As a property investor, choosing the right business structure can make your investments more efficient.
Two popular options are Special Purpose Vehicles (SPVs) and traditional limited companies.
Perhaps you’re wondering what these structures are and if they might offer advantages over owning investment properties in your own name.
While they share some similarities, understanding their differences is essential for making calculated decisions about your property investments. This article will explore the key differences between SPVs and limited companies, with a particular focus on their implications for mortgages and property investment.
What is a limited company?
In simple terms, a limited company is a legal entity separate from you as an individual.
When you set up (incorporate) a limited company, it gets formally registered at Companies House, the UK’s registrar of companies.
You and any co-investors become shareholders and directors, owning a piece of this new entity. This separation provides the crucial benefit of limited liability, meaning your personal assets are protected if the company faces financial difficulties.
Limited companies are used for all sorts of businesses; mortgage broker, property management company, retail shop, insurance broker, restaurant etc.
What is an SPV?
An SPV, or Special Purpose Vehicle, is a specific type of limited company.
It’s created for a single purpose, which in the world of property investment usually means buying, holding, and renting out properties. It’s a standalone legal entity with its own assets and liabilities, separate from its owners.
You set it up in the same way, by registering a new company at Companies House.
SPVs can simplify accounting and tax filing since all transactions relate to property. They can also make it more straightforward to secure mortgages as many lenders only work with property SPVs.
Legal Structure and Formation
Both SPVs and limited companies are registered with Companies House.
The setup (formation) process is similar for both, requiring you to choose a company name, appoint directors and shareholders, and provide a registered address.
However, there’s a key difference in the Standard Industrial Classification (SIC) codes used to define the company’s activities.
The SIC code/s dictate what activities the company is allowed to do.
For an SPV focused on property investment, you would typically use SIC codes such as:
- 68100: Buying and selling of own real estate
- 68209: Other letting and operating of own or leased real estate
- 68320: Management of real estate on a fee or contract basis
A traditional limited company, meanwhile, can use a broader range of SIC codes, reflecting its potential for diverse business activities. For example this could be as a retailer of goods, manufacturer, software etc.
The decision about which SIC codes to use needs to be made when registering the company. Although they can be changed at any time, should the activities change. It is also allowable to have more than one code.
Purpose and Scope
The fundamental difference between SPVs and limited companies lies in their purpose and scope.
An SPV is created with a singular focus – in this case, property investment.
This narrow purpose can be advantageous, as it simplifies operations and makes the company’s structure and objectives clear to lenders and other stakeholders.
It is very common for property developers or house builders to set up a new SPV company for each project. This keeps each one separate from the other and can make JV (Joint Venture) investments easier to segregate.
A traditional limited company, by contrast, offers more flexibility. It could engage in property investment alongside other business activities, which might be appealing if you have diverse business interests. To do this though, the SIC codes would need to be updated to allow for the new activity.
Tax Implications
Both company styles are subject to the same corporation tax rules on their profits.
SPVs will pay corporation tax on rental profits and capital gains, which can be lower than personal income tax rates for higher earners.
For SPVs used in property investment, a key advantage is the ability to fully offset mortgage interest against rental income before calculating profits.
Mortgages and Financing
When it comes to securing mortgages, there are notable differences between SPVs and traditional limited companies that property investors should be aware of.
SPVs are preferred by lenders.
Their focused purpose makes them easier to understand and assess, which can streamline the underwriting process. Many lenders offer specific mortgage products for SPVs, and some even provide more favourable terms compared to personal buy-to-let mortgages.
One significant advantage of using an SPV is the potential for higher borrowing capacity.
Lenders typically use different stress tests for SPV mortgages compared to personal buy-to-let or holiday-let mortgages. This can allow investors to borrow more against a property’s value, which may be particularly beneficial for expanding a property portfolio.
However, it’s worth noting that interest rates for SPV mortgages can sometimes be slightly higher than those for personal investment mortgages. Additionally, lenders may require personal guarantees from directors, which somewhat mitigates the limited liability benefit of the company structure.
SPV based mortgages:
For traditional limited companies, securing a buy-to-let mortgage can be more challenging, especially if the company engages in non-property activities. Lenders may be more cautious about lending to a company with diverse operations, as they need to consider the overall financial health and stability of the business.
Should a trading business/company which to purchase some business premises, then a commercial mortgage in the business name will be allowed.
Limited Liability
By default, special purpose vehicles and limited companies offer the benefit of limited liability, protecting shareholders’ personal assets from the company’s debts.
Limited liability means that the owners (shareholders) of the company are not personally responsible for the company’s debts or financial obligations. Their liability is limited to the amount they have invested in the company, typically in the form of shares.
However, the situation involving SPV’s is not always that straightforward.
Before granting a mortgage, most lenders will require all of the directors to sign a personal guarantee for each mortgage. That signed PG means that you are fully liable for the mortgage, and limited liability will not apply to that arrangement.
That said, by isolating property assets within an SPV, you can protect them from liabilities associated with other business ventures. This can be particularly advantageous if you have other investments or business interests.
Conversely, a traditional limited company that engages in various activities may expose its property assets to risks from other business operations, as everything is held within one company.
Regulatory Obligations
Both companies have the same regulatory and compliance obligations, including filing annual accounts, Companies House updates and tax returns.
Choosing the Right Structure for Your Property Investment
So, which structure is right for you?
The answer depends on your individual circumstances and investment goals.
Here’s a quick guide:
- SPV Company: Ideal if you’re focused solely on property investment and want a simple, streamlined structure with potential tax benefits and easier access to mortgages.
- Limited Company: Consider this if you plan to diversify your business activities beyond property.
The only real difference between the two is the choice of SIC codes and that a property SPV does not generally sell anything (service or product) to generate it’s revenue. Properties are held as assets and the rental income pays the property costs, finance and company costs.
Before making any decisions always discuss your plans with your accountant and mortgage adviser.
While SPVs and limited companies share some similarities, they offer distinct advantages and challenges for property investors.
SPVs provide a focused structure that can simplify operations and are more attractive to mortgage lenders. Traditional limited companies, on the other hand, offer greater flexibility but may complicate property investment activities.
But, of course, there’s nothing stopping you having both options!
Keep your trading company going, and maybe this can buy it’s own premises with a commercial mortgage.
Then set up a new SPV to hold future property investments and developments. It should even be possible for the trading company to ‘lend’ the SPV funds for deposits etc.. Ask your accountant how this could work.