Have you heard of an SPV before?
If you haven’t then please read this post as it could be very important for your property investment business.
Even if you have heard of an SPV I get the feeling that there is a lot of confusion about whether you need one and how best to use one. So I want to make it clear to you exactly what an SPV is and what it isn’t.
What is an SPV?
An SPV is a Special Purpose Vehicle. This is a generic name for an entity such as a Limited Liability Company (LLC), a partnership such as a Limited Liability Partnership (LLP) or even for a sole trader entity.
This is of particular interest to property investors in the buy to let market. Back in 2015 the UK government decided that they would abolish the tax relief related to offsetting the interest on mortgages against rents. The decision has lead to a lot of property investors forming limited companies to purchase properties.
There is a good reason for doing this as with a limited company an investor can offset the interest on mortgages against rents to calculate the amount of corporation tax payable. If you assume that there will be no further changes by the government on this then it is a good way for property investors to get around this change in policy.
In this scenario the limited company is the SPV. If you have, or intend to build, a large portfolio of buy to let properties then having your mortgage interest offset against rents as part of the corporation tax calculation is a big advantage.
It is very important that you understand that an SPV is a reason for setting up a type of entity and not the entity itself. An SPV does not have to be a limited company although most of them are. If you go to the Companies House website you will not find an option to create an SPV because it isn’t a legal business entity.
When you setup a limited company correctly as an SPV then you will be able to use it to obtain financing for your projects from mortgage lenders. You will need to use a specific SIC code to register the company with Companies House. With this specific code mortgage lenders will be willing to work with you.
Your SPV needs to be setup so that it will just hold property and nothing else. You need to keep it clean and simple. Lenders in the buy to let market will give you preferential treatment if your SPV is just for property holding rather than an existing trading entity as it is easier for them to underwrite a simple structure and understand it.
How can you Setup an SPV?
There is nothing particularly difficult to setting up an SPV. You can go online and setup a SPV limited company for around £15. Alternatively you can ask your accountant to set one up for you. The important thing is that you setup the SPV for property only and do not make it any more complicated than this.
What about if you have an existing limited company? If the company has no other history of trading then you could use this as an SPV. But if it has traded then I strongly advise that you set up a new company as mortgage lenders may not want to work with a company that has already traded in other areas. It is just too complicated for them.
This doesn’t mean that all mortgage lenders will refuse to work with you if you have a limited company that has traded before. What they will look for is the right SIC code (Standard Industrial Classification of Economic Activities). You can see a list of the permissible SIC codes for use with UK limited companies here.
The best SIC code I recommend you use is in Section L – Real Estate Activities. A potential mortgage lender will also want to see confirmation from you and your accountant that you will only use your limited company for the purchase of buy to let properties in the future.
When should you use an SPV?
I have already touched on the tax issue with buy to let properties so let me expand on this further for you. If you purchase a buy to let property in your own name then any rental profits will be taxable at your normal rate of income tax. If you in the higher tax bracket then the rate is 40%.
If you have an SPV limited company setup for your buy to let properties then you will have to pay corporation tax on any profits instead and the rate for this is only 20% at the time of writing if your profits are less than £300,000 a year.
You will have to pay tax on dividends if you take any profits out of your SPV but you can take advantage of the timing here so that you the most tax efficient. It is possible for you to distribute dividends to members of your family that only pay basic rate tax as well.
As I have already stated in this post, the government has changed the rules on treating mortgage interest as a cost for individual buy to let property owners. But if you have an SPV limited company then you will still be able to treat your mortgage interest as an expense when calculating corporation tax.
There are other reasons for choosing to use a limited company for your property investment business as well. A lot of people use them as a vehicle for JV’s. Consider a very simple scenario where you will do all of the work and your JV partner will provide all of the funding.
You agree a 50/50 deal and a good way to set this up is to create a limited company where you both have a 50% share holding each. This is an example of an SPV, where the special purpose is the actual joint venture between you and the other party.
So if the thought of setting up an SPV limited company appeals to you then you need to think about the following:
To work with most mortgage lenders the company needs to be simple and not be trading in other industries. You must also use the right SIC code which as I said before is in Section L – Real Estate Activities.
In the past a lot of mortgage lenders would not provide financing for property investment through limited companies but since the government changes this is much less of an issue. Just make sure that everything is setup correctly.
The second thing that you need to consider is whether you will take profits out of the SPV or leave them for future projects. If you intend to use the profits in the SPV for your own purposes then you will have to pay tax on this as dividends.
I hope this has provided you with a clear understanding about the advantages of using an SPV for buy to let property investment. If you have any questions please leave a comment below or contact me here and I will respond as quickly as I can.