What are Special-Purpose Vehicle Companies?
SPVs are commonly used to purchase and manage buy-to-let properties in the real estate industry. Limited companies isolate the risk when financing and purchasing property, since they have their own legal status, assets, and liabilities. A SPV can hold multiple properties, allowing landlords to expand quickly.
Why have Special-Purpose Vehicle Companies increased in popularity?
Taxpayers with a higher rate of income could claim mortgage interest payments as a deduction, and limited companies were rare. However, as of April 2020, landlords were no longer able to deduct any mortgage expenses from rental income to reduce their tax bill. In the wake of the changes to interest and finance costs, the SPV route has become increasingly attractive, even to smaller property investors.
Is a Special-Purpose Vehicle Company right for everyone?
A SPV company structure may not be suitable for everyone if you are looking to buy-to-let a property. Higher and additional rate taxpayers often use SPVs, along with those who used to be basic-rate taxpayers but were pushed into the higher bracket due to the changes. For these individuals, establishing an SPV can make a huge difference and reduce the amount of tax paid on rental income.
How can SPCs benefit buy-to-let investors?
Tax relief on mortgage interest
Since April 2020, mortgage interest is no longer deductible from rental income, and landlords cannot deduct mortgage expenses from rental income. Tax credits will be provided based on 20% of your mortgage interest payments. Higher-rate taxpayers will no longer be able to deduct up to 40% of interest payments.
In contrast, landlords who own properties through SPVs are not affected by this change, which means limited company landlords can save significantly on their tax bill. Aside from mortgage interest, service charges and repairs can also be claimed as tax deductions.
Lower tax rates on profits
It is likely that landlords use SPV’s for buy-to-let properties because of the tax treatment of profits. As an SPV, profits will be subject to 19% Corporation Tax instead of individual income tax. If you are a higher or additional rate taxpayer (45% or 40%), owning real estate through an SPV can provide significant tax benefits.
You will be taxed on all rental income, regardless of how it is distributed, if you own and rent a property personally. By using an SPV, you can choose how to distribute profits, and you can take advantage of tax-free dividends (£2,000 per person). Depending on your circumstances, you may decide to draw a larger dividend and a lower income in some years. It is also possible to reinvest the profits in more properties by leaving the profits in the company.
Limited liability and increased credibility
As SPVs have their own assets, liabilities, and legal status, they are often referred to as bankruptcy-remote entities. You are only liable for any investment you made in the company and the financial risk only extends to the company. The worst that can happen if your company runs into financial difficulties and goes bust is that it ceases to trade and becomes insolvent.
Individuals who own buy-to-let properties personally would pay outstanding debts with their personal assets. Due to the separation of the SPV’s liabilities from your own, lenders tend to offer more generous mortgage calculations. As a result, landlords are able to borrow more and expand their portfolio while keeping the SPV separate from any personal liabilities.
Transferring ownership to reduce Inheritance Tax
In the event that you wish to gift your property to your child or children outside a company structure, you will be liable for Capital Gains Tax. If the property is held in an SPV, it is relatively easy to give the property to a family member and might reduce your taxable estate for Inheritance Tax purposes. As the company owns the property, it is relatively easy to add the beneficiary as a shareholder to inherit the property at a later date.
Disadvantages of using a Special-Purpose Vehicle Company
Mortgage availability
Due to the additional paperwork required, SPV buy-to-let mortgage rates and fees are often higher than for personal buy-to-let mortgages. There are also a limited number of lenders who offer SPV buy-to-let mortgages. However, this is continually changing as SPV’s continue to gain popularity.
Reporting duties
An SPV is a limited company. Due to this, there are specific reporting requirements and deadlines you need to meet. Both Companies House and HMRC require you to file annual accounts.
Additional costs and taxes to consider
Creating an SPV before buying property is advisable if you intend to use it to manage your property portfolio. Stamp Duty Land Tax, legal fees, higher rate tax brackets, and possibly Capital Gains Tax will be incurred if you transfer existing property to the SPV. The property would also have to be sold at market value to the SPV.
In some cases, you may want to claim rental profits as income from the company. If this is the case, Corporation Tax is applicable at 19%, and then you will incur personal dividend tax charges of either 7.5% (basic rate), 32.5% (higher rate) or 38.1% (additional rate).
The final difference is that when an individual sells a property, they are entitled to a tax-free allowance of £12,300 (2020/21), whereas when a company sells a property, there is no Capital Gains Allowance.
