There may be situations where you are faced with a large tax bill. This could be income tax as a business or self-employed person, or inheritance tax when a loved one passes away.
Surprise bills like this can put a lot of stress and strain on you and your finances.
If you find yourself faced with a tax bill and don’t have the funding to pay it off quickly, you may be considering a bridging loan.
In this article, we will discuss how a bridging loan could be used to pay a tax bill.
Understanding bridging loans
It’s important to understand what a bridging loan is before deciding to use one. A bridging loan is a short-term borrowing option that helps ‘bridge the gap’ until you have a more long-term solution. They are secured against a property that you own, and can be organised quicker than other types of loans.
If you wanted to use a bridging loan to pay a tax bill, you would need to show the lender how you plan to pay the money back. This is called the ‘exit strategy’, and is vital to demonstrating your eligibility to the lender.
It is worth noting that many lenders do not like lending for this purpose, so you need to make sure you check with each provider.
You can use a bridging loan for multiple different legal reasons. They are commonly used to secure property in a time-sensitive situation, such as auction purchases. If you’d like to read more about the different uses of a bridging loan, have a look at our blog; ‘reasons to get a bridging loan’.
Benefits of using a bridging loan to pay a tax bill
Quick access to funds: One of the main advantages of using a bridging loan is the ability to get fast access to funds. The streamlined application and approval processes can help you get the money in a matter of days. This is particularly beneficial if your tax bill is time sensitive, and could help you avoid additional penalties for late payments.
Flexibility: Bridging loans provide borrowers with flexibility in terms of the loan amount and repayment options. Depending on the lender and your financial circumstances, you can usually tailor the loan to suit your specific needs. This can be beneficial when dealing with tax bills of varying amounts.
Secured using property: The person or business will secure their loan using a property they own. This helps improve chances of loan approval, as it reduces the risk to the lender. This can be particularly helpful if you have a history of bad credit or need to raise a large amount of money.
Disadvantages of using a bridging loan to pay a tax bill
Higher interest rates: Bridging loans generally come with higher interest rates compared to other financing options. The increased cost of borrowing can add a significant financial burden, making you pay much more than the original bill.
Secured loan requirement: Bridging loans are secured against property. This means if you default on your exit strategy, your property is at risk of repossession. It also means that those who do not own a property may need to explore alternative financing options.
Exit strategy: Bridging loans need a clear exit strategy, which usually involves refinancing, or selling a valuable asset. If you don’t have a viable exit strategy in place, getting a bridging loan may not be possible.
Alternative ways of paying a tax bill
- Savings: if you have any savings set aside for a rainy day, this might be the time to use them. This avoids having to pay interest on a loan, and may be the cheapest option.
- Borrowing from friends and family: If possible, borrowing from trusted friends or family members can provide a temporary solution without incurring interest or fees. Clearly establish repayment terms and ensure open communication to avoid potential conflicts.
- HMRC payment plans: HM Revenue and Customs may allow you to set up a payment plan to spread the cost of your tax bill over time. This can be an effective option if you can’t pay the entire amount upfront. Contact HMRC to discuss the possibility of setting up a payment plan that suits your financial situation.
- Unsecured loan – An unsecured loan is another option you can use. With these loans, a property is not taken as security against the loan. This could be a less risky route for you to take, however the loan sizes are usually smaller than other funding options.
- Secured loan: A secured loan is a form of borrowing that uses a property you own as security. With this option, you may be able to spread out the repayments over a longer period, especially when compared to a bridging loan.
Find out more about these options in our blog ‘can you use a loan to pay off a tax bill’.
Summary
While bridging loans can provide quick access to funds and offer flexibility, they can come with higher interest rates and risks. Additionally, they require collateral and a clear exit strategy, which may not be feasible for everyone.
Therefore, you should seriously consider your options and evaluate if there is an alternative option that is more suitable. Assessing your circumstances and seeking professional advice can help you make an informed decision to address your tax bill effectively.
Any property used as security, which may include your home, may be repossessed if you do not keep up repayments on your mortgage.
