Setting up a special purpose vehicle (SPV) to purchase properties

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.

What is a Special Purpose Vehicle (SPV) Company?

An SPV is a limited company set up only for the purpose of holding property and for 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 on-going 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 ar:

• 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 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

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

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.

Also See: Buy To Let Limited Company Mortgages

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 riskierthan 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.

Also See: Apply for Refund of Additional 3% Stamp Duty Land Tax (SDLT) Surcharge

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.

DNS Accountants are property 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.

“This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction”

In case you want more information or 30-minute free specialist advice on SPV or how to structure your property, kindly call us on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk

About the author

Owais Bombaywala
Working closely with individuals and businesses to help grow their business requires a significant amount of experience and industry knowledge. Owais is BA (Hons) Accounting and Finance and Member of ACCA. Besides being a compliance champion, he specialises in Property tax planning. With over 7 years of experience in Accountancy and Tax world, our clients count on us to give them timely and up to date advise to help them make the right move. Owais works closely with some of the DNS’s most valued clients to give them the confidence they need to focus on their business. He is known for his calm nature and proactive approach. At DNS, we proud to be a modern and client centric firm. Our advise doesn’t just look at what’s best for your business moreover our aim is to help you achieve your personal goals. Away from work, he resolve family disputes and provide care and support to elderly people. He is a founding member of Human welfare organisation Hounslow.