SPV - Special Purpose Vehicle explained

Categories: limited company | guides | property investment guides

A special purpose vehicle (SPV) is company structure set up for a given purpose, with its own assets and liabilities and its own legal status.

In the world of property investment, landlords often use an SPV to purchase buy to let, holiday let or commercial premises.

When you look at lender websites, or talk to a mortgage broker, it is more usual to hear products for SPV’s described as for ’limited companies’, rather than ‘for SPV’s’, simply because most people know what is meant by the former.

As with everything, there are both pros and cons to investing via SPV companies, and they are not suitable for everyone.

In this guide, we’ll address some of the most common questions relating to SPVs and how they pertain to the real estate sector, including:

Before we get into the nitty-gritty, make sure you read our guide to acquiring a buy to let mortgage for limited companies, if this is something that interests you.

How do SPVs work?

What is an SPV limited company and how does it relate to buy to let mortgages?

To answer this question, we need to understand the typical process of buying/renting buy to let properties.

Before 2017, landlords could deduct mortgage interest from rental income as an expense. This meant tax was only paid on the profit made from renting property, thus reducing tax liability on their buy to let portfolio. However, from the tax year 2020-2021, mortgage interest tax relief changed and became a flat 20% tax credit. So, many landlords sought alternative ways to be more tax efficient.

That included investing via limited companies, typically set up using an SPV structure specifically for property investment (as opposed to using an existing and already trading limited company).

Limited companies are separate legal entities from a financial standpoint and when it comes to tax. Limited companies are subject to corporation tax instead of personal income tax.

The costs of running a limited company can be deducted from its income, i.e. mortgage interest (and also repairs and insurance), which is not the case when investing in personal name. SPV profits under £50,000 are based on the 19% corporation tax rate or, for profits over £250,000 the rate is 25% amounts in between are calculated on a sliding scale (visit the UK government website for more detail around corporation tax rates) so, these things combined can put some landlords in a more preferable tax position.

Please consult a qualified tax professional regarding your tax position.

When should you consider an SPV?

Ultimately, the “right time” for an SPV is when you have considered your options, calculated your potential earnings/expenses/tax liabilities, and sought advice from property tax experts.

SPVs are usually formed by experienced landlords who own multiple properties and pay the highest rate of personal income tax.

There are a few reasons for this:

• Tax rates: When investing via a limited company that is subject to Corporation Tax and not Personal Income Tax, a higher rate tax payer might find that their tax liability is lower with Corporation Tax than it would be with Personal Income Tax. However, this may not be the case for anyone who does not fall into the higher rate tax bracket. Corporation tax is 19%-25%, but there is no personal allowance, so costs can vary.
• Availability: Not all lenders work with first time landlords, which may contribute to fewer incorporating. However, where lenders do accept first time landlords, and also offer limited company products, the availability will be the same regardless of experience. Speaking to a broker will help you find appropriate borrowing opportunities.
• Cost: SPV investors can expect to pay higher mortgage rates and fees than those charged to standard borrowers. As a result, the tax benefits of incorporating may help reduce their overall property investment costs.

To understand whether incorporation will be beneficial for you, speak to a qualified tax professional. Commercial Trust offers mortgage advice, but cannot help with tax advice.

The difference vs a typical buy to let

The overall cost of an SPV mortgage is usually higher than a traditional buy to let. Not only are the interest rates higher, but lenders/solicitors may also charge more to cover the additional paperwork.

The number of lenders who offer limited company buy to let mortgages is fewer than the total offering standard buy to let deals, but there are still plenty available to choose from.

Difference between an SPV company and limited company

In the realm of property investment and financing, two common business structures are the Special Purpose Vehicle (SPV) company and the trading limited company.

While both structures serve distinct purposes, it is important for landlords to understand their differences to make informed decisions regarding their property investments.

A limited company (Ltd), is a legal entity separate from its owners (shareholders).

It provides a level of liability protection to its shareholders, as their personal assets are typically shielded from the company’s debts or legal issues.

Limited companies are commonly used for a wide range of business activities, including property investment.

It is important to note that, when it comes to investing in property, lenders will ask for personal guarantees from the company directors, which therefore eliminates a degree of the financial protection a company structure would otherwise offer.

The key difference between an SPV company and a regular limited company lies in their objectives and scope. A limited company is a more general business structure that can engage in various activities beyond property investment, while an SPV company is specifically designed for a given purpose, e.g. to hold and manage properties.

There are more lenders in the market who will accept buy to let mortgage applications made through a SPV set up specifically and solely for property investment, than will accept an application for a buy to let mortgage made via a trading limited company, which also being used for another type of business.

This is because, where two businesses are being run under one company structure, the financial performance of each one affects the other. Should the trading company fail, it may affect the property investment.

Seeking professional advice from mortgage brokers, accountants and legal experts experienced in property investment can provide further guidance and can help make an informed decision.

What is the process for setting up an SPV?

We’ve answered the question “what is an SPV limited company?”. We’ve discussed how SPV buy to let mortgages differ from traditional buy to let mortgages. But how do you actually set up an SPV in the UK?

The following is for information only, please seek the advice of a qualified legal professional.

The process starts with Companies House and looks something like this:

• Choose a name, director(s) and shareholder(s) or guarantors: Your company will need a name, as well as at least one director and one shareholder or guarantor, you may choose to have more. You will also need to establish which of the people associated with the company will have ‘significant control’ – those with voting rights or who have over 25% shareholding.
• Choose a registered address: Your business must have a registered address. This will be shown on the Companies House website and will be visible to anyone who searches for information about your company.
• Provide personal documents: During the setup process, you will be asked for your contact details and personal information, as well as your passport number and national insurance number.
• Prepare business documents: You need both a Memorandum of Association (MOA) and Articles of Association (AOA), which define the company’s operations. If you’re registering online, the former will be created for you and the latter can be taken from standard articles.
• Get a SIC code: The Standard Industrial Classification of Economic Activities (SIC) is a code that classifies your business type. Check the government’s SIC list for more information. Some examples include 68209, which is for “other letting and operating of own or leased real estate”.
• Register: The final step is to confirm your registration and pay the fee.

You will also need to register for corporation tax.

What are SIC codes?

The Standard Industrial Classification of Economic Activities (SIC) is a system used to categorise and classify businesses, based on their primary economic activities. It provides a standardised framework that allows organisations and government bodies to better understand and analyse various sectors of the economy.

The SIC system is essential for gathering statistical information, conducting research, and formulating policies related to different industries. It helps to identify trends, monitor economic performance, and compare businesses within the same sector. For landlords, understanding the SIC codes relevant to their activities can be particularly valuable.

Each business is assigned a specific SIC code, based on its primary economic activity. These codes consist of a series of numbers that categorise the industry in which the business operates. There are hundreds of SIC codes available, covering a wide range of sectors, such as real estate, manufacturing, construction, finance, and more.

For landlords, the most relevant SIC codes typically fall within the real estate sector. The codes within this sector are designed to distinguish between various types of property-related activities, including buying, selling, renting, managing and developing real estate. Where SPVs for real estate are concerned, options include:

• 68100 – Buying and selling of your own real estate
• 68209 – Letting and operating of own or leased real estate
• 68320 – Management of real estate

It is important for landlords to ensure that they accurately determine and use the appropriate SIC code for their business. This ensures that they can access the most relevant resources, support, and information related to their industry sector.

When engaging with a mortgage broker (or other financial institutions), understanding the SIC code that best represents their activities can also help streamline the loan application process and ensure a smooth transaction.

You can find the full UK government SIC code list here.

Costs involved on setup

An SPV only costs a small amount to create, as that’s the charge for creating a company through Companies House. The fee can be paid via a credit card or debit card.

There are third-party providers that offer to complete the process for you, but it’s a relatively short and straightforward process.

The pros and cons of SPVs

Pros

• Reduced tax liability: Not only can the tax rate be lower, but the director(s) have an element of control over how much income leaves the company and how much is used to reinvest in other properties.
• Inheritance tax benefits: Ask your tax advisor about the implications of incorporation on inheritance tax, it is possible there may be benefits.
• Easy transfer of ownership: The properties are owned by the company, which means it’s relatively easy to transfer ownership.

Cons

• Higher fees: Interest rates may be higher when purchasing a buy to let property via an SPV. 
• Strict assessment criteria: Criteria varies from lender to lender, but they are usually more demanding of SPV purchases. The lender may look into the financial history of the director and personal guarantees for the debt are a requirement.
• No personal allowance: The personal allowance you receive with personal income tax does not apply to businesses and therefore won’t ease the burden when selling the property or profiting from rental income, seek professional legal advice for clarity on this.

Can I invest using a trading limited company?

Within the property investment industry, you can use a trading limited company or an SPV limited company to buy property. The SPV can be newly set up or long-standing.

You may be able to invest using a trading limited company, but there are implications when a limited company is used for more than one thing. As such there are fewer options available. Lenders prefer that an SPV has been set up specifically for property investment.

There are reasons why it may be beneficial to do so for you too, including limiting the liability of that company, if there are any issues.

Help buying property with an SPV

If you’re looking into SPVs but don’t really know what they are or whether they’re a good fit (if you’re googling “what is an SPV limited company?”, that’s probably true), seek professional tax, legal and mortgage advice before going any further.

If you are looking to buy a property via an SPV or through a trading limited company, then contact us today to speak with a buy to let mortgage expert.

In the meantime, check out our limited company buy to let mortgage calculator and take a look at our other property guides.

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