operate your business as usual. Once the funds have been reimbursed from HMRC you can repay the bridging loan in full along with an additional borrowing costs incurred. Alternatively, if you are not eligible to claim back your VAT fees, a bridge loan gives you time to sort other forms of longer term finance. The quicker the loan is repaid, the lower the overall borrowing costs and the easier the transaction for all.

How much can you borrow and what are the fees?

VAT bridging loans require 20% of the property value, which is considerably less than a standard bridge loan which is often needed for covering the entire cost of purchasing a property. Therefore, a buyer requiring a VAT bridge loan is often able to source 100% of the amount required through a specialist lender, such as Bridging Options.

VAT bridging loans usually start from around £50,000 (the equivalent of the VAT on a £250,000 purchase) and the rate of interest varies anywhere from 0.75%-1.95% depending on the lender.

These types of specialist loans are generally secured on recovery from HMRC rather than on available equity in the property. However, you may be required to place a second charge on the property as security for the loan until the debt is cleared.

Please be aware that late payments can incur penalties and failure to repay the VAT bridge loan in its entirety or agreed timeframe, could lead to your lender acting against you to recover the outstanding debt.

At Bridging Options, we pride ourselves on being highly competitive and can offer our clients flexible payment terms for their short term loans.

Why Bridging Options are best for you

Whilst VAT in relation to commercial property can be complex, at Bridging Options we aim to make the process as seamless as possible. We even offer a fully managed service, providing valuable information and assisting you with the recovery of your VAT through HMRC. Afterall, VAT mistakes can prove costly, with HMRC applying penalties for non-compliance and increasing property values.

It is not unusual for property buyers to come to us at short notice requiring finance to cover their property VAT. At Bridging Options, we are able to arrange your VAT bridge loan within a matter of days, allowing you to continue with your purchase without delay.
And, when you take out a VAT bridge loan with us, you’ll free up other funds that will allow you to proceed with your property project.

If you need access to funds quickly, due to a property that is eligible for VAT – then contact our experienced advisers at Bridging Options today. Our expert team are the best in the bridging loan business and can offer a reliable service and free advice that is easy to understand.

More often than not, a VAT bridging loan is sought in conjunction with a typical bridging loan. In some circumstances we are able to combine both sources of finance by adding your VAT bridge loan to a standard bridge loan solution. If this is something of interest to you, please contact us for more information.

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