A Special Purpose Vehicle or SPV is generally a type of company that can be set up to hold a property. Where property developers want to obtain finance for their projects an SPV is normally used as it is a company that can be used on one project only and therefore represents fewer risks and liabilities for the lender. In this article, special purpose vehicle property development, we take a look at the points to consider and the process involved.
Free Initial Telephone Discussion
For a free initial discussion on how we can advise you on the use of an SPV for property development, get in touch with us today. We will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or complete our online enquiry form and a member of the team will get back to you.
Why do developers use SPVs?
There are two fundamental ways you can own a buy-to-let property. You can own the property in your own name or alternatively, you can own the asset by means of a limited company. One of the main advantages of owning a property through a limited company is the amount of tax you will end up paying. As an individual, you will pay income tax on rent received but if the property is held by a limited company, corporation tax will be due. Previously, higher rate taxpayers were able to effectively claim mortgage interest payments as an expense and thereby reduce their tax bill. However, the treasury changed this allowance and the consequence of this is an increased cost to individual landlords.
If you own a property in your personal name and you rent it to a tenant, you pay tax on any profit you make from the rental income that is not covered by your personal allowance and the amount of tax you pay will be determined by which tax band you fall into
If the property is owned through an SPV, the rental profits will be subjected to corporation tax, currently at 18%. Your personal allowance of £12,500 will not be usable, however, you can claim the financial expenses that relate to the business, which is another benefit of an SPV.
The tax benefits of owning a property through an SPV can be significant particularly if you are a higher rate (40%) or additional rate (45%) taxpayer.
Will using an SPV affect my ability to borrow money?
If a property developer is looking to obtain finance for a scheme, an SPV is normally used as it is a company that can be used on one project only and therefore represents fewer risks and liabilities for the lenders.
Banks and other lenders tend to prefer SPVs to trading limited companies because they are easier and quicker to understand and underwrite. Additionally, their lending criteria aren’t as restrictive in terms of rental cover as for an individual trying to raise finance.
SPVs can also be used for partnering and joint ventures with the shareholding reflecting the participant’s contributions. It can also allow investors opportunities which would not otherwise exist, creating a new source of revenue generation for the sponsoring firm.
Setting up an SPV is quite straightforward and is very similar to setting up any other type of company. An SPV is treated as a separate legal entity and has to be registered with a specific SIC code under Companies House.
The Standard Industrial Classification of Economic Activities (SIC) is used to classify business establishments by the type of economic activity in which they are engaged.
Are there additional advantages of using an SPV?
There are other advantages to purchasing a property through an SPV company such as:
It is possible to reduce your potential Income Tax liability. This is because you are able to control how much income is taken out of the company, or you can leave it in the SPV if it is not needed.
It is possible to grow your buy-to-let portfolio quickly through an SPV limited company as there is no Income Tax due on the retained profit, giving you more capital to re-invest.
You can use the same SPV company for multiple properties. This allows you to build a portfolio within one entity, reducing admin and ongoing costs.
As the company owns the property, it is relatively easy to change the shareholders. This is very useful if you plan to gift property to a family member. It could help the beneficiaries save money on Inheritance Tax and all you need to do is add the beneficiaries as shareholders. Although some lenders cap the number of shareholders/directors in an SPV.
If you wish to transfer an asset to an SPV there will be capital gains tax to pay but it will still be at the corporation tax rate rather than at the higher rate for an individual.
What are the disadvantages of using an SPV?
The market for limited company mortgages is smaller and less competitive than standard mortgages. Many mainstream lenders do not offer limited company mortgages. With lenders that do, the interest rate charged is usually higher than for standard mortgages and a lower LTV or loan to value may be applicable too.
The paperwork in filing accounts is much more cumbersome than a personal tax return. You will have to file accounts with Companies House and then a tax return to HMRC. Due to filing requirements, it makes this very difficult for the average person and a professional accountant will need to be paid to file correctly, which is an extra cost.
As a director, you will also be responsible for the annual confirmation statements. This is a Companies House return that informs the public what the purpose of the limited company, who is involved and the registered office.
How We Can Help
Our team is well versed in dealing with all the various aspects of using a special purpose vehicle for property investment and development, and we are here to help in any way we can.
We are able to explain clearly the legal issues and provide open, honest and professional advice.
How to Contact our Commercial Property Solicitors
It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.
To speak to our Commercial Property solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
Leave a Reply
You must be logged in to post a comment.