With demand for rental property being high, and likely to remain so for some time, it is natural property investment options appeal. However, there are many ways to manage rental properties, and your business structure will impact your chance of success. One option to consider is operating a Special Purpose Vehicle (SPV) when operating rental properties. This guide informs you why you should use an SPV, the benefits and challenges of doing so, and how to best
arrange an SPV mortgage.
What are Special Purpose Vehicle (SPV) Companies?
An SPV runs like a limited company, and you commonly find them buying and managing rental properties in the property market. As the company has a separate legal status, with assets and liabilities, it minimises the risk for people involved with the SPV. An SPV can hold multiple properties,
which is ideal for landlords looking to build a property portfolio. Over the last few years due to tax changes we have seen an increase in SPV’s for property transactions being set up and therefore the need for SPV mortgages.
Is there much of a difference between an SPV and limited company?
In the grand scheme of things, no. With respect to shareholder and director options, there are no differences. Also, there is no difference in the obligations relating to Companies House.
A quick breakdown of how a SPV runs
Owners hold shares in the SPV
Directors run the SPV and make decisions
Properties are bought and retained in the SPV
The SPV can arrange mortgages
There is no limit on the number of properties an SPV can hold
Rental income generated belongs to the SPV
Business expenses operate through a company bank account
SPV assets and liabilities are ring-fenced from other owner assets and liabilities
Choosing the correct SIC code
When registering with Companies House, the SPV requires a Standard Industrial Classification of Economic Activities, or SIC code. This code describes the business activities of the SPV.
Common SIC codes include:
68100 – Buying and selling of own real estate
68209 – Letting and operating of own or leased real estate
Given so many people set up SPVs, there must be a wide range of reasons people choose to do so.
An obvious reason to use an SPV is the tax benefits in the UK. There have been numerous tax changes in the past five years. From April 2020, landlords cannot deduct mortgage expenses from their rental income, hampering their ability to reduce tax liability. In some cases, landlords find up to 40% of interest payments aren’t eligible for a tax deduction.
However, this doesn’t apply to SPVs, allowing landlords with this mechanism to reduce significantly the tax they pay. Also, SPVs can claim tax relief on repairs and service charges. It is important that anyone looking to purchase a buy to let property gets tax advice from a property tax advisor before making any applications.
It is possible to loan a property deposit to the SPV in the shape of a director’s loan. This loan can be repaid reasonably, and as it is a loan repayment, there is an income tax impact.
The Simplicity of use
Any landlord or investor owning a range of properties can do so under one company umbrella, making it easier to manage all income and expenditure in a single business bank account.
An individual investor or landlord can grant themselves greater protection by running an SPV. A parent company’s assets and liabilities are protected if issues arise with the SPV.
Flexibility with Ownership Structures
Flexibility is always necessary, especially in financial and business matters. With property investment often being a long-term matter, flexibility is crucial. Investors can alter percentage shares over time or for certain purchases. This is ideal for those looking to involve family members or introduce new partners over time. It helps to get the structure right from the start, but as there is a bit of flexibility with an SPV, it is possible to amend the arrangement. This isn’t always the case with other structures; if a problem arises, it can be difficult to resolve.
Speed of Working
There is no lengthy delay in the process of setting up an SPV and applying for a mortgage. In many cases, it only takes a few weeks to set up the organization and apply for an SPV buy to let mortgage. If you need to move quickly, this is a suitable option. In more than a couple of months, a SPV can be operational and generating rental income.
Challenges associated with running an SPV
While there are many benefits to setting up an SPV, there are also drawbacks. These are not insurmountable challenges, but if you are unaware, they might cause problems. As an SPV, you have reporting responsibilities, as expected from a limited company. Failure to file annual accounts with HMRC and Company House will result in penalties. There are additional taxes to consider, and companies don’t benefit from a Capital Gains Tax Allowance as individuals do. The timing of setting up an SPV and buying property also matters. Setting up the SPV before purchasing property makes sense; otherwise, you might be liable for Stamp Duty Land Tax, Capital Gains Tax, higher tax brackets and legal fees. However, for many, the biggest challenge with an SPV is obtaining a mortgage. Not all lenders offer limited companies buy-to-let lending facilities. The best advice for anyone running an SPV to buy rental property is to speak with a specialist broker. An expert in this field knows which companies offer specialist lending facilities and will advise on SPV mortgage rates. SPV mortgage rates are expected to be slightly higher than standard mortgage rates, so make sure you budget for this. A specialist broker will assist you in finding an option within your budget.
What property types are available for SPV mortgages?
SPV mortgages are suitable for:
Therefore, no matter the property asset you wish to buy, there will be a mortgage option available.
With an SPV mortgage, who can I let to?
For residential properties your mortgage lender will need to know the type of tenants you intend to let to. A single person/couple/family will be acceptable, however if you intend to let the property as a HMO (House of Multiple Occupants) not all lenders are comfortable with this. With a commercial property, you can let to a wide range of businesses, although there might be local limitations to consider with the property.
What impacts an SPV mortgage application?
As with a traditional mortgage application, many factors influence a lender’s judgment on an SPV mortgage application. The property itself, the size of the deposit offered, and the expected rental income of the property are all crucial factors. Also, the financial background of shareholders is considered, with credit checks playing a vital role in how much a lender is willing to fund.
Key takeaways from SPVs:
They are set up for a specific reason – commonly, buying and managing rental property
There are many benefits of an SPV, including tax benefits and flexibility of ownership structure
There are challenges to overcome, notably in finding a mortgage, but specialist mortgage brokers will assist in this process.
How to explore your SPV mortgage options with The Money Hub
If you are looking into operating an SPV or you need SPV mortgage advice, help is available. Call The Moneyhub Limited on 0203 725 5830 and speak to one of our highly specialised and dedicated Mortgage Advisors or you can complete an enquiry form which will allow you to schedule a call time.
SPV mortgages tend to be a higher rate and higher lender arrangement fees when compared to personal name buy to let mortgages. Getting property tax advice is key to establishing the best Way to purchase property.
People set up an SPV (Special Purchase Vehicle) and take out an SPV mortgage to purchase property generally as a more tax efficient way to hold property, however this is unique to your circumstances and you should get property tax advice before purchasing any property.