Structuring a company for corporate finance purposes
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.
Irrespective of ordinary shares, there are different classes of shares which can be added when the SPV is being incorporated or could be added later. If adding later, it is necessary to take shareholders consent before introducing a new class of shares. You can add as many share classes as you like but only after the shareholder’s consent.
Some companies issue ordinary A, ordinary B shares to their shareholders, also known as alphabet shares. Creating different classes of shares might allow companies to pay dividends unequally to shareholders. Caution needs to be exercised here to ensure the shareholding structure is compliant with HMRC guidance, especially the settlement legislation. Other than ordinary shares, a company can issue the following type of shares –
- Deferred ordinary shares
- Non-voting ordinary shares
- Redeemable shares
- Preference shares
- Cumulative preference shares
- Redeemable preference shares
NOTE: There may be other share classes a company can create depending on the circumstances.
Adding/Gifting spouse and children to the SPV by way of gifting shares
This simply means gifting shares of your SPV to spouse/children. It is common for Husband/Wife to gift shares in their SPV’s to the other spouse since transfers between spouses are exempt from Capital Gains Tax (CGT). Whereas gifting shares to children may result in CGT.
If the shares are gifted/transferred without any consideration, no stamp duty is payable. If the consideration received for the shares is £1,000 or more, stamp duty is payable on the transaction at 0.5%.
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.
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.
If you are an accountant and guiding your clients to take this route, you may need to help them find suitable funding solutions. Government has made certain changes to buy-to-let investments in relation to tax and deliberately make it less attractive to individuals.
What is an HMO?
It is a popular option amongst the landlord community. When a property let to unrelated tenants, it will be classed as a house in multiple occupations (HMO). A clause specifically included by most buy to let mortgage lenders is the exclusion of HMO’s. Lenders considered it to be riskier than letting it to a single tenant. There are exclusive lenders in the UK who caters for HMO’s. Lenders prefer SPV’s because it is exclusive for property investment business.
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.
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: –
- 8.75% (Basic rate)
- 33.75% (Higher rate)
- 39.35% (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.
Note – Plan before you act, otherwise you may end up paying SDLT twice, first buying B2L under personal name and 2nd upon transferring it to an SPV. Contact us today for a Free assessment.
Witbooi & Associates are corporate tax experts and have worked with hundreds of landlords and property owners to mitigate their exposure to property taxes. We pride ourselves in being more than just accountants and help you in achieving your objectives with regular meetings and expert advice.