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. Unlike an investment fund, which makes multiple investments over time, SPVs typically make a single investment into a business.

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) Legal Entity?

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 has its own legal status as a separate company, which means it operates independently with its own assets and liabilities.

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. The SPV is considered a ‘bankruptcy remote entity’, meaning it can continue operations even if the parent company goes bankrupt.

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. SPVs help to isolate financial risk, making them attractive for property investors.

There are other reasons such as succession planning, offset mortgage interest costs, ringfencing of assets and passing wealth onto the next generations etc. SPVs can also be used to raise capital from investors to manage funds independently and focus solely on designated projects or assets. Below are just some more of the advantages of an SPV.

Advantages and disadvantages of using an SPV to isolate financial risk

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.
• SPVs can be used in public-private partnerships to manage financial exposure and risks in capital-intensive projects.
• The legal structure of an SPV can provide flexibility in managing property investments and securing obligations.

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.
• The complexity of managing a special purpose entity can be a disadvantage, especially if it involves multiple legal and financial obligations.
• While an SPV has its own legal status, this can also be a disadvantage if it complicates the overall corporate structure.

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 – the parent company 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.

The parent company needs to carefully consider the investment process when setting up an SPV to ensure it aligns with their overall investment strategy.

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. The legal structure of the SPV determines how property ownership is managed and protected. It’s worth remembering that a mortgage company still has the same rights if you fall into arrears. The SPV can act as a target company for investors looking to pool resources for property investments.

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.

Understanding the investment process is crucial for effective tax planning and financial management of the SPV. Proper accounting practices help to isolate financial risk, ensuring that the SPV’s financial obligations are managed independently.

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 to raise capital?

SPVs have increased in popularity due to the advantages they give you (see above). SPVs are popular in public-private partnerships for managing large-scale property investments. They are also an effective way to raise capital for property investments, attracting investors looking for structured opportunities.

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.

Transferring properties into an SPV can be part of an asset securitization strategy to manage specific assets more effectively. The SPV will focus on specific assets, which can streamline the management and financial planning of the property portfolio.

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 Land Tax and Capital Gains Tax implications if you already own properties.
6. Early redemption charges on any mortgages you have.
7. Increased administration costs.
8. The legal status of the SPV must be clearly defined to ensure compliance with legal and financial regulations.
9. The parent company must carefully plan the setup process to align with their overall business strategy.

Summary

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 accountants on 03300 575 902.

Frequently Asked Questions – FAQs

What is a Special Purpose Vehicle (SPV) company?

A Special Purpose Vehicle (SPV) company is a legal entity created for a specific, often temporary, purpose. An SPV is also known as a special purpose entity, created to isolate financial risk. In the context of property investment, an SPV company can be used to purchase and hold property assets. An SPV has its own legal status, with its own assets and liabilities.

What are the benefits of using an SPV company for property investment?

Using an SPV company for property investment can provide tax advantages, liability protection, and flexibility in structuring ownership and financing arrangements. An SPV is considered a bankruptcy remote entity, providing financial protection even if the parent company goes bankrupt. Additionally, using an SPV can streamline the investment process, making it easier to pool investor capital for property investments.

How does purchasing property through an SPV company differ from purchasing property as an individual or a limited company?

Purchasing property through an SPV company can offer distinct tax benefits and liability protections that may not be available when purchasing property as an individual or through a regular limited company. The legal structure of an SPV provides distinct tax and liability benefits compared to other methods. Additionally, an SPV focuses on specific assets, which can provide more targeted financial management.

Are there any specific legal requirements or regulations for setting up an SPV company for property investment?

Yes, setting up an SPV company for property investment involves complying with company law, tax regulations, and any specific requirements related to property ownership and management. The legal status of the SPV must be clearly defined in the setup process. Additionally, the legal structure of the SPV must comply with company law and tax regulations.

Can an existing limited company be converted into an SPV company for property investment?

In some cases, an existing limited company can be restructured or converted into an SPV company for property investment, but this process may involve legal and tax considerations. The parent company must carefully plan the conversion process to ensure it aligns with their overall business strategy. Additionally, the SPV can act as a target company for investors looking to pool resources for property investments.

How can I determine if using an SPV company is the right choice for my property investment strategy?

It is advisable to seek professional advice from legal, financial, and tax professionals who specialize in property investment and company structuring to evaluate the suitability of using an SPV company for your specific investment goals. Analyzing financial risk is crucial in determining the suitability of an SPV for property investment. Understanding the investment process is essential for evaluating the benefits of using an SPV.