Holding buy-to-let property in a Special-Purpose Vehicle (SPV) company offers certain improved tax benefits and planning which are not available to private landlords. Continue reading to discover the benefits of using an SPV company to build your property portfolio.
What are Special-Purpose Vehicle Companies?
There are two ways of owning buy-to-let property; personal ownership of the property or through a limited company. Using a limited company separates the risk during the funding and purchasing of property, and it is commonly used in the real estate industry.
Benefits of using an SPV for buy-to-let property
There are many benefits of using an SPV to purchase and manage buy-to-let property. These include:
Tax treatment of profits
In the past, higher rate taxpayers were able to claim mortgage interest payments as an expense to reduce their tax bill. However, this is no longer possible due to changes implemented in 2017. Therefore, one of the primary reasons for the significant growth in limited companies (specifically SPV’s) being used for a buy-to-let property is the tax treatment available.
Instead of paying income tax as an individual, the limited company will pay corporation tax on the profits. The amount of tax you pay as an individual is dependant on which tax band you fall into; whereas if an SPV owns the property, the rental profits will only be subject to 19% Corporation Tax.
The tax benefits of owning property through an SPV can be significant, especially if you are a higher rate (40%) or additional rate (45%) taxpayer. This is because you can control how much income you withdraw or leave in the SPV, and could potentially reduce your Income Tax liability.
Tax relief on mortgage interest
As of April 2020, landlords are no longer able to deduct any mortgage expenses from rental income to reduce their tax bill. Instead, you’ll receive a tax credit which is based on 20% of your mortgage interest payments. The tax credit is less generous for higher-rate taxpayers, who previously benefitted from up to 40% tax relief on mortgage payments under the previous regulations.
The changes currently only affect private landlords, and there are currently no plans for it to be phased out for the SPV model. If you are a landlord operating through an SPV, you can continue to declare rental income after deducting mortgage. On top of the mortgage interest, you are also able to claim tax relief on repairs and service charges.
Boost your retirement income
Building a buy-to-let property portfolio via an SPV is a useful way to boost your retirement income whilst giving you the flexibility to manage your highest marginal rate of tax in retirement. It is also beneficial if you plan to gift the property to a relative as SPV’s are particularly useful for legacy and estate planning. This is because the company owns the property, and therefore it is relatively easy to add the beneficiary as a shareholder to inherit at a later date. Please be aware; some lenders may cap the number of directors/shareholders you can have in an SPV, so always check the parameters of the agreement if you plan to gift the property.
Expand your property portfolio
An SPV is set up solely for purchasing and managing property and can be used to leverage the further expansion of your property portfolio as there is no Income Tax due on the retained profit, giving you more capital to re-invest. You can also use the SPV for multiple properties which can reduce the amount of admin required and you can easily manage ongoing costs.
Increased credibility and isolated risk
SPV’s are seen as ‘bankruptcy-remote entity’s’ because the company has its own assets, liabilities and legal status. As its operations are limited to the financing and acquisition of specific assets, the financial risk is isolated. SPV’s are particularly useful if you have other companies as your liability runs only to any investment you make in the company and are isolated to the new venture.
Buy-to-let lenders who offer mortgages to corporate vehicles, mostly prefer SPV’s to limited trading companies as they are quicker to underwrite and easier to understand. As the SPV tax liability is considered separate from your personal tax liability, most lenders will offer a more generous mortgage calculation. Therefore, making it easier for landlords to borrow more whilst keeping the SPV separate from any personal liability and property (such as a family home).
There are also fewer age restrictions imposed by lenders when lending to a limited company, than to an individual. However, most reputable brokers would recommend that you discuss your circumstances with a tax advisor before setting up an SPV to ensure you can pay back your mortgage.
Do lenders accept SPVs?
The government tax changes have resulted in a growth in the SPV mortgage market, and many lenders have started to offer and approve buy-to-let mortgages through an SPV. The increase in products on the market has meant a wider variety of choice and better rates are available for SPV borrowers.
Speak to an expert about our landlord accountancy service
Churchill Knight & Associates Ltd has over 20 years of industry expertise, and your dedicated account manager will be on hand to offer guidance and support throughout your time with us. You will also be given access to your own FreeAgent business portal which will allow you access real-time information about your SPV business finances.
Founded by an IT Contractor in 1998, Churchill Knight has become one of the most respected contractor accountants in the UK. We’ve helped over 20,000 contractors with their accountancy requirements. As well as our accountancy services, we also have an industry-leading PAYE umbrella company and dedicated in-house personal tax department. Whichever service you choose, you can move forward with complete peace of mind. We are proud of the reputation we’ve built over the years, and our FCSA accreditation proves how committed we are to compliance within our sector. Keep reading…