VAT Bridging Loans
Buying a commercial property that’s subject to VAT can create a genuine funding gap most buyers don’t anticipate – your mortgage covers the purchase price, but not the additional 20% VAT due at completion. A VAT bridging loan funds that specific shortfall until HMRC processes your reclaim.
Why VAT Arises on Commercial Property in the First Place
Unlike residential property, which is generally exempt, commercial property can be subject to VAT at the standard 20% rate in two common situations: where the building is genuinely new, typically less than three years old, or where the seller has formally “opted to tax” the property, an election that lets them recover VAT on their own costs and lasts 20 years once made. It’s worth checking a target property’s VAT status early in your due diligence, since this catches a genuine number of buyers off guard at a late stage in the transaction.
Why This Creates a Genuine Funding Gap
Most commercial mortgage lenders assess your loan-to-value purely against the purchase price, without factoring in the VAT liability at all. On a £1 million purchase subject to VAT, you’d need to find an additional £200,000 at completion, on top of your deposit – a shortfall that can push your total upfront cash requirement to close to half the property’s value. A VAT bridging loan exists specifically to close this gap.
What a VAT Bridging Loan Actually Covers
The facility funds the VAT element specifically, paid directly at completion alongside your main purchase finance, rather than needing to come from your own reserves. Some structures can fund up to 100% of the VAT due, meaning you’re not tying up working capital or diverting funds from other parts of your business to cover a tax liability you’ll ultimately reclaim.
How and When the Loan Is Repaid
Once your VAT-registered business submits its VAT return including the input tax claim on the purchase, HMRC processes the refund, typically within 30 to 90 days, sometimes longer depending on your specific circumstances and HMRC’s own processing times. The bridging loan is then repaid directly from that refund, and in some structures the property may be held in a Special Purpose Vehicle until the reclaim is complete, simplifying the security arrangement.
Loan Sizes and Terms
VAT bridging loans are typically available from around £50,000 – broadly the VAT due on a £250,000 purchase – up to £20 million or more for larger commercial acquisitions. Terms are commonly structured around 3-4 months to align with the expected HMRC refund timeline, though this can extend if the reclaim itself takes longer than anticipated.
Repayment Structure
Most VAT bridging facilities don’t require ongoing monthly repayments – the loan is typically settled in a single repayment once the VAT refund arrives, rather than being serviced month by month in the way a standard bridging loan might be.
What Lenders Assess
Approval generally depends on your business’s underlying financial strength, with limited companies typically needing at least two years of accounts, a valuation confirming the property provides adequate security, and a genuinely viable exit – usually the VAT reclaim itself, though occasionally an alternative route such as resale. You’ll also need your VAT registration details and confirmation of whether your business submits monthly or quarterly returns, since this affects the realistic reclaim timeline.
Transfer of Going Concern: When VAT May Not Apply at All
If a commercial property purchase can be structured as a Transfer of Going Concern, VAT may not be payable on the transaction at all, since the sale is treated differently for VAT purposes. It’s worth discussing this possibility with your accountant or solicitor before assuming a VAT bridging loan is necessary, since a TOGC structure can sometimes avoid the need for this kind of finance entirely.
VAT Bridging for Land Purchases
VAT bridging isn’t limited to completed commercial buildings – it’s also commonly used for land purchases where VAT is payable at completion, following the same principle of funding the tax element separately from the main land finance.
Who Can Apply
VAT bridging finance is generally available to trading limited companies, Special Purpose Vehicles, Limited Liability Partnerships, and pension fund trustees such as SIPPs and SSAS, provided the purchasing entity is genuinely VAT-registered.
Speed: Why This Often Needs to Move Quickly
Given VAT liability sometimes only becomes apparent late in a transaction, VAT bridging facilities are generally arranged quickly, sometimes within 5-14 working days, and occasionally faster still for strong, well-documented cases. It’s worth flagging the possibility of VAT applying as early as possible in your due diligence, rather than discovering the requirement close to your completion date.
Frequently Asked Questions
Why does VAT apply to some commercial properties and not others?
Generally where the building is less than three years old, or where the seller has formally opted to tax the property, an election that lasts 20 years once made.
Does my commercial mortgage cover the VAT as well as the purchase price?
Usually not – most lenders assess loan-to-value against the purchase price alone, meaning VAT creates a genuinely separate funding requirement.
How much of the VAT can I borrow?
Some structures fund up to 100% of the VAT due, avoiding the need to use your own working capital.
How long does it take to get the VAT refund from HMRC?
Typically 30-90 days, though this can vary, which is why VAT bridging terms are commonly structured around a 3-4 month window.
Can I avoid needing a VAT bridging loan entirely?
Possibly, if the purchase can be structured as a Transfer of Going Concern – worth discussing with your accountant or solicitor before assuming VAT bridging is necessary.
Get in touch with details of the property and your purchase timeline, and we’ll help you understand whether VAT applies and how to fund it if it does.
