Although bridging loans are used mainly for property-related use they can be employed in lots of other purposes, including paying large tax bills.
Types of tax bills
There are many forms of large tax bills that individuals and companies need to pay.
Income tax is paid by most employees, but is normally deducted monthly from a wage. It is unusual to be faced with a large income tax bill, but if an employer has deducted too little tax, you could be asked to pay towards the arrears each month, or you may want to pay the whole bill at once.
If you are self-employed, you will need to complete a yearly tax assessment and pay the tax bill over one or two instalments.
If you sell a capital asset such as property, you may have to pay capital gains tax. Companies pay corporation tax and VAT.
If you inherit an estate worth over £325,000, you will be charged inheritance tax.
Examples of how bridging finance works
Most tax bills are not unexpected and can be budgeted for, but there are occasions when a large unexpected tax bill arrives. Individuals or businesses may have difficulty paying them before payment deadlines.
There are two main requirements for bridging finance – security and an exit strategy. Security is usually in the form of property. The exit strategy is how and when the funds will be available to repay the bridging loan.
Inheritance tax is usually paid from the deceased person’s estate, but often the main asset of the estate is property that needs to be sold in order to pay the tax. If the property is difficult to sell it could take a while before funds are available. HMRC may demand payment before the house is sold. In this case, the house can be used as security for a bridging loan, then repaid after the house has been sold.
VAT at 20% is charged on the purchase of commercial property, and this could amount to tens of thousands of pounds. VAT-registered companies can claim this back, but only at the end of the next VAT accounting periods. VAT periods are three months, so if a company buys property at the beginning of the period, it could be up to three months before the money is refunded.
If paying the VAT negatively impacts a company’s cash flow, the property can be used as security, and the loan repaid after the VAT has been refunded.
Bridging loans are for short periods, usually three years or less. If an individual wants to use a bridging loan to pay a tax bill, they need to provide evidence to the lender that they can repay the loan within the loan period. For self-employed people, business premises they own or their residential property can be used as security.
For further advice and information on using bridging finance to pay a tax bill, talk to Ascot Mortgages. We can arrange a suitable bridging loan for you.