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.
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
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.
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.
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
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
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.