There will be very few active property investors that have not encountered the terms SPV Company or Special Purpose Vehicle over the last few years.
Ever since the Section 24 legislation restricted the amount of claimable mortgage interest relief, landlords have been considering whether using an SPV Company could help them.
Here we will explain what an SPV Company is and how they work.
What is an SPV Company?
An SPV, or Special Purpose Vehicle, is a generic name for a legal entity that is created for a limited or defined purpose.
Within property investment they are formed for purchasing and holding residential buy to lets or for property development.
SPV’s are mostly set up as a private limited company but it could also be a Limited Liability Partnership (LLP), Public Limited Company (Plc) or other business types.
SPV is a term used within the mortgage and property world for sole purpose companies and therefore may not be a term that everyone recognises.
So in the context of residential property investment an SPV Company means that:
- Ownership is via shares in the company
- Directors will operate the Company and make the decisions
- Properties can be purchased and held within the Ltd Co
- Mortgages are taken out in the name of the Ltd Co
- There’s no limit to how many properties an SPV can own
- Rental income belongs to the SPV
- All business expenses will go through the company bank account
- The SPV is ringfenced from other assets and liabilities
A Limited Company usually provides protection for the shareholders personal assets should the Company be forced to close with unpaid debts. However, most SPV mortgage lenders will ask you to sign a Personal Guarantee (PG) for the mortgage applied for, thus making the protection somewhat theoretical for this purpose.
You will need to have the Company accounts signed off each year and make the necessary returns to Companies House.
Reasons for Using an SPV Limited Company
One of the most popular reasons for using an SPV for property investment is tax. Both income tax and capital gains tax (CGT) positions can be improved when within an SPV.
Here are some other reasons:
- All mortgage interest costs can be offset against income
- Succession planning for your family
- An SPV can offer ownership with different percentages
- Any profits can be retained in the Company
- Deposits can be funded from directors loans
- The rental income is held within the business until needed
- Multiple properties can be owned
- Ringfencing of assets
Experienced property investors who have a mixed portfolio of commercial, residential, HMO and MUFB often prefer to keep these within a company structure.
Around a quarter of buy to let mortgage products available are for limited company BTL mortgages. The remaining 75% can only be used for investing in property in your personal name. The number of products is growing as lenders become more familiar with SPV lending.
Since it is a company, an SPV will have its own assets and liabilities. This has the benefit of allowing investors to apply for a mortgage as a business, rather than as an individual.
How to set up a Special Purpose Vehicle Limited Company
You can register a new Limited Company yourself to use as an SPV but we would recommend seeking the advice of your accountant first.
COMPANY NAME
You will need to decide upon a name for your company. This cannot be the same, or too similar, to one that already exists. You can search existing registrations at Companies House.
REGISTRATION
Once a unique name has been chosen then it’s time to register the company.
Options for setting up a new limited company SPV:
- Use your accountant
- Use a company formation agent
- Do it yourself online!
REGISTERED ADDRESS
The public address of your company where Companies House correspondence will be sent.
SHAREHOLDERS
The registration process will require you to state who owns the company and in what proportion. For example if there are two owners this could be 50/50 or 60/40 etc.
DIRECTORS
The Company Directors are the people who will run the company day to day and sign contracts and invoices etc. Usually this will be the same as the shareholders for a small SPV.
SIC CODE
You need to enter the SIC code which will denote what your company will do.
SPV NOMINATION
The registration information, including the Memorandum of Association and Articles of Association, should clearly state the activity of the company and that it is a property based Special Purpose Vehicle.
CORPORATION TAX
Once your company has been formally established you will need to register with HMRC for corporation tax. This should be done within three months of incorporation.
While the DIY route to formation is very cheap we would recommend using a professional to assist with this. This will ensure the full benefits of an SPV can be achieved.
What are SIC codes?
Standard industrial classification of economic activities (SIC)
The SIC code is part of the registration with Companies House and provides a description of your company’s type of business.
You select the most appropriate codes that match the type of business you are setting up.
These are commonly chosen SIC codes:
- 68100 – Buying and selling of own real estate
- 68209 – Letting and operating of own or leased real estate
- 68320 – Management of real estate
They can be found in Section L of the list of SIC codes:
Section L Real estate activities
68100 Buying and selling of own real estate
68201 Renting and operating of Housing Association real estate
68202 Letting and operating of conference and exhibition centres
68209 Other letting and operating of own or leased real estate
68310 Real estate agencies
68320 Management of real estate on a fee or contract basis
How much does it cost to set up an SPV?
The cost for setting up a new SPV will vary from £50 to £1000 depending on whether you go for the DIY route or via your accountants.
Although the DIY online option is actually quite simple, and considerably cheaper, we would urge you to think about using a professional. If your SPV is not set up correctly it could cause future problems with HMRC and may restrict who will offer your company a mortgage.
What’s the difference between an SPV and a Ltd Company?
Not much actually.
A Special Purpose Vehicle is a single purpose company, in this instance being created for the sole purpose of buying and holding property for investment purposes.
The options you have regarding shareholders and directors are the same, as are the obligations required from Companies House.
Read more: What’s the Difference Between an SPV and a Limited Company?
Limited Company Director Loans
As a Director you can lend your own money to your limited company to fund purchases, conversions, developments etc. This will be formally registered within the business accounts.
As they are a loan, when they get repaid there’s no income tax complications for you to worry about.
Buy to Let Mortgages
At Drake Mortgages, we work with specialist lenders who offer buy to let mortgages via an SPV limited company.
Let our buy to let brokers find the most appropriate and cost effective solution for your property investments.
Holiday Let Mortgages
Using an SPV (Special Purpose Vehicle) or Limited Company to purchase holiday lets is now commonplace.
Our experienced brokers will guide you through the best way to structure your application.
Other SPV Advantages
A Special Purpose Vehicle Company can be utilised in many different ways depending on your aim.
TAX
For a higher rate tax payer holding properties within an SPV is generally more tax efficient. You will also be able to full offset all of the mortgage interest payments.
DEPOSITS
Property deposits can be loaned to the SPV as a director’s loan and then repaid when affordable and without income tax (as it is a loan repayment).
SIMPLICITY
If you own several properties then having these under the umbrella of one company can make things simpler. With all income and expenditure going through the one business bank account.
JOINT VENTURE (JV)
If you are working with other investors then establishing a separate SPV just for that JV project will ringfence it from your other assets.
TRADING COMPANY
Lenders don’t generally like granting buy to let mortgages to a trading business.
MORTGAGES
Some lenders offer a more generous rental cover calculation to SPV applicants, enabling you to borrow more for a given rental figure.
Who owns the property?
If you use an SPV Company to purchase a property then the SPV Company is the owner.
This will be reflected in the Land Registry records and also the mortgage application will be in the name of your SPV Company.
Ultimately it is the owners (shareholders) of the SPV Company that own the property purchased via shares held in the Limited Co.
Why have SPVs increased in popularity?
Until 2020, higher rate taxpayers could claim all of their mortgage interest payments as an expense to reduce their tax bill and to own property via a limited company was rare.
However, landlords are no longer able to deduct any mortgage expenses from rental income to reduce their tax bill.
This has led to a transition for many property investors over to SPV status where their Limited Company owns the properties, pays the mortgages and receives the rents.
Company Bank Account
You will need to set up a new bank account in the name of the SPV Limited Company, this would normally be a business current account. This account will be used to purchase properties, receive rents and to settle bills and mortgage payments.
Be aware that it can take several weeks before the account is operational so allow sufficient time.
Mortgage Availability
Lenders are becoming more comfortable with the idea of individuals running a property business within an SPV Limited Company.
So more and more limited company buy to let mortgage products are coming to the market each year including Holiday Let Mortgages for Limited Companies.
As an experienced mortgage broker for buy to lets our brokers can arrange mortgages and remortgages for SPV property businesses. Please call us on 020 8301 7930 to discuss your ideas.