A Special-Purpose Vehicle (SPV) Company is a limited company which is set up for the sole purpose of purchasing property and property management for buy-to-let activities. Read our short guide to gain a better understanding of what a SPV company is, why you should set a SPV company up before you buy the property and how our SPV service works.
What is a Special-Purpose Vehicle Company?
A Special-Purpose Vehicle (SPV) Company is a limited company which is established for the sole purpose of purchasing and managing a buy-to-let property. You can hold multiple properties under one SPV to rent out each month. A SPV is seen as a ‘bankruptcy-remote entity’ because the operations of the company are limited to the financing and purchasing of specific assets. A SPV has its own legal status, liabilities and assets; it can also help a contractor to isolate and securitise assets, create joint ventures and complete other financial transactions.
How does a Special-Purpose Vehicle Company work?
When you invest in a property, the buy-to-let mortgage is usually in your own name. However, when you buy a property through a SPV company (a small business in your name), the company will own the property. Therefore, the mortgage will be taken out in the company’s name. Money paid into the SPV company can be used as a deposit for your chosen property and a limited company buy-to-let mortgage can be used to cover the rest of the cost of the property.
The advantages and disadvantages of using a Special-Purpose Vehicle Company
There are many advantages to purchasing a property through a SPV company. Unfortunately, there are also a few disadvantages to consider. We’ve compiled a brief overview to help you determine whether or not you should use one.
Advantages of SPV Companies
- Buy-to-let lenders which offer mortgages to corporate vehicles mostly prefer SPVs to trading limited companies because they are easier to understand and quicker to underwrite.
- Normal buy-to-lets are taxed as part of your personal income which means you will pay Capital Gains Tax (CGT) on the income you make from rent. Whereas with a limited company buy-to-let, you will pay Corporation Tax instead. This could work out cheaper for some investors as Corporation Tax is charged at 19% (dropping to 18% in 2020).
- 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.
- 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.
- HMRC has committed to phasing out the ability to put through mortgage interest as an expense when operating as a sole trader. This is not the case with the SPV model and there is currently no plan for it to be phased out. On top of the mortgage interest, you will also be able to claim tax relief on repairs and service charges.
- 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.
- If you make a personal investment into the SPV limited company it is possible to draw your investment back out of the SPV in the form of a director’s loan. Directors’ loans can get very complicated very quickly; always seek the advice of a contractor accountant to help you make an informed decision. Read our blog to find out more.
- Isolated financial risks as the SPV operates as its own entity.
- If you purchase a property through an existing company it will mean you lose the benefit of closing that company down via a Members Voluntary Liquidation (MVL) and withdrawing the retained profits tax efficiently. However, if you purchase a property through a SPV you are able to keep it as a separate entity and will not lose the benefit of closing the existing company down via an MVL.
- Direct ownership of a specific asset.
Disadvantages of SPV Companies
- 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.
- Some lenders may require a personal guarantee from the directors of the SPV limited company, so if the mortgage is not fully re-paid you (and the other shareholders) may be liable for the debt.
- 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.
- 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).
- 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.
- Reduced lender choice as there are not many lenders who offer SPV limited company buy-to-let mortgages.
Why should you set up a Special-Purpose Vehicle Company before buying the property?
If you purchase a property prior to setting up a SPV company you will have to buy it in your own name and pay the Stamp Duty. If you then set up a SPV company you would have to effectively sell the property to the company and Stamp Duty would be due on it again. Therefore, it is advisable to set the company up before buying any property to avoid paying two lots of Stamp Duty.
You could receive better mortgage rates from lenders as they prefer SPV limited companies to trading limited companies. This is because they are easier to understand and quicker to underwrite.
Did you know Churchill Knight has a Special-Purpose Vehicle Company service?
Churchill Knight & Associates Ltd can set up your SPV limited company for free and will complete all the registration with HMRC. For every accounting period that your company is operating your accountant will prepare a full set of accounts for you and submit it to HMRC on your behalf – upon your approval.
We work alongside industry-leading accountancy software provider – FreeAgent. You will be given access to your own FreeAgent account which will help you to manage your business and stay on top of your finances.
You will also be given your own dedicated account manager who will be happy to provide you with expert advice throughout your time with us. Give our team a call today on 01707 871622 to discuss, or alternatively visit our page to find out more about our SPV service.