If you are looking to invest in property, then you need to think about how you purchase the property. You can purchase property as an individual, a limited company and via a SPV limited company.
A Special Purpose Vehicle (SPV) is a popular choice for property investors. It is a legal entity that is created for the purpose of purchasing and managing buy-to-let property investments. SPVs can offer many tax advantages, when set up correctly.
In this blog we will cover all you need to know about creating an SPV company, its advantages and disadvantages and how to set one up.
What is a Special Purpose Vehicle (SPV) Company?
Let’s start with a basic understanding of what a Special Purpose Vehicle company is.
SPV’s are mostly set up as a private limited company but it could also be a Limited Liability Partnership (LLP), Public Limited Company (Plc) or other business type.
An SPV is a company set up purely to purchase property and for undertaking buy-to-let activities. You can hold multiple properties under one SPV.
SPV is a standalone legal entity, having its own assets and liabilities. For example, an SPV will own assets (property) and have liabilities (mortgages) and this can help to ringfence your assets and liabilities from other businesses you may have.
Reasons for using an SPV limited company
One of the biggest reasons that property investors use a Special Purpose Vehicle company is to gain tax advantages from tax relief offered.
There are other reasons such as succession planning, offset mortgage interest costs, ringfencing of assets and passing wealth onto the next generations etc. Below are just some more of the advantages of an SPV.
Advantages and disadvantages of using an SPV
Advantages of an SPV
- It helps in the reduction of potential income tax liability by limiting your personal income.
- In the case of limited company buy-to-let, you only need to pay corporation tax (instead of income tax) on the rental profits.
- Unlike holding properties personally, where you cannot deduct the finance costs from rental income, an SPV can claim full relief on mortgage interest as it an allowable business expense.
- Financial risks are restricted and ring fenced as SPV is classed as a separate legal entity.
- The rental income is held within the business until needed and then withdrawn more tax efficiently.
- You can use the cash held in SPV to redeploy and use to purchase future buy to let properties.
- Multiple properties can be included under SPV, meaning less administration and on-going costs.
- After making a personal investment into SPV as a loan, you can draw it back by way of a director’s loan (tax-free).
- You can ringfence your property portfolio assets from other assets or business activity.
- It can help with wealth and succession planning options in the future.
- It can help to manage risk from riskier investments by isolating these into a separate SPV away from other business activities.
Disadvantages of an SPV
- Added complexity in a corporate structure by adding an SPV company as well as your trading company.
- Burden of separate records and financial needs if it’s an addition to another trading company.
- The interest rate for mortgages on an SPV is more expensive compared to personal mortgage rates.
- Reduced choice of lenders who will offer SPV limited company buy-to-let mortgages.
- As a director of an SPV, some lenders may ask directors of the SPV to provide personal guarantees.
- If you want to transfer existing properties into the company you could be liable to pay Stamp Duty Land Tax, legal costs and potentially Capital Gains Tax, so seek advice before going ahead.
- Upon selling the property, an SPV doesn’t get any Capital Gains Tax allowance.
- If you take all your rental profits out of the SPV as income, you will need to pay income tax and dividend tax at the appropriate rates.
Setting up a SPV?
Seek advice from us to help you to set up your SPV Company. The information you require to set up a Special Purpose Vehicle (SPV) in the UK is:
- Directors names – you will need to appoint a minimum of one director and one shareholder. Do you want your spouse or other business partners as directors or shareholders?
- Company name, registered address.
- Shareholders – Getting the right shareholder structure is a crucial part of ensuring your business is running as tax-efficiently as possible. There are different classes of shares for you to consider such as ordinary shares, alphabet shares, non-voting ordinary shares, redeemable shares, preference shares and more.
Having children or grandchildren as shareholders can help you to be more tax efficient with inheritance tax planning. Seek advice before setting up a SPV.
- Memorandum of association (MOA) and Articles of association (AOA) should clearly define the business of the company.
- Nominate and appoint a company secretary.
- A percentage share of the company should be allocated to each shareholder.
- Nominate a person of significant control (PSC) including their date of birth, address and year of nationality.
- Nominate an appropriate SIC code for the business. SIC code stands for standard industrial classification of business activities and shows the type of business activity a company is involved in.
Do I still own the property when I buy it through a limited company SPV?
You will not own any properties personally if you purchase them via an SPV. Instead your company owns the property, but if you are the sole owner of the company then, you do in a way, still own the properties. It’s worth remembering that a mortgage company still has the same rights if you fall into arrears.
Accounting and taxation of SPV
Most people choose to use a SPV to reduce their tax bill. This is because instead of paying Income Tax as an individual, an SPV will pay Corporation Tax on any profits made.
Corporation Tax is charged at 19% to 25% (dependent on the level of profits). Therefore, there can be significant tax benefits to owning property via an SPV limited company. It is even more tax advantageous if you are a higher or additional-rate taxpayer, who are charged 40% and 45% respectively.
You can pay yourself rental profits using both salary and dividends from limited companies.
Dividends are significantly lower than personal taxed rates but are taxed depending on your overall income in the financial year at the following rates:
- 8.75% (Basic rate)
- 33.75% (Higher rate)
- 39.35% (Additional rate)
There is also a tax free dividend allowance for 2023/24 of £1,000.
Claiming allowable expenses against rental income is also a way of reducing your tax bill via a limited company.
You will need to produce a set and file annual accounts for your limited company SPV, which may add additional costs.
Why have Special-Purpose Vehicle Companies increased in popularity?
SPVs have increased in popularity due to the advantages they give you (see above).
I currently own a rental property. Can I transfer it into my limited company?
The simple answer is yes you can. However, it’s more financially viable to transfer a property portfolio of two or more properties into an SPV. This is because you will have to pay Capital Gains Tax on the sale personally and your SPV company will have to pay Stamp Duty on the purchase. So, it’s often financially sensible to only transfer one property into a SPV as costs often outweigh the benefits for only one property.
Things to consider when setting up an SPV
1. How many properties you have.
2. How long you intend to keep the properties.
3. Your personal taxable income from all sources.
4. Availability of your dividend allowance.
5. Stamp duty and Capital Gains Tax implications if you already own properties.
6. Early redemption charges on any mortgages you have.
7. Increased administration costs.
Special Purpose Vehicle companies can offer many benefits to property investors who own a property portfolio of two or more buy-to-let properties. An SPV can reduce your tax liability, increase tax efficiency, help you to manage risk and plan for succession.
If you are considering purchasing buy to let investments, then it is worth seeking advice now.
For more help and advice on Special Purpose Vehicles, setting up an SPV company or property tax, contact the property tax experts at dns accountants on 03300 575 902.