Why VAT can appear on a property purchase
Most sales of existing commercial property are exempt from VAT. The exceptions are where the seller has opted to tax the building, or it is the freehold of a new building, meaning one completed within the last three years. In those cases VAT at the standard rate of 20% is added to the price, and the buyer must pay it at completion along with the rest of the purchase money.
A VAT-registered buyer who will use the property for taxable purposes can usually reclaim that VAT on its next VAT return. The money comes back, but not until HMRC has processed the return. On a large purchase, the VAT can be a substantial sum to find for a short period, which is the gap a VAT bridging loan is designed to fill.
In some sales VAT is not charged at all because the deal is a transfer of a going concern, for example the sale of a tenanted investment where the buyer carries on the letting business. Whether that applies depends on detailed conditions, so take advice from your accountant or solicitor early. HMRC's guidance on VAT and land and property sets out the rules.
How a VAT bridging facility works
A VAT facility is a short loan, usually for a few months, that pays the VAT element of the price at completion. It is normally arranged with the same lender as the main purchase loan and secured on the same property, so both are agreed together and complete at the same time. Once HMRC repays the VAT, the repayment is used to clear the VAT facility.
Interest is charged monthly, as with other bridging, and is often retained or rolled up so there is nothing to pay until the refund arrives. Arrangement fees apply, and some lenders ask for the VAT repayment to be paid to an account they can monitor, or for your accountant to confirm when the return has been submitted.
Because the VAT facility sits on top of the main loan, lenders look at the total borrowing against the value of the property. The repayment comes from HMRC rather than a sale or refinance, but the property still has to support the combined debt.
Timing the reclaim
The speed of the refund depends mainly on your VAT return cycle. Buyers on quarterly returns may wait until the end of the quarter before they can claim, so some move to monthly returns, or time completion close to the start of a return period, to bring the repayment forward. Your accountant can advise on what is possible for your business.
HMRC may carry out checks before paying a large repayment, particularly for a newly registered business or an unusual claim. Building a few months of margin into the term of the VAT facility avoids pressure if the refund takes longer than expected. Our VAT bridging calculator shows how the interest builds up month by month, so you can see the cost of a longer wait.
You need to be VAT registered, and to have made any option to tax that applies to you, before completion. Gaps here are among the most common reasons a VAT refund is delayed or refused. HMRC's notice on opting to tax explains the process.
How we compare VAT facilities
Only some bridging lenders offer a VAT element alongside a commercial purchase, and terms vary on the maximum amount, the term, the fees and how the repayment is controlled. We compare the purchase loan and the VAT facility together, so you can see the full cost of completing the deal.
We then approach suitable lenders with the purchase, your VAT position and your plan for the reclaim set out clearly. Instant Quotes gives indicative figures for the main purchase loan as a starting point, and final terms depend on each lender's valuation and checks. For the property loan itself, see commercial bridging loans, office bridging loans and business premises bridging.
