A special purpose vehicle or special purpose entity is a company with a clear asset/liability structure and legal status that clarifies and secures its obligations.
Large developers often set these up as subsidiary companies so that the assets are ring-fenced, even if the parent company goes bankrupt, or vice versa.
SPVs / SPEs are used to isolate financial risk and can be formed through corporations, limited liability corporations or partnerships, trusts and other entities.
It protects a project from operational or insolvency issues and can be used to create joint ventures that protect partners from risk.
Buy To Let SPVs
An SPV Company or special purpose vehicle limited company is normally* a specific company formation type with specific articles of association required by Buy To Let Lenders.
The purpose of the SPV limited company is simply to hold property for the purposes of letting. The underwriters of lenders prefer this type of limited company as they are both easier to understand and underwrite.
Another benefit of a special purpose vehicle limited company is that mortgage lenders offer more lenient rental coverage.
Landlords purchase property via an SPV company as it is more tax efficient and there are also almost 200 Buy To Let mortgage products that are available to an SPV limited company.
Most mortgage lenders will only accept SPVs that have a maximum of four Directors.
With the restrictions on Buy To Let mortgage interest relief (which will be restricted to the 20% basic rate of income tax in 4 years time) a SPV limited company provides some tax relief to landlords.
From April 2017 mortgage interest relief will be given as a tax liability reduction derived from rental income (deductions, allowable costs but not mortgage interest) instead of gross profit. So mortgage interest is now a credit not a deduction as it was previously. The changes will be phased in from this April to April 2020.
Mortgage deposits can be withdrawn from the SPV Limited Company in the form of a Director’s loan with no tax liability, as long as the money was paid in by the Director originally.
By using a special purpose vehicle company Landlords can also retain net profits within the company and fund further property purchases without having to pay income tax in the retained amount of capital.
SPV Company : Property Development SPVs
Creating a special purpose vehicle limited company or limited liability partnership to do property development can also help reduce your tax liability. Instead of paying the 40% higher rate of income tax, property investors holding property will pay Capital Gains Tax (CGT) at 18% or 28% if they are on the higher rate of income tax.
By incurring the cost of the development work within the company, this will ensure the profit on disposal of shares is assessed as a capital gain (sale of shares) instead of income (sale of property). The benefit being that the CGT rate of 18%/28% would then apply.
When a property is disposed of, the proceeds can be retained within the SPV trading company and then taken out in a tax efficient way such as a phased draw-down or as capital, while claiming entrepreneur’s relief. This relief won’t apply if it is an investment SPV company.
The benefits are less, or nullified if property is being put into an SPV, if property is sold and the money taken out of the company as a Director’s dividend then it would be liable for corporation tax at 20% and dividend tax at 7.5% (after the first £5000).
If the money is retained within the company then a special purpose vehicle company is still going to be advantageous.
Setting Up a Special Purpose Vehicle
A special purpose vehicle limited company is very straightforward to set up online and costs around £20, or you can get your accountant to set one up for you.
Mortgage lenders will want to see The SIC Code for letting property. SIC stands for Standard Industrial Classification of Economic Activities and is used to classify businesses based on the type of economic activity in which they are engaged. Lenders will also want to see that there is no revenue other than from property letting.
You will need a SIC code when filing the Annual Return with Companies House for the Special Purpose Vehicle. Real Estate Activities are covered under Section L: Real Estate Activities. To choose a SIC code, use the official Condensed SIC list on the Government website. The most common three are:
- 68100 Buying and selling of own real estate
- 68209 Other letting and operating of own or leased real estate
- 68320 Management of real estate on a fee or contract basis
*If you wish to turn another company that previously traded in another field into an SPV company this can be done. Lenders will lend to the company as long as your accountant can confirm that the company will only be letting property from now on and the SIC Code is correct(ed).