Bridging loans – aka bridging finance – can be used for almost any purpose whatsoever. Often sought as a form of affordable short-term development finance, bridging loans can be great for purchasing and improving both residential and commercial properties alike.
However, there are instances where purchasing a commercial property means paying a relatively hefty VAT bill. In such instances, VAT bridging loans can be useful for covering VAT costs, prior to reclaiming them from HMRC.
What is a VAT bridging loan?
As the name suggests, a VAT bridging loan is designed to cover the VAT payable upon purchasing a commercial property. VAT is payable on the vast majority of commercial properties that are less than three years old, though the rules governing commercial property VAT are quite complex. Where VAT is payable, the purchasing party is expected to pay the required 20% at the time the property is purchased. This can therefore add a significant additional cost to the overall purchase price of the commercial property.
Can commercial property VAT be reclaimed?
If you’re eligible to reclaim the VAT levy on the commercial property, it may take up to 120 days for the refund to be processed. Nevertheless, the VAT payment must be made at the time the property is purchased. This is why many commercial property investors and developers turn to specialist financial products, in order to bridge this temporary gap and remain in control of their cash flow.
How does a VAT bridging loan work?
All bridging loans work in largely the same way. Loans are typically available from around £50,000 as a minimum up to a maximum of £20 million or more. The applicant’s current property or assets are used as collateral to secure the loan, which is designed to be repaid within 6 to 18 months. The funds borrowed can be used to pay the VAT bill and subsequently repay the balance in full when the money is refunded by HMRC. As a specialist short-term funding solution, bridging loans can be more convenient than traditional loans and significantly more cost-effective.
The advantages of VAT bridging loans
The most immediate benefit of a VAT bridging loan is the speed with which the funds can be accessed. If the applicant is able to provide acceptable collateral to cover the cost of the loan, the money may be transferred to their account in less than five days. In addition, it’s rare for credit checks to be carried out or proof of income demanded. Again, just as long as sufficient security is available to cover the loan, no further verification is necessary.
With monthly interest rates from as little as 0.5% or less, a bridging loan can also represent unbeatable value for money. Depending on the lender the loan is sourced from, arrangement fees and overall borrowing costs can be kept to absolute minimums.
Penalties and levies of course apply where late payment or non-payment occurs, though the guarantee of a refund on the part of HMRC makes both eventualities unlikely.