1. What is an SPV?
An SPV (special purpose vehicle) is a limited company that exists to undertake a specific business purpose/activity. Oftentimes, this includes the purchase and management of buy-to-let properties, which is what this article will examine.
SPVs are often private companies; limited by shares. Though, they can also take other forms, such as PLCs and limited liability partnerships. They have their own legal status, assets and liabilities and they stand in their own right without other business or trading activities running through them. Properties are purchased under the name of the SPV - rather than the individual/s who runs, owns or finances them.
To ensure projects remain independent from one another, you have the option of forming and running more than one SPV, simultaneously. For instance, you can form an SPV for a specific project, then dissolve it when you sell the property. You’ll then form a new SPV for your next project, restarting the process. Alternatively, you can open one SPV and use that to conduct your property affairs, buying and renting out multiple properties under one SPV.
2. How does an SPV work?
When you set up an SPV, you’re setting up a new limited company. Those who have owned and run a limited company before will be well aware of the increased levels of time, administration, and responsibility required.
To start with, you’ll need a company name and address, at least one director and shareholder, and a Standard Industrial Classification (SIC) code specifying the nature of your business. In this case, property. Here are a couple of examples of relevant SICs:
- 68100: The buying and selling of your own real estate.
- 68209: The letting and operating of your own - or leased - real estate (other than Housing Association real estate and conference and exhibition services) not elsewhere classified.
Your SPV will be incorporated and registered at Companies House, whereby it becomes a separate legal entity from yourself. Your SPV’s Memorandum and Articles of Association should be adapted to define the interests of the company. Likewise, you’re also responsible for submitting annual confirmation statements to Companies House.
By separating things like records and accounts, you’ll insulate your personal finances from that of your business. This limits liability and can also be helpful when it comes to tax. Incorporation enhances protection over your personal assets and credit rating should your company fall into financial trouble.
Limited companies pay Corporation Tax on business profits in the year earned. Any salaried income from a limited company is subject to Income Tax and National Insurance Contributions (NICs) at the time of payment. But, as the director of a limited company, you decide when and how to make payments and when to distribute profits. This might allow for certain tax advantages. Find out more about setting up a limited company, here.
When you open an SPV, you’ll also need to set up a business bank account under the name of the SPV. And, any loans, mortgages (repayments for which will be made by the company’s bank account) or contracts with prospective tenants will also be taken out by the SPV.
3. Transferring property under an SPV
If you want to transfer property you already own into a newly created SPV, you’ll need to sell the property to the SPV at market value. Here’s how it works:
- Eric personally owns a buy-to-let property worth £180,000.
- He sets up a limited company - EC Holdings Ltd - under the SPV model.
- In order to transfer the ownership of his buy-to-let to his SPV, Eric needs to sell the property to EC Holdings Ltd. The following costs apply:
- An early repayment charge on his existing mortgage.
- Conveyancing fees.
- The costs associated with taking out a new mortgage, as well as his brokerage fee.
- Stamp duty of just under £5,400.
- Capital Gains Tax is due on any uplift in value from the original purchase price to £180,000. So, if Eric’s property was originally purchased for £150,000, he would have a gain of £30,000. After deducting tax free allowance, CGT would be due at 18% or 28%.
- Furthermore, Eric is ineligible for (entrepreneurs’/incorporation) tax relief in this instance, as his property is considered an investment, not a trade, by HMRC.
When an SPV sells a property it owns, the proceeds from the sale are retained by the SPV. What then happens with those funds (reinvestment, distribution of dividends, etc.) is then decided on by the company’s shareholders.
4. Should I set up an SPV?
Following an increase in stamp duty on second properties - and a tax change relating to mortgage interest on buy-to-let income for higher rate tax payers - plenty of property investors now use SPVs to purchase, hold and manage their buy-to-let portfolios.
As an individual private landlord, you can no longer claim mortgage interest as a tax allowance. This change has made buy-to-let investments impracticable for some potential landlords.
SPVs are increasing in appeal for property developers with portfolios of all sizes. But choosing whether to transfer your buy-to-let properties to a limited company, or to purchase properties via an SPV, depends on your specific circumstances. The SPV model tends to better suit higher and additional rate taxpayers. That tends to be those with more substantial property portfolios, who are long-term investors.
Before reaching a decision, it’s always a good idea to seek the advice of a specialist business accountant. Consider the value of your portfolio and the ambitions you have for it. As a rule of thumb, if you aren’t operating a lettings business and you ‘only’ own/envisage owning a handful of buy-to-lets, then the costs associated with transferring your properties to an SPV may outweigh the benefits.
5. Setting up an SPV: The Pros
The tax treatment on profits can be much more favourable for SPVs when compared with individual private landlords. If your property portfolio is substantial and you don’t intend to draw regular income from your company, your post-tax profits could be considerably more if you use an SPV to hold your buy-to-let properties. For instance, you’re eligible for full tax relief on your mortgage interest.
There are also benefits to be found when it comes to the tax you pay on the properties you own. The main reason for this is the difference in the type of tax SPV owners pay on their rental income and/or gains through the sale of property. Namely, Corporation Tax. While private landlords pay Income Tax on their profits (as much as 45% for additional rate taxpayers), SPVs pay Corporation Tax at 19% (as per 2021/22 tax year). That’s less than half of the higher and additional rates of personal Income Tax, and represents a significant reduction for higher earners.
Furthermore, while private landlords get taxed on all their rental income, with an SPV, the choice is yours in terms of how and when profits are distributed. Depending on your strategy for extracting money from your company, you’ll need to pay yourself sale or rental profits by way of salary or dividends. You may be subject to Income Tax when you withdraw profits from your limited company. For instance, only the first £2000 worth of dividends are tax-free. Beyond that, any dividends taken are taxed at 7.5% (basic rate tax payers) / 32.5% (higher rate) / 38.1% (additional rate).
And, as there’s no Income Tax due on the profits you retain either, you’ll have more capital to re-invest into your expanding property portfolio. If you hold property in an SPV/s, you can also claim tax relief on service charges and repairs.
Finance & Accountability
As with any limited company, the financial risks of owning an SPV are, largely, limited to the company. As an individual, you’re liable only as far as the amount you’ve invested into your company. So, if your SPV were to fail financially, you would stand to lose your (property) assets. Whilst that scenario is far from ideal, it’s perhaps preferable to the alternative as an individual private landlord, where you’d be liable for any outstanding debts associated with your properties; i.e. mortgages. In a sense, when you own an SPV, your property is ring-fenced from your other assets and liabilities. However, some lenders will require some sort of financial guarantee for the mortgage from the SPV director; i.e. you.
Operating through an SPV could also help when it comes to obtaining finance for your projects. This is because, as above, limited companies represent fewer risks and therefore less liability for lenders. Part of the attraction is that new SPVs are also free from pre-existing obligations, such as debts and legal claims.
You may be thinking ‘I already own a limited company, can I not use that?’ Well, yes, you can. And, you’d still get the benefit of mortgage interest tax relief through your existing trading company. With an SPV, though, as with your personal finances, any unrelated trading companies you own will not be affected financially if your SPV fails or is not successful.
In terms of working capital, and the funding of your SPV, you can transfer funds from an existing trading company. Though, you should speak to an accountant to ascertain the most tax efficient way in which to do this.
6. Setting up an SPV: The Cons
As you might expect, there are certain drawbacks to the SPV model, depending on your specific circumstances.
Firstly, as is the case with any limited company director, there are additional accounting obligations and reporting duties associated with SPVs. And, as anyone who’s purchased property will know, the paperwork involved is already sizable.
Interest rates can be higher for limited company mortgages when compared to other buy-to-let products. That said though, financial costs, such as mortgages, are tax deductible for limited company landlords.
While SPVs tend to get slightly healthier mortgage calculations, the fees associated can be higher than they are for private landlords - with a smaller, less competitive pool to choose from.
Furthermore, when an individual landlord sells a property they have a tax-free allowance of £12,570 (21/22). This does not apply to limited companies. And, when you sell a property through an SPV, you’re not entitled to any Capital Gains Allowance. You also forego any annual capital gains exemption on profits. Here’s how it works:
- Eric sells his personal property to EC Holdings Ltd at its market value of £180,000.
- Two years later, EC Holdings Ltd sells the property for £190,000.
- At which point, EC Holdings Ltd pays Corporation Tax on the increase in value of £10,000.
- Should Eric wish to take these surplus funds out of the business, he will need to pay a further Income Tax charge.
- Alternatively, if Eric had held this property personally, the increase in value of £10,000 may be covered by his annual Capital Gains Tax allowance - with no Income Tax due.
7. Landlords: Launch your business with Danbro Business
At Danbro Business, we have a service that’s dedicated to landlords just like you - whether you own property personally or via a limited company.
If you’re considering setting up an SPV, we can provide independent consultations to help you decide whether it’s the right route for you. With industry-leading, cloud-based technology, combined with traditional, tailored accountancy, you can launch your SPV with Danbro Business. From incorporation and company set up, to tax returns and financial planning, we’ll get your limited company formed, registered and set up to succeed in under 24 hours.
Our specialist team will provide advice and support to help you manage your buy-to-let portfolio, keep you compliant, and make sure you’re paying no more tax than you ought to be.
Once you’re set up, an experienced personal accountant will be assigned to help you take care of business. So, you’ll get the peace of mind you need to do what you do best - build your property empire.
What’s more, thanks to our partners at Danbro Financial Planning, you’ll have access to Mortgage & Protection Specialist, Sharon Kennedy. Sharon can provide expert advice and assistance in finding the best mortgage and re-mortgage deals on the market.
Sam Wright is Danbro’s Marketing Manager. He produces regular content and feature articles on our digital and non-digital channels – and social platforms – for the Danbro Group and its subsidiaries, as well as having responsibility for the Company’s internal and external communications.
His background is in Journalism and Creative Writing, having previously contributed to publications such as The Daily Post, The Lancashire Evening Post, and The Blackpool Gazette.
He is a keen swimmer and avid Manchester United fan (but don’t hold that against him), and he lives in Lancashire with his wife, Sarah.