VAT Bridging Loans
Are you eyeing up a new commercial property but worried about the VAT bill?
We understand that the additional cost of VAT can be a significant hurdle in commercial property transactions. VAT bridging loans offer quick funding to ensure your purchase goes through without a hitch.
These short-term financial solutions are designed to fund the 20% VAT amount due on commercial property purchases.
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Understanding VAT Bridging Loans
A VAT bridging loan is a short-term financing solution designed specifically to cover the Value Added Tax (VAT) payable on commercial property purchases.
This specialised form of bridging finance allows buyers to borrow the full amount of VAT due, typically 20% of the property’s purchase price, for a short period.
These loans are characterised by their quick approval process, flexible terms (typically 3-6 months), and focus on the property’s value rather than the borrower’s financial status.
Unlike traditional loans, VAT bridging loans are structured with the understanding that repayment will come from the VAT reclaim process, making them an ideal solution for businesses and investors who need to maintain cash flow during property acquisitions.
When Do You Need a VAT Bridging Loan?
VAT bridging loans become necessary in several scenarios, primarily when purchasing commercial property.
You might need this type of finance if:
- You’re buying a new commercial property (less than three years old), as VAT is typically charged on these transactions.
- The property seller has “opted to tax,” meaning they’ve chosen to charge VAT on the sale.
- You’re purchasing a commercial property for business use and need to maintain cash flow for other operations.
- You’re involved in a property development project where VAT is charged on the purchase of land or existing structures.
Residential property purchases are generally exempt from VAT, so these loans are specifically geared towards commercial property transactions.
Even if you’re aware of the VAT requirement, the substantial additional cost can often catch buyers off guard, making VAT bridging loans a valuable tool in your property investment arsenal.
How VAT Bridging Loans Work
Understanding the mechanics of VAT bridging loans can help you determine if this financing option is right for your situation.
Here’s a breakdown of how these loans typically function:
- Property Purchase Agreement: Once you’ve agreed to purchase a commercial property, you’ll determine whether VAT is applicable to the transaction.
- Loan Application: You apply for a VAT bridging loan, usually through a specialist lender or broker.
- Approval Process: The lender assesses your application, focusing primarily on the property’s value and your exit strategy (the VAT reclaim).
- Loan Issuance: Upon approval, the lender provides the funds to cover the VAT amount, allowing you to complete the property purchase.
- Property Acquisition: You use the loan to pay the VAT due on the property, completing the transaction.
- VAT Reclaim: You or your accountant submits a VAT return to HMRC, claiming back the VAT paid on the property.
- Loan Repayment: Once HMRC processes your reclaim and issues the refund, you use these funds to repay the bridging loan.
Most VAT bridging loans are secured against the expected VAT refund from HMRC. Some lenders may require additional security, such as a second charge on the property. In cases where the property is already held in a Special Purpose Vehicle (SPV), the lender may take security over the shares of the SPV.
Don’t get left out of pocket.
Benefits
VAT bridging loans offer several advantages for businesses and property investors:
Cash Flow Preservation
By covering the VAT cost, these loans allow you to retain working capital for other business needs or investment opportunities.
Quick Completion
The rapid approval and funding process of VAT bridging loans enable you to complete property transactions without delays, potentially securing better deals or meeting tight deadlines.
Flexibility
Unlike traditional bank loans, VAT bridging loans are more adaptable to unique situations and can be arranged quickly, even in complex cases.
No Monthly Repayments
You only repay the loan once you receive your VAT refund from HMRC, reducing the burden on your monthly finances.
Opportunity Maximisation
These loans allow you to pursue property investments that might otherwise be out of reach due to the additional upfront VAT cost.
When compared to other financing options, such as extending your mortgage or using business overdrafts, VAT bridging loans offer a more targeted and often more cost-effective solution for managing VAT on property purchases.
Eligibility Criteria
While VAT bridging loans are more flexible than many traditional finance options, there are still eligibility criteria to consider:
- VAT Registration: Your business must be VAT registered to be eligible for a VAT bridging loan.
- Property Type: The loan must be for a VAT-applicable commercial property purchase.
- Exit Strategy: You need a clear plan for repaying the loan, typically through the VAT reclaim process.
- Business Structure: Loans are available to individuals, partnerships, limited companies, SPVs, trusts, and offshore companies.
Required documentation usually includes:
- Proof of property purchase (e.g., sale agreement)
- VAT registration certificate
- Recent bank statements
- Details of the property and transaction
- Information about your business and its directors
While credit checks may be performed, they’re typically not the primary factor in the decision-making process. Lenders are more focused on the property’s value and the viability of your exit strategy.
Costs and Fees
Understanding the costs associated with VAT bridging loans is needed for making an informed decision. Here’s a breakdown of the primary expenses you can expect:
Interest Rates
VAT bridging loan interest rates are higher than long-term mortgages, reflecting their short-term nature and quick arrangement. Rates usually range from 0.44% to 1.5% per month, depending on the lender and your specific circumstances.
These rates are often quoted monthly rather than annually, so be sure to calculate the total cost over the expected loan term. Remember, the faster you can repay the loan, the less interest you’ll pay overall.
Arrangement Fees
Most lenders charge an arrangement fee for setting up the loan. This fee usually ranges from 1% to 2% of the loan amount. For example, on a £100,000 VAT bridging loan, you might expect to pay between £1,000 and £2,000 in arrangement fees.
Other Potential Costs
Be aware of these additional costs that may apply:
- Valuation Fees: The lender may require a professional valuation of the property, which you’ll typically need to pay for.
- Legal Fees: You’ll need to cover legal costs for both yourself and the lender. These can vary depending on the complexity of the transaction.
- Exit Fees: Some lenders charge an exit fee when you repay the loan earlier than agreed. This is often a percentage of the loan amount.
While these costs might seem substantial, it’s important to weigh them against the benefits of completing your property purchase and maintaining your business cash flow. Always ensure you have a clear understanding of all costs before proceeding with a VAT bridging loan.
Given the variation in costs between lenders, it’s advisable to compare offers from multiple providers. A specialist broker can do this on your behalf and find the best deal for your circumstances.
The Application Process
Securing a VAT bridging loan is typically faster and more straightforward than obtaining traditional property finance.
Here’s what you can expect during the application process:
- Initial Enquiry: Contact a specialist broker to discuss your needs and get an initial assessment of your eligibility.
- Application Submission: Provide the required documentation, including details of the property purchase, your business, and your VAT registration.
- Property Valuation: The lender may arrange for a professional valuation of the property to confirm its value.
- Loan Offer: If your application is approved, you’ll receive a loan offer outlining the terms, including the interest rate, fees, and repayment conditions.
- Legal Work: Your solicitor and the lender’s legal team will handle the necessary paperwork, including arranging the security for the loan.
- Funds Transfer: Once all checks are complete and paperwork is in order, the lender will transfer the funds to cover the VAT payment.
The timeline for this process can be remarkably quick, with some lenders able to provide funding in as little as 48 hours from the initial application.
However, a more typical time-frame is 5-10 working days, depending on the complexity of the transaction and how quickly you can provide the required information.
Repaying Your VAT Bridging Loan
Understanding how to repay your VAT bridging loan is important for managing your finances effectively.
Let’s break this down into two key areas:
Understanding the Exit Strategy
Your exit strategy is your plan for repaying the VAT bridging loan.
For most borrowers, this involves reclaiming the VAT from HMRC and using the refund to repay the loan. It’s essential to have a clear and realistic exit strategy before taking out the loan.
Alternative exit strategies might include:
- Refinancing to a longer-term loan
- Selling other assets
- Using business profits
Whatever your chosen strategy, make sure it’s robust and achievable within the loan term to avoid potential penalties or the need to extend the loan. It’s also a good idea to build in a contingency plan, just in case HMRC delay the refund.
The VAT Reclaim Process
Reclaiming VAT is a straightforward process, but it can take time.
Here’s how it typically works:
- Submit VAT Return: Include the VAT paid on the property purchase in your next VAT return.
- HMRC Processing: HMRC will process your return and issue a refund if due. This usually takes 30-45 days but can sometimes take up to 120 days.
- Refund Receipt: Once you receive the refund, use these funds to repay your VAT bridging loan.
It’s essential to factor in HMRC’s processing time when planning your loan repayment. Some lenders offer a grace period to account for potential delays in receiving your VAT refund.
Remember, you must be VAT-registered and using the property for VAT-eligible business purposes to reclaim the VAT. Keep all relevant invoices and documentation to support your reclaim.
You should repay the loan as soon as you receive your VAT refund. Delay in repayment could result in additional interest charges or penalties.
Fully Managed VAT Options
Some VAT bridging loan providers offer a fully managed VAT option, which can significantly simplify the process for borrowers.
This service is designed to handle the entire VAT reclaim process on your behalf, from preparing and submitting the VAT return to dealing with any queries from HMRC.
Here’s what you can expect from a fully managed VAT option:
- Expert Handling: The lender’s team of VAT specialists manages your reclaim, ensuring accuracy and compliance with HMRC requirements.
- Direct Communication: The lender communicates directly with HMRC, saving you time and potential stress.
- Faster Processing: With their expertise and established relationships with HMRC, lenders can often expedite the reclaim process.
- Simplified Repayment: Many lenders will set up a dedicated account for the VAT refund, allowing for immediate repayment of the loan upon receipt of funds from HMRC.
The benefits of choosing a managed option include:
- Time Savings: You can focus on your business while experts handle the VAT reclaim.
- Reduced Stress: Less worry about correctly managing the reclaim process or dealing with HMRC queries.
- Potential Cost Savings: Faster processing can mean less interest paid on your loan.
While there could be an additional fee for this service, many borrowers find the benefits outweigh the cost, especially for complex transactions or when time is of the essence.
Case Study: VAT Bridging Loan in Action
To illustrate how a VAT bridging loan can work in practice, let’s consider the case of Swift Office Solutions, a growing technology company looking to purchase their first commercial property.
Swift Office Solutions found an ideal office space priced at £500,000.
As a commercial property, it was subject to VAT, adding an additional £100,000 to the purchase price. While the company had secured a commercial mortgage for the main purchase, this did not include the VAT element.
Here’s how a VAT bridging loan helped Swift Office Solutions complete their purchase:
- Loan Application: Swift applied for a £100,000 VAT bridging loan.
- Quick Approval: Given the clear exit strategy (VAT reclaim) and the property’s value, the loan was approved within 48 hours.
- Property Purchase: Swift was able to complete the property purchase on schedule, paying the full amount including VAT.
- VAT Reclaim: After the purchase, Swift’s accountant submitted the VAT return, claiming back the £100,000.
- Loan Repayment: Upon receiving the VAT refund from HMRC (which took 6 weeks), Swift repaid the bridging loan in full.
The total cost of the bridging loan, including interest and fees, came to £3,500. While this was an additional expense, it allowed Swift to secure their ideal property without delay and without tying up their working capital.
This case demonstrates how VAT bridging loans can provide a practical solution to the cash flow challenges posed by VAT on commercial property purchases, enabling businesses to seize opportunities that might otherwise be out of reach.
Why Use Respect Capital?
At Respect Capital, we understand that every commercial property transaction is unique, and VAT can often be an unexpected hurdle.
That’s why we’ve tailored our VAT bridging loan service to meet the diverse needs of businesses and investors across the UK.
Once we understand your position we will match you to a specialist finance broker, one who is experienced in bridging finance and VAT loans.
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Here’s why we stand out:
- Expertise: Our broking team has extensive experience in VAT bridging finance. They understand the intricacies of commercial property transactions and can guide you through the process with confidence.
- Speed: We pride ourselves on our quick turnaround times. In many cases, we can provide loan approval within 24 hours and funding within 48 hours of receiving all necessary documentation.
- Flexibility: Loans are available from £50,000 to £5 million, with terms tailored to your specific needs and circumstances.
- Competitive Rates: Strong relationships with lenders allow our brokers to secure some of the most competitive rates in the market.
- Clear Communication: We believe in transparency. Our team will clearly explain all terms, costs, and processes, ensuring you’re fully informed at every step.
Call us on 0330 030 5050 to get started.
FAQ
Yes, most lenders allow early repayment.
No, these loans are available to any business purchasing a commercial property where VAT is applicable. This includes first-time commercial property buyers and established businesses expanding their premises.
Generally, no. VAT bridging loans are specifically for commercial property transactions where VAT is charged. Residential property purchases are usually exempt from VAT.
If for some reason you’re not able to reclaim the full VAT amount, you’ll need to have an alternative strategy to repay the portion of the loan not covered by the VAT refund.
Yes, while first charge loans are more common (and preferred), certain specialist lenders will provide 2nd charge VAT loans.
