When you purchase a commercial property in the UK, it will usually have standard rate VAT added to the price you have agreed.
When buying with a commercial mortgage, this means that the cash deposit and the VAT charge both need to be paid to your solicitor before legal completion. This can dramatically affect the business cashflow, while waiting for the VAT refund to be processed.
A special type of bridging loan can be used to fund the VAT part but how much can you borrow? This article looks at VAT bridging loans, what they are and whether it’s possible to borrow 100% of the VAT.
What is a VAT bridging loan?
Let’s start by looking at a standard bridging loan.
These are short-term loans that are secured against a specific property or piece of land. The loans will normally go up to 75% loan to value and the money raised can be used for any purpose. You will be charged interest each month but there’s no need to make any repayments.
The downside is that you need to pay it all back within the agreed term, this can be between 3 – 24 months.
The uses for a bridge loan are wide ranging but most people will use them to purchase a property. This may be to break a property chain, to purchase a house at auction, or just to snap up a below value bargain really quickly.
To repay the loan you would need to either sell the property or refinance it using a long term mortgage (eg buy to let).
So how does a VAT bridging loan work?
It’s still a bridging loan so many of the above will apply.
However, it has been designed to do one job, to fund the VAT payable on a commercial property purchase, while you wait for a refund from HMRC.
This means that it is usually setup with a 3 month term, no repayments are needed, and the maximum loan is the value of the property related tax charge.
Why would you want to borrow the money?
The primary reason will be cash-flow.
A commercial mortgage will be able to fund 60-70% of the purchase price but this will not include the VAT.
So the 20% charge is usually paid by taking extra cash out of the business, in addition to the 30-40% deposit. For many businesses a reduced cashflow means being extra careful on spending and financial forecasting for the next few months.
Some businesses simply won’t have the financial means to fund it themselves.
How much can you borrow with a VAT bridging loan?
There aren’t too many bridging lenders that work in this area of financing.
It’s very short term lending and all of the loans are repaid within 3 months.
But because the repayment plan for the loan is a VAT refund from HMRC, there are lenders that will fund 100% of the VAT bill.
This releases the cashflow pressure from your business and it’s the tax refund that pays the loan off (not including fees and charges).
100% VAT funding
Repaid by HMRC refund
Improves cashflow
Fast decisions
Here’s a quick example
You’re buying a commercial property for £500,000, with 70% funding agreed from a commercial mortgage lender.
So you will need £150,000 to cover the 30% cash deposit, plus the mortgage and legal fees.
However, the additional £100,000 for VAT pushes the amount of cash needed to £250,000.
Which is 50% of the property value!
| Purchase price | £500,000 |
| Cash deposit 30% | £150,000 |
| Commercial mortgage 70% | £350,000 |
| VAT 20% | £100,000 |
| Total cash needed | £250,000 |
The cash-flow solution
By utilising a VAT bridging loan you will be able to borrow 100% of the property based VAT.
In the example above this will be £100,000 that is fully funded until the refund is paid to you.
This brings down the cash deposit needed to £150,000.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
To recap
When you buy a commercial property, the purchase price normally has VAT at 20% added to it, dramatically increasing the amount of cash needed. While a commercial mortgage will provide some funding towards the acquisition costs, this will not include the VAT element.
A VAT bridging loan is a solution designed to cover this additional amount of tax, upto 100%. The lender covers the VAT part by way of a short term loan, and you pay it back when you get a refund on your next VAT return.
Some lenders may look to place a legal charge against a property, just to give them some extra protection, but others rely on personal guarantees and the validity of the VAT reclaim.
This is a very specialist area of lending and you should always work with an experienced bridging finance broker.
