Tax Implications Of Using Bridging Loans For Property Investments

Bridging loans are a popular way for property buyers and investors to gain quick access to funding.

However, like with any business transaction, using them has some tax implications. Before you apply for a bridging loan, it’s worth understanding what these are to make sure you’re staying compliant with UK tax laws.

Here, we tell you everything you need to know.

What Are Bridging Loans And What Are They Used For?

Bridging loans are designed to “bridge” the gap between property transactions. This could include:

  • Buying property quickly, such as at auctions.
  • Financing renovation or development projects to add value to a property, and then selling it.
  • Helping out with cash flow issues while waiting for longer-term financing options like mortgages.
  • Funding off market property transactions that may not be eligible for traditional mortgages.

One of the things that makes bridging loans unique is that they are secured against property and can be financed by private lenders. This makes them quick financing options for investors, but does also mean they come with unique tax implications.

What Are the Tax Implications Of Owning Multiple Properties?

If you use a bridging loan to buy a property while still owning your current one, it can impact your tax position.

Here’s how:

Stamp Duty Land Tax (SDLT)

  • When buying a second property, SDLT is charged at a higher rate, with an extra 3% added on.
  • This rate applies even if the property is intended to be used for business, such as rental or development.
  • However, if the property is being bought for you to live in and you sell your first property within three years, you may be able to claim back the surcharge.
  • If a company purchases a residential property worth over £500,000, the SDLT may be charged at a flat rate of 15% under the “enveloped dwellings” rule.
  • However, this rule doesn’t apply if the property is bought for certain business purposes, such as renting or development. Reliefs are available in these cases.
  • SDLT must be paid within 14 days of property completion, so it’s important to have the money ready and baked into your plans.

Reliefs For Limited Companies

Limited companies may qualify for certain reliefs depending on the nature of the property purchase:

  • Multiple Dwellings Relief (MDR): If buying multiple residential units, the SDLT can be calculated based on the average value of the properties rather than the total price.
  • Build-to-Rent Relief: Some reliefs may apply for companies in the build-to-rent sector, but these are specific so it’s worth speaking to a specialist advisor about them.

Capital Gains Tax (CGT)

  • If you use a bridging loan to fund a property renovation and then sell it, you may have to pay capital gains tax.
  • Capital gains tax is applied to profits made from selling properties that are not your main residence.
  • Rates are 18% for basic-rate taxpayers and 28% for higher-rate taxpayers, with an annual tax free allowance of £6,000 (as of 2024).

Can Bridging Loans Be Used To Pay Taxes Like Inheritance Tax?

Yes, bridging loans can be a way to pay taxes like inheritance tax. This is especially useful when people inherit properties that they have not yet sold to pay off the taxes.

How Do Bridging Loans Help with Inheritance Tax?

  • Bridging loans can be approved within weeks. This can help beneficiaries access funds quickly so that their inheritance tax is paid on time. This helps them avoid penalties or interest charges.
  • Beneficiaries can use bridging loans to get a better price for their estate assets, selling them at market value rather than rushing to liquidate them under pressure.

Are Bridging Loan Interest Payments Tax-Deductible?

For Property Investments

Interest payments on bridging loans can often be tax-deductible if the loan is used for investment purposes, such as:

  • Buy-to-let properties: Interest can be offset against rental income.
  • Property development: Interest costs may be deducted as part of the development expenses.

For Business Purposes

If the loan is used for commercial property purchases or business operations, any interest and fees may qualify as deductible business expenses. However, it’s always worth consulting with a specialist advisor around your specific case.

What About VAT for Property Developers?

For property developers using bridging loans, VAT implications are important to consider:

  • VAT on refurbishments or construction can be reclaimed, provided the property qualifies.
  • Developers should keep track of their VAT registration thresholds to make sure they are staying compliant when working on multiple projects.

How Can You Manage Tax Efficiently When Using Bridging Loans?

Tax laws in the UK are constantly changing, so it’s always good to get professional advice. Here are some things you can do to arm yourself with the most up to date information:

1. Speak To A Tax Advisor

It’s important to get professional advice around tax. Speak to a tax expert that is familiar with property taxes to help you stay compliant but still understand where you might be able to get tax relief.

2. Keep Accurate Records

Keep records of all money spent and borrowed, including loan agreements, interest payments and expenses to make tax reporting easier.

3. Plan Your Exit Strategy

Make sure you have a clear repayment plan for your bridging loan, like selling the property or refinancing under a mortgage to avoid penalties of tax complications.

4. Make The Most Of Reliefs and Exemptions

Take advantage of tax relief once your advisor identifies them. Make sure you keep track of everything so that you can submit them as expenses where applicable.

Making Decisions About Bridging Loans and Tax

Bridging loans are a powerful financial tool for property investments, but their tax implications can be a little more complex.

From stamp duty and capital gains to interest deductions and VAT, understanding them can help you make good financial decisions.

To explore more about bridging loans and tax, always get professional advice.

For bridging loans up to £2M at 0.95%, available within 2 weeks get in touch with Blue Square Capital at [email protected]

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