VAT lending and commercial property investment
Your clients who are involved in property investment may have been hard hit recently.
Residential Property Investment – which was once almost a licence to print money – was already going out of favour, thanks to the punitive changes brought in when the government became aware of the distortion Buy to Let was was inflicting on the housing market in general, and first-time buyers in particular.
The fall in house prices noted in many regions has made investment in flats and houses even less attractive. However commercial property is becoming increasingly attractive to experienced and inexperienced property investors alike. Both yields and the taxation environment can be more attractive to investors large and small.
What are your clients looking for?
The UK commercial property sector is a highly developed international market with an estimated size of nearly £900 billion. Returns can out-perform the FTSE 100 - average yields of around 5% remain.
With stamp duty capped at 5% over £250,000, as opposed to SDLT of up to 12% on residential properties over £1.5m, and loan interest relief still available against commercial rental, income of a commercial investment can now look very different to a residential buy to let.
The primary sectors within the commercial property space include:
- Commercial office space
- Industrial property
With Brexit, new trading patterns could mean exciting opportunities for reinvigorating west coast ports – which are better placed for trade with the rest of the world than those ports on the east coast who deal mainly with Europe – the so-called “Rotterdam Effect” from EU membership. Other property sectors may also benefit indirectly from this rebalancing, as businesses head west.
How Rangewell can help
At Rangewell, we can help your clients find the funding they need for commercial property purchases. We can call on lenders across the entire UK market, and frequently secure funding for purchases in the £1,000,000 - £5,000,000 bracket.
But there is another way that we can help when your clients are buying commercial property.
Where the sale of a commercial property involves premises less than 3 years old, VAT may be payable at the standard rate of 20%. This also applies to commercial property transactions where the landlord has elected to charge VAT to recover the VAT element of any refurbishment or renovation costs.
When VAT is charged, this is referred to as an “opted-in” commercial property and, if the property is VAT elected, your client will need to pay this on completion. This can mean another 20% of equity required on top of the normal 30% required under the LTV required by most senior lenders.
£800,000 on a £4m purchase is a significant additional amount to find. Whilst you may be able to reclaim the VAT from HMRC on your client's behalf, they will still have to pay the VAT at the time of purchase. Claims to HMRC can typically take between 45 to 120 days between the date of payment and recovery, which can have a serious detrimental effect on your clients' cash flows.
The solution is a VAT Bridging Loan, which enables your client to borrow the cost of the VAT and then repay the loan once the money has been reclaimed from HMRC.
At Rangewell we know the lenders who can provide this kind of funding with a VAT Bridging Loan. Loans are usually available from a minimum level of around £50,000 (the equivalent of the VAT on a £250,000 purchase) up to £20 million plus. It may be possible to borrow up to 100% of the VAT element of a commercial property purchase with this type of VAT Bridging Loan, which means that your client can cover the full costs until you are able to reclaim this from HMRC on their behalf.
A VAT Bridging Loan provides short-term finance to cover the VAT element that may be due on the purchase of a commercial property.
The terms may be relatively attractive as the loan is secured on recovery from HMRC rather than on the equity seen in the property. Despite this, however, some lenders may require a second charge on the property as security for the loan. Others may make other stipulations, such as requiring the property to be held in a Special Purpose Vehicle until the debt is cleared.
Interest rates will vary between lenders but rates of between 1.25% and 1.5% per month are typical.
How can you help your clients?
The rules around VAT and property are complex.It is not unusual for clients only to become aware of the issue of VAT at a late stage. A VAT Bridging Loan may be the simplest way to provide the finance to meet this additional cost and ensure that the deal completes.
And the simplest way to find that loan? Simply call us at Rangewell.