Accountants for SPV Special-Purpose Vehicle Company

Special-Purpose Vehicle Company Defined

A Special Purpose Vehicle may be defined as a limited company that is set up solely to purchase or manage buy-to-let properties. A Special Purpose Vehicle (SPV) can have several properties under its name and get rent income from each every month. Since the SPV is limited to the purchase and finance of specific assets, the company is often deemed a “bankruptcy-remote entity.” The SPV typically has its own assets, legal status and liabilities; for a contractor, it may be used to securitize and isolate assets, enter into financial transactions and create joint ventures.

The Workings of a Special-Purpose Vehicle Company

Investing in a property usually means that the buy-to-let mortgage is in your name. However, when you use an SPV company to buy a property, the property belongs to the SPV (the SPV company is usually in your name). As such, it will be the company that is taking out the mortgage rather than you as an individual. You can deposit money into the SPV which the company can then use to pay the deposit on a property you intend to buy while the limited company buy-to-let mortgage can provide the top-up needed to finance any other costs of purchase.

Why You Should Use a Special-Purpose Vehicle Company

An SPV company provides a lot of advantages when purchasing a property. Nonetheless, there are also some disadvantages that you need to take into account when purchasing properties through such an entity. The following is a brief overview of the positives and negatives to take into account when using an SPV Company.

Advantages of SPV Companies

  • They are quicker to underwrite and understand and hence you can get mortgages from buy to let lenders easier and faster as compared to using a trading limited company.
  • The conventional buy to let usually results in Capital Gains Tax (CGT) since taxes on rent are applied as part of personal income. With a limited company buy to let, you will be obligated to pay Corporation Tax rather than CGT. This could be advantageous for some investors given that Corporation Tax is generally cheaper at 19%
  • Since you can control how much income is withdrawn from the SPV, you could significantly reduce Income Tax liability. You could also leave the money in the SPV if it is more convenient for the business
  • Buy to let portfolios purchased through an SPV have no Income Tax obligations on retained profit. As such, you will have more money at your disposal that you can reinvest in more properties to grow your portfolio even faster.
  • HMRC is working on doing away with the option of declaring mortgage interest as an expense for sole traders. You can still declare mortgage interest as an expense if you purchase buy to let properties through an SPV and there are no plans to do away with the provision any time soon. You can also claim tax relief on serviced charges and repairs on an SPV purchase.
  • You can reduce ongoing and administration costs by buying and building your portfolio in one SPV. This is because you can use just one company for all your buy to let properties.
  • You can easily get your money back out of the SPV Company through a director’s loan even if the money was put into the SPV as a personal investment. However, it is important to note that director’s loans could have a lot of complications and hence it is critical to get the advice of a qualified accountant before you decide to get one. Read our blog on how to hire a contractor account for such purposes.
  • Since the Special Purpose Vehicle Company is its own entity, you can be isolated from many of the financial risks as an individual.
  • Purchasing a property via an existing company usually means you cannot shut down the company through a Members Voluntary Liquidation (MVL) or withdraw any retained profits in a tax-efficient manner. With an SPV, the business is a separate entity and you will retain the right to shut down the company through an MVL.
  • You have direct ownership of a particular asset.

Disadvantages of SPV Companies

  • Buy to let mortgages purchased through SPV limited companies tend to be more expensive as compared to conventional buy to let mortgages. The reason for this is that lenders will sometimes charge higher interest and often include a charge for the extra paperwork required.
  • Some lenders will only agree to grant a mortgage if the directors of the SPV limited company give personal guarantees. As such, the directors and shareholders which may include you could be on the hook for the mortgage if it is not repaid in full.
  • If you have other properties whose management you want to transfer into the SPV, you may have to pay Capital Gains Tax, Stamp Duty, Higher Rate Tax Brackets, Land Tax, and Legal Costs.
  • Capital Gains Allowance is usually not charged on companies selling a property whereas an individual will have to pay Capital Gains on any property worth more than £12,000 starting in the 2019/20 financial year.
  • Corporation tax will be applied at a rate of 19% if you withdraw all your rental profits as income. Additionally, you will also have to pay basic director rate at 7.5%, higher rate at 32.5% and additional rate of 38.1% for Dividend Tax.
  • There are fewer choices on lenders since not many lenders are offering buy to let mortgages to SPV limited companies.

Reasons to set up a Special-Purpose Vehicle Company Prior to Purchasing Property

If you decide to buy a property before setting up the Special Purpose Vehicle company, you will have to pay Stamp Duty as you will be buying in your own name. When you finally set up the company and need to transfer the property to the SPV, the tax authorities will deem the transfer as a sale to the company and you will be required to pay Stamp Duty all over again. As such, it is recommended to have the SPV set up before purchasing the property so that you can avoid double taxation on the Stamp Duty.

Lenders may offer better mortgage rates since they prefer to lend to limited company SPVs as compared to trading limited companies. The reason for this is that they are quicker to underwrite and understand.

GM Professional accountants have office located in London, Manchester and Essex.