Setting up a special purpose vehicle (SPV) to purchase properties
What is a Special Purpose Vehicle (SPV) Company?
A Special Purpose Vehicle (SPV) is a legal entity formed solely for the purpose of purchasing and managing buy-to-let properties. Read our short guide on SPV, which will give you a brief overview of what is SPV, its advantages and disadvantages, its creation, SIC code, etc.
Setting Up a Special Purpose Vehicle (SPV) To Purchase Properties
An SPV is a limited company set up only for the purpose of holding property and carrying out buy-to-let activities.
To build your buy-to-let portfolio and renting out each month, you can hold multiple properties under one SPV.
SPV is a standalone legal entity, having its own assets and liabilities, i.e. property and mortgage belong to the legal entity (Ltd Company). Compare it when you as an individual invest in a buy-to-let (B2L), the mortgage will be in your name.
SPV can also help in the following ways:
- Isolation and securitisation of assets
- Creating joint ventures
- Performing other financial transactions
- Advantages and disadvantages of using an SPV
Advantages
- SPV’s are easy to understand and quick to underwrite.
- Financial risks are restricted as SPV is classed as a separate legal entity.
- In the case of limited company buy-to-let, you only need to pay corporation tax at 19% (2020/21) on the rental profits and gains from selling property.
- It helps in the reduction of potential income tax liability by limiting your personal income.
- You can use the existing pot of money in SPV to redeploy into buying more B2L.
- Multiple properties can be added into one portfolio under SPV, and it leads to a reduction in administration and ongoing costs.
- The Benefit of closing existing company down via Members Voluntary liquidation (MVL).
- After making a personal investment into SPV as a loan, you can draw it back by way of a director’s loan (tax-free).
- Unlike properties held in a personal name, where you cannot deduct the finance costs from rental income, an SPV can claim full relief on mortgage interest as it an allowable expense.
Disadvantages
- The Mortgage interest rate for an SPV is more expensive when you compare it with personal mortgage rates.
- Some lenders may ask directors of the SPV to provide personal guarantees.
- Transfer of existing properties into SPV may result in Stamp Duty Land Tax, Capital Gains tax, and legal costs.
- Upon selling the property, an SPV doesn’t get any capital gains allowance of £12,300 (2020/21), where it is available to individuals.
- In case you draw all your rental profits as income, you may need to pay dividend tax (paid by shareholders) at 8.75% (Basic rate), 33.75% (higher rate) and 39.35% (additional rate).
How to create an SPV?
Most commonly, SPV’s are set up as a limited company, but it can also be formed as trusts and partnerships. You can easily set up your SPV Company within a few hours by simply going to the Companies House website or asking your accountant to arrange it for you. The information you require to form special purpose vehicle (SPV) in the UK are:
- Appointment of minimum one director and one shareholder.
- Company name, registered address, details of the directors of the company.
- Memorandum of association (MOA) and Articles of association (AOA) should clearly define the business of the company.
- Additional directors and/or company secretary can also be added.
- A percentage share of the company should be allocated to each shareholder.
- Any shareholder holding share of more than 25% is a person with significant control (PSC).
- Name of PSC’s, date of birth, service address and year of nationality will appear on the public register.
- Appropriate SIC code
What SIC code should I use for my SPV?
SIC code stands for standard industrial classification of economic activities that represents the purpose or type of business/economic activity the company is involved in.
The following SIC codes should be specified while incorporating a company:-
- 68100 – Buying and selling of own real estate.
- 68209 – Other letting operating of own or leased real estate.
- 68320 – Management of real estate on a fee or contract basis.
- 68310 – Real estate agencies