VAT bills add a hefty charge on to commercial property purchases, and developers must use VAT bridging loans in order to minimise their impact on a project’s profitability
If there’s one thing which property developers must always keep in mind, it is their cash flow. Without the ability to absorb costs and renew their on-hand capital, developers will struggle to drive expansion and run the risk of becoming over-committed to just a few investments. This can slow growth and ultimately damage profits, which is why property developers need to minimise their costs and cash tied up in assets. One significant but often-overlooked cost is the need to pay VAT on property transactions, and with VAT standing at 20% this can add a significant amount to the price of a purchase or sale.
While it’s important for developers and investors to take VAT into account, it may not always be possible to finance its payment through the use of their purchase finance; the loan that’s being used to buy the property may not stretch to cover the VAT bill as well. Therefore, it’s necessary to seek additional finance that can be used to meet this cost, and VAT loans are an ideal solution for investors who wish to expand quickly.
As with all financial products, a VAT bridge should not be sought without first consulting an experienced financial advisor. VAT bridges will have a price tag attached, so it’s vital that anyone considering this form of finance checks their sums before committing to an agreement to borrow.
VAT is not always payable on a property transaction, which means it can sometimes trip up unwary buyers; the sudden discovery that there’s a 20% fee payable is a nasty shock for investors who thought they had the deal all sewn up. In short, VAT is usually payable on new commercial property sold as a freehold, and most other buildings are exempt. This is because the additional cost of VAT would have a negative impact on the UK residential housing market - house prices leaping up by 20% would hardly help the real estate sector.
While many commercial properties are exempt from VAT, this only means that the tax can be recouped - it will still need to be paid in the first place. This is a significant burden for developers, because while they may eventually get their money back sinking an additional 20% into a purchase for 2-3 months severely restricts their ability to take on new projects in the meantime. Because VAT can be payable when you sell a property as well as buy it, both parties in the transaction are liable for sudden expenses, and while the vendor may not need to pay VAT on the building itself, they will likely become liable for other VAT-related costs.
Clearly VAT bills can pose a problem for purchasers and vendors alike, and they’re in need of a solution. Luckily, VAT bridging loans are available to help entrepreneurs meet the requirements set by HMRC and the UK Government with respect to VAT responsibilities.
A VAT bridging loan is similar in many ways to a standard bridging loan, in that it is designed as a short-term financial product to help “bridge the gap” while long-term finances are put in place. VAT bridging lenders prize the same attributes that regular bridging lenders do, and have to work under exceptionally short time constraints; top lenders are able to provide finances in just 5 days, which lets them provide solutions for buyers under a lot of pressure to complete a deal.
VAT bridging loans are generally of a smaller total value than those for property purchases, because a VAT bridge will only need to cover 20% of a property’s total purchase price. In contrast, bridging loans often need to cover the entire cost of purchasing a property, to allow the transaction to complete without recourse to a mortgage provider. However, VAT bridges are available for amounts as low as £50,000 (i.e. the VAT for a £250,000 property) and there is no maximum; like many bridging lenders, VAT bridging loans are offered with highly flexible terms. This means that buyers will always be able to source the finances they need to cover their VAT costs, often is a very short space of time.
More often than not, a VAT bridging loan will need to be sought in conjunction with a typical purchase bridging loan. Some VAT bridging lenders require a security commitment from their borrowers, which means they must be given a charge over the property. However, it is possible to obtain an unsecured VAT bridging loan that can be combined with other sources of finance easily and with no negative impact. This means that a VAT bridge can be added to a complex pre-existing bridging solution without disrupting the careful balance of charges, an invaluable bonus for investors with multiple funding sources.
In many cases, the VAT paid on a property transaction will be recoupable from HMRC. However, the process of doing so is often convoluted and time-consuming, and it can be a drain on resources to pursue the return of this money. Many specialist VAT bridging lenders handle this entire process on their client’s behalf and provide an “all-inclusive” service from start to finish, which lets the borrower focus on completing their project profitably and on-schedule.
The property development sector is a high-stakes one, where every possible advantage that can be taken must be seized. In this arena it’s vital that investors and developers are able to minimise their financial commitments in order to remain financially agile; becoming over-committed and inflexible is a severe hindrance to the speed and adaptability that are so crucial for success in the property development industry. VAT costs are simply a fact of life, and smart investors will make sure that they’re able to minimise the impact VAT has on their developments; by planning ahead and sourcing a VAT bridging solution that works for them, developers will be able to maximise their profits and move on to a new project.
No. In short you can use a VAT bridging loan on commercial property and for SDLT (Stamp Duty Land Tax)
There are many ways in which businesses can use a commercial bridging loan. Common uses are to cover short-term cashflow issues or to finance tax liabilities. More positively they can be used as working capital and by new businesses as a cashflow injection to acquire additional stock or even to acquire new equipment or premises for the business. Beyond these examples there are a huge variety of ways in which commercial bridging loans can be used.
Yes. Whilst not as widely available as 1st Charges some lenders will happily write 2nd charge commercial bridging loans.