The Funding Gap
With the majority of commercial properties in the UK “opted to tax” and therefore attracting VAT on the sale, it is important to recognise that this additional 20% upon completion can create a funding gap.
If the purchaser is financing the acquisition with debt funding, most commercial mortgage lenders adopt a maximum ‘loan to value’ criteria of 70-75% of the purchase price, excluding any VAT payable. This leaves many borrowers experiencing difficulty in securing the short-term funding required to settle the VAT.
An example of this is a purchaser buying a commercial building for £1 million, financing the purchase with a 70% loan to value. This leaves the purchaser with 30% (£300,000) to pay upon completion excluding stamp duty. With the addition of 20% VAT, then the actual funding gap is not 30%, but 50% (£500,000) of the purchase price.
The Bridging Vat lending product provides a solution to this problem: short-term secured loans that recognise the security of the VAT recovery from HMRC, rather than focusing purely on the underlying property. Unlike most lenders, we are not restricted by fixed loan to value criteria and this explains why we are happy to operate as second or even third charge holders, behind senior debt and mezzanine funders.
As opposed to just funding the product, we become the borrower’s authorised VAT agent. In the period between offer and advancing a loan, we work closely with the borrower, using in-house tax expertise, to ensure the borrower is “Recovery Ready”.
After completion of the loan, we manage the VAT reporting process and communicate directly with HMRC on the borrower’s behalf. Our approach ensures the VAT loan is outstanding for the shortest possible time, reducing our risk and the borrower’s cost.
If you are currently buying a commercial building or building site which is opted to tax and would like to discuss your options, please do not hesitate to contact us on email at firstname.lastname@example.org or by telephone on 01206 645 050.