A commonly asked question among existing and potential property investors is "what is an SPV property?", and the answer is quite simple. An SPV, or special purpose vehicle, is a business entity that has been formed for a specific purpose. As far as property investors are concerned, SPVs are typically created when purchasing commercial buy-to-let properties or other development projects.
If you are an existing or potential property investor and would like detailed answers to the question, "what is an SPV property?" and information on how a special purpose vehicle could potentially benefit you, please do not hesitate to contact Mortgage Mentor today. A member of our experienced team will be happy to talk you through the options available to you and provide essential advice on company formation for property investment purposes.
Property investors often choose to form an SPV with several specific aims in mind. SPVs can:
- Make reselling a property much easier in the future.
- Help an investor to arrange finance on a property.
- Keep assets and liabilities clear for tax purposes.
- Help to reduce the investor’s tax bill.
In 2015, restrictions on mortgage interest levels that could be legally claimed as a tax allowance were introduced under Section 24 of the Finance Act. From the 2020-2021 tax year onwards, rental profits are now taxed with maximum deductions for finance costs at the basic rate, currently 20 per cent. The knock-on effect has increased tax liability for property investors who use mortgage finance while registered as sole traders. As a result, some property investors have found certain buy-to-let investments as commercially unviable, and in some cases, even loss-making.
However, limited companies are still eligible to claim tax relief on any mortgage interest they pay, which means that a limited company can be a more financially lucrative proposition for investors thinking about opening a property business.
While it makes sense for property investors to operate as a limited company, the reasons for setting up an SPV are slightly more complex, which we’ll now explain. It can sometimes be difficult for a company with other activities in addition to the property to obtain mortgage finance. It’s unfortunate, but the lending policies of most mortgage lenders dictate this.
It is generally easier for a limited company that exists solely to trade in property to obtain mortgage finance. For property investors who operate in a limited company format, it is beneficial also to make their company a special purpose vehicle.
A limited company SPV usually takes advantage of two distinct situations: the ability for the limited company to claim back mortgage interest tax relief while simultaneously being able to obtain finance from mortgage lenders more readily. These two situations are then combined for more significant benefit.
Let’s take an example of a building contractor. This builder is already trading as a limited company and wants to start purchasing buy-to-let properties. However, as an existing company with assets, creditors, debtors, employees and liabilities, mortgage lenders might not be willing to lend to the company. Setting up an SPV would allow the builder to access finance for a mortgage much more quickly.
Some financiers and mortgage lenders tend to prefer limited company SPVs as it is much easier to understand the lending risks. For example, a brand new SPV for a buy-to-let property project exists as a new business with zero trading history. Therefore, it is free from any debts, charges, existing financial obligations or legal claims that could impact lending decisions. The SPV also exists as a separate entity from its owner/director for tax and accountancy purposes.
However, when lending to an SPV, mortgage lenders will take the director’s ability to repay into account rather than to the company, as it is likely to have no income or assets. Instead, lenders usually require personal guarantees from the director, as opposed to the company. If you have any personal financial issues on your credit file, forming an SPV will not help you to avoid scrutiny of these.
Property investors should be aware that it can be more difficult obtaining a mortgage for a limited company in comparison to a standard mortgage. This is because the market for limited company mortgages is much smaller, and a lot of mainstream lenders do not provide mortgages for limited companies.
In addition to tax benefits, SPVs offer several other advantages too. This includes the following:
1) When a property is placed within an SPV, it helps to reduce and separate business risk. For example, if an existing trading company you own has failed, this will not affect the property assets held within your SPV. On a similar note, if your property portfolio is unsuccessful as an SPV, it won’t affect your existing trading company.
2) SPVs are flexible. Property investors can own multiple SPVs to keep different projects independent from one another. You can even form an SPV for the express purposes of purchasing a property and then dissolve it after you decide to sell.
3) SPVs are practical if you’re planning on working with other investors on a property investment project. This could help you to keep joint projects separate from your other business interests.
4) You can easily transfer assets held within an SPV by transferring the ownership of the SPV to another party.
If you are an existing or potential property investor and would like detailed answers to the question, "what is an SPV property?" and information on how a special purpose vehicle could benefit you, please do not hesitate to contact Mortgage Mentor today. A member of our experienced team will be happy to talk you through the options available to you and provide essential advice on company formation for property investment purposes.
Contact UsPlease note: as a mortgage is secured against your home/property, it may be repossessed if you do not keep up with the mortgage repayments.
Sources:
https://www.legislation.gov.uk/ukpga/2015/33/section/24/enacted
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