Auction bridging loan to cover the VAT on your purchase

Most people budget for the hammer price and forget that VAT can sit on top of it. VAT usually arises at auction when a commercial property has been standard rated, most often because the seller has exercised the option to tax. In that case the auction house collects VAT at 20% on the hammer price, and the addendum in the legal pack will say so.

Not every lot carries VAT. A plain commercial letting that has never been opted stays exempt, and a genuine transfer of a going concern (a TOGC, for example a tenanted investment sold with the lease in place) can mean no VAT is due if the conditions are met. The legal pack is where you confirm the position. Because the commercial property VAT treatment turns on the option to tax and the TOGC rules, we always suggest you check the addendum with your solicitor before the sale, so the number you bridge is the right one.

A VAT bridging loan runs alongside the finance you use for the property itself. Your main funding, whether a commercial mortgage, bridging finance or development finance, covers the net purchase price. The VAT bridge covers the 20% VAT on top. The two are sized separately, so you are not asked to find the VAT out of your own cash on completion day.

The steps are straightforward:

• You win the lot and exchange. The legal pack confirms VAT is due on the hammer price.
• We agree the VAT bridge against the net purchase price and the VAT figure, and secure it by charge over the property.
• The VAT bridge draws down at completion so the full VAT is paid to the seller.
• You reclaim the VAT on your next VAT return and repay the bridge from the HMRC VAT refund.

The lender can take a first charge or sit behind your main facility on a second charge, depending on how the deal is structured. Because it is a short term facility with a clear exit, a VAT bridge is quick to put in place.

The whole point of an auction bridging loan is that it moves at the pace of the sale. Traditional auction contracts give you 28 days from exchange to completion, and modern method sales run to their own timetable, but either way there is a hard date and a penalty for missing it. Lose the deadline and you can forfeit your deposit and face further costs.

VAT bridging finance is designed for that window. Because the loan is secured against the property and the exit is a predictable VAT refund, underwriting focuses on the security and the VAT position rather than a long affordability process. Getting the valuation booked early and the legal pack to your solicitor quickly are usually the two things that keep a completion on track. The sooner you speak to us after the hammer falls, or ideally before you bid, the more comfortably we can hit the date.

A VAT bridge is priced like other short term finance. You pay monthly interest on the amount borrowed for the months it is outstanding, plus an arrangement fee, valuation costs and legal fees. Because a VAT bridge is only meant to run until the refund lands, usually one to three months, the interest cost is limited by design.

Interest can often be handled by interest roll-up, where the monthly interest is added to the balance and cleared at the end rather than paid each month. That keeps your cash free through the term. The size of the loan is set by the VAT due, and the lender will look at LTV across the property as a whole. The gap between the gross loan and the net loan reflects the fees and any rolled interest deducted at the outset. We set out the full cost in writing before you commit so the repayment figure holds no surprises.

The exit on a VAT bridge is the VAT refund itself. To reclaim, you must be VAT registered and the purchase must be for a taxable business use. You account for the VAT you paid as input tax on your next VAT return, and once HMRC processes the return the refund is paid to you. That cash repays the bridge.

A refund is commonly paid within one to three months of the return, though HMRC may raise queries that add time, so we structure the term with a little headroom. Because the exit strategy is a defined event rather than a sale or a remortgage, it is one of the cleaner exits in bridging. If your refund is delayed, the facility can usually run on, and we will have talked through that possibility with you before completion.

The VAT is not the only cost that lands on completion. Stamp Duty Land Tax is due too, and for commercial property SDLT is charged on the price you actually pay. Where VAT applies, SDLT is normally calculated on the VAT inclusive figure, which is another reason not to leave the VAT unfunded and disrupt the rest of your budget.

Keeping the VAT ring fenced in its own bridge means your main facility, whether a commercial mortgage or development finance, is sized cleanly against the net purchase price and the project. It also keeps the VAT position tidy for your accountant when the reclaim goes in. VAT bridging on property is commercial finance and is not regulated by the FCA, and nothing here is tax or financial advice. Confirm your VAT and SDLT position with your solicitor and accountant, and speak to us about a VAT bridge as soon as you spot a lot with VAT in the legal pack.