What is a Special Purpose Vehicle (SPV)?
A SPV (Special Purpose Vehicle) is a type of limited company that is set up for a specific purpose.
The term SPV in the mortgage industry is the term for a limited company specifically set up to buy and rent properties.
Why are SPV’s Used by Property Developers?
There are two ways of owning buy-to-let property: using your personal name, or through a limited company.
One of the primary reasons for the growth in limited companies being registered for buy-to-let purposes is the tax treatment.
Instead of paying income tax as an individual, a limited company pays corporation tax.
Changes to buy-to-let tax relief in 2016 were phased in during 2017.
In the past, higher rate taxpayers were able to effectively claim mortgage interest payments as an expense and thereby reduce their tax bill.
That is no longer possible to the same extent and if you are a higher rate tax payer, you will be negatively affected by this change.
So some landlords have used different strategies to reduce their tax bills – from increasing rents to setting up companies.
If you own a property in your personal name and you rent it to a tenant, you pay tax on any profit you make from the rental income that is not covered by your personal allowance, which is set at £12,500 for the 2019-2020 tax year.
The amount of tax that you pay depends on which tax band you fall into.
If the property is owned through a SPV, the rental profits will be subjected to corporation tax, currently at 19% (this will reduce to 17% in 2020).
The personal allowance of £12,500 will not be usable, however you can claim the financial expenses that relate to the business, which is another benefit of a SPV.
The tax benefits of owning a property through a SPV can be significant particularly if you are a higher rate (40%) or additional rate (45%) tax payer.
Why Do Lenders Prefer SPV’s to Trading Limited Companies?
Where property developers want to obtain finance for their projects, a SPV is normally used as it is a company that can be used on one project only and therefore represents fewer risks and liabilities for the lenders.
Lenders prefer SPVs to trading limited companies because they are easier and quicker to understand and underwrite.
Lenders also tend to relax the stress testing when it comes to rental calculations allowing the borrower to maximise the borrowing.
Setting up an SPV
Setting up a SPV is very simple and is no different to setting up any other company.
A SPV is treated as a separate legal entity and has to be registered with a specific SIC code under Companies House.
What is a SIC code?
The Standard Industrial Classification of Economic Activities (SIC) is used to classify business establishments by the type of economic activity in which they are engaged.
You will need a SIC code when filing the SPV’s Annual Return with Companies House.
The SIC codes you would need to choose from are:
- • 68100 Buying and selling of own estate
- • 68201 Renting and operating of housing association real estate
- • 68202 Letting and operation of conference and exhibition centres
- • 68209 Other letting and operating of own or leased real estate
- • 68310 Real estate agencies
- • 68320 Management of real estate on a fee or contract basis
Other Advantages of SPV Companies
There are many other advantages to purchasing a property through a SPV company such as:
- You can reduce your potential Income Tax liability as you are able to control how much income is taken out of the company, or you can leave it in the SPV if it is not needed.
- It is possible to grow your buy-to-let portfolio quickly through a SPV limited company as there is no Income Tax due on the retained profit, giving you more capital to re-invest.
- You can use the same SPV company for multiple properties. This allows you to build a portfolio within one entity, reducing admin and ongoing costs.
- As the company owns the property it is relatively easy to change the shareholders. This is very useful if you plan to gift property to a family member. It could help the beneficiaries save money on Inheritance Tax, all you need to do is add the beneficiaries as shareholders. Although some lenders cap the number of shareholders/directors in a SPV.
- If you wish to transfer an asset to a SPV there will be capital gains tax to pay but it will still be at the corporation tax rate rather than at 28% (the higher rate for an individual).
Disadvantages of SPV Companies
There are also a few disadvantages to SPV’s to consider such as:
1 SPV limited company buy-to-let mortgages can cost more than normal buy-to-let mortgages. This is because interest rates are often higher and lenders sometimes charge more to cover the extra paperwork.
2 Assessment criteria for limited company buy-to-let mortgages can vary from lender to lender; the personal financial history of the company director(s) will often be taken in to account, and lenders usually require the director(s) to personally guarantee the debt. The directors have to have good credit scores.
3 If you want to transfer existing properties into the company you could be liable to pay Stamp Duty Land Tax, Legal Costs, Higher Rate Tax brackets and potentially Capital Gains Tax, as it is treated as a sale of property.
4 When a company sells a property there is no Capital Gains Allowance, whereas an individual selling a property would have a £12,000 tax-free allowance (2019/20).
5 If you want to draw all the rental profits as income, Corporation Tax is applicable at 19% and then the director will pay either 7.5% (basic rate), 32.5% (higher rate) or 38.1% (additional rate) Dividend Tax. The current dividend tax free amount is £2,000.
6 Reduced lender choice as there are not many lenders who offer SPV limited company buy-to-let mortgages.
7 The lenders that do offer these mortgages often have strict criteria, i.e must already be an experienced landlord, own your own home, be paid in sterling etc. It is crucial to find the right lender to fit your circumstances.
Whether you opt to own your rental property on a personal or limited company basis, it’s advantageous to make your decision at the outset.
Restructuring your business later on can attract additional costs in transferring the ownership of properties from personal to company ownership (or vice versa) in terms of both legal fees and tax liabilities.
If you opt to set up a SPV, you need to be aware that there will be administrative work involved such as the filing end of year accounts and annual statements with Companies House.
Our sister company Marine Accounts tax consultancy can provide this service should you need assistance.
If you would like to discuss your mortgage options get in touch with us to arrange a consultation.
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Disclaimer: Mortgages for Yacht Crew does not provide advice in relation to savings and investments. This article is intended for discussion only and does not propose financial advice in any way, and therefore should not be construed as such. Your property may be repossessed if you do not keep up with mortgage repayments.