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Setting Up a Special Purpose Vehicle (SPV) To Purchase Properties

  • December 2021
  • 5 minutes

A Special Purpose Vehicle (SPV) is a legal entity formed solely to purchase and manage buy-to-let properties. Read our short guide on SPV to get a quick overview of what it is, its benefits and drawbacks, how it was created, its SIC code, and so on.

taxqube What is a Special Purpose Vehicle (SPV) Company?

An SPV is a limited company set up only for the purpose of holding property and for carrying out buy-to-let activities. To build your buy-to-let portfolio and renting out each month, you can hold multiple properties under one SPV.

SPV is a standalone legal entity, having its own assets and liabilities, i.e., property and mortgage belong to the legal entity (Ltd Company). Compare it when you as an individual invest in a buy-to-let (B2L), the mortgage will be in your name.

SPV can also help in the following ways:

  1. Isolation and securitisation of assets
  2. Creating joint ventures
  3. Performing other financial transactions

taxqube Advantages and disadvantages of using an SPV

Advantages

  1. SPV’s are easy to understand and quick to underwrite.
  2. Financial risks are restricted as SPV is classed as a separate legal entity.
  3. In the case of limited company buy-to-let, you only need to pay corporation tax at 19% (2020/21) on the rental profits and gains from selling property.
  4. It helps in the reduction of potential income tax liability by limiting your personal income.
  5. You can use the existing pot of money in SPV to redeploy into buying more B2L.
  6. Multiple properties can be added into one portfolio under SPV, and it leads to a reduction in administration and on-going costs.
  7. The Benefit of closing existing company down via Members Voluntary liquidation (MVL).
  8. After making a personal investment into SPV as a loan, you can draw it back by way of a director’s loan (tax-free).
  9. Unlike properties held in a personal name, where you cannot deduct the finance costs from rental income, an SPV can claim full relief on mortgage interest as it an allowable expense.

Disadvantages

  1. The Mortgage interest rate for an SPV is more expensive when you compare it with personal mortgage rates.
  2. Some lenders may ask directors of the SPV to provide personal guarantees.
  3. Transfer of existing properties into SPV may result in Stamp Duty Land Tax, Capital Gains tax, and legal costs.
  4. Upon selling the property, an SPV doesn’t get any capital gains allowance of £12,300 (2020/21), where it is available to individuals.
  5. In case you draw all your rental profits as income, you may need to pay dividend tax (paid by shareholders) at 7.5% (Basic rate), 32.5% (higher rate) and 38.1% (additional rate).

taxqube How to create an SPV?

SPVs are most commonly formed as limited companies, but they can also be formed as trusts or partnerships. You can easily set up your SPV Company in a matter of hours by visiting the Companies House website or asking your accountant to do so for you. The following information is required to form an SPV:

  1. A minimum of one director and one shareholder must be appointed
  2. Company name, registered address, details of the directors of the company
  3. The company’s business should be clearly defined in the Memorandum of Association( MOA) and Articles of Association ( AOA).
  4. Additional directors and/or company secretary can also be added.
  5. A percentage share of the company should be allocated to each shareholder
  6. Any shareholder holding share of more than 25% is a person with significant control (PSC)
  7. Name of PSC’s, date of birth, service address and year of nationality will appear on the public register
  8. Appropriate SIC code

taxqube What SIC code should I use for my SPV?

The term SIC code refers to the standard industrial classification of economic activities, which represents the purpose or type of business/economic activity in which a company is involved. When forming a company, the following SIC codes must be specified:

68100-Buying and selling of own real estate

68209-Other letting operating of own leased real estate

68320-Management of real estate on a fee or contract basis

68310- Real Estate agencies

taxqube What type of shares can a company have?

When you form an SPV, all the rules and regulations related to a limited company in relation to shares will remain the same. There are certain rights attached to Ordinary shares:

  • Each share is entitled to one vote under any circumstances
  • Each share gives equal right to dividends
  • Each share gives an equal right to participate in the company’s asset distribution at the time of winding up or sale.

In addition to ordinary shares, there are different classes of shares that can be added when the SPV is formed or later. If adding later, shareholders must be consulted before introducing a new class of shares. You can create as many share classes as you want, but only with the shareholder’s permission.

Ordinary A and ordinary B shares, also known as alphabet shares, are issued by some companies to their shareholders. Companies may be able to pay unequal dividends to shareholders if different classes of shares are created. Caution is required here to ensure that the shareholding structure complies with HMRC guidance, particularly the settlement legislation. A company can issue the following types of shares in addition to ordinary shares –

  1. Deferred ordinary shares
  2. Non-voting ordinary shares
  3. Redeemable shares
  4. Preference shares
  5. Cumulative preference shares
  6. Redeemable preference shares

taxqube Adding/Gifting spouse and children to the SPV by way of gifting shares

This simply means transferring shares of your SPV to your spouse or children. Because transfers between spouses are exempt from Capital Gains Tax, it is common for husbands and wives to gift shares in their SPVs to the other spouse (CGT). Gifting shares to children, on the other hand, may result in CGT.

There is no stamp duty payable if the shares are gifted or transferred without consideration. If the consideration for the shares is £1,000 or more, stamp duty of 0.5 percent is payable on the transaction.

You need to keep the lender mind when gifting shares as this increases their risk, and you might breach your lending terms.

Gifting shares to children might trigger inheritance tax, so professional advice is highly recommended.

The above points are not exhaustive. Professional guidance is recommended on the tax (and non-tax) implications where necessary.

taxqube Commercial Mortgage for SPV

Usually, the main objective in mind when setting up an SPV to buy-to-let property investments if for tax efficiency purposes. Government has made certain changes to buy-to-let investments in relation to tax and deliberately make it less attractive to individuals.

taxqube What is an HMO?

It is a well-liked option among the landlord community. When a house is rented to unrelated tenants, it is classified as a house in multiple occupations (HMO). The exclusion of HMOs is a clause specifically included by most buy to let mortgage lenders. Lenders deemed it riskier than renting to a single tenant. In the United Kingdom, there are exclusive lenders who cater to HMOs. Lenders prefer SPVs because they are only used for property investment.

The most important factor considered by the lenders before offering a commercial loan to a limited company is Directors personal credit rating and profitability of the property. Lenders may vary on their assessment criteria’s. Some lenders may analyse borrower position by taking into account their financial history of company directors, and some take their decision based on SPV structure. Generally, lenders may ask the directors to give their personal guarantee, so be prepared.

taxqube Accounting and taxation of SPV

This is straight forward. You are required to file annual accounts to Companies House along with confirmation statement and CT600 to HMRC, so consider the compliance cost, but it’s minimal and tax-deductible.

As an individual landlord, you may be paying tax at 40% on your profits. However, an SPV will only pay 19% corporation tax + you can earn up to £2,000 tax-free dividends to each shareholder (excluding children under 18).

Any further dividends will be taxed depending on your overall income in the financial year at the following rates: –

  1. 5% (Basic Rate)
  2. 5% (Higher Rate)
  3. 1% (Additional Rate)

Additionally, the SPV is required to complete a confirmation statement at least annually with the Companies House or if there are any changes to the SPV’s capital, shareholder information and SIC codes an early statement could be filed.

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