Interested in setting up a Special Purchase Vehicle (SPV) company, but unsure whether you’re better off staying as a private landlord to manage your rental properties?
There is a lot to consider, from tax advantages, how you’ll pay yourself, and the legal obligations to file limited company accounts – so the right decision is down to you!
Here we look at why SPV mortgages can be attractive to property investors and some of the pitfalls to keep in mind.
Advantages of SPV Mortgages for Buy to Let Landlords
Some landlords prefer to manage their businesses independently, but that might be a risk if, at some point, you find yourself in a sticky situation.
Limited companies (whether an SPV or another trading structure) are treated as separate legal entities – so you, as an individual, and your business, are two different things.
If your business falls into debt, you could be personally liable, but that exposure disappears if you trade as an SPV. The only financial risks apply to the company because your SPV has its own legal status and separate assets and liabilities from you as the owner.
Below we’ve run through some of the other reasons an SPV might be a good option, particularly if you’re looking for a mortgage.
Lender Appetite for SPV Mortgages
Most UK lenders are more generous when considering buy to let mortgage applications from an SPV, as opposed to an individual.
That all links back to the legal separation we talked about above.
Investors can usually borrow more, work on expanding their portfolio and get approved with fewer hurdles, all while protecting their personal affairs.
Tax Relief for Buy to Let Property Interest
Landlords can’t claim tax relief on mortgage interest anymore. They also can’t deduct mortgage costs from their rental income before filing self-assessment tax returns.
The updated system gives a tax credit worth 20% of mortgage interest payments – but that’s nowhere near equivalent to the previous process.
Higher-rate taxpayers effectively have to pay tax on up to 40% of the interest they pay on a buy to let loan because it isn’t tax-deductible.
Managing rental properties through an SPV is often more profitable because a limited company can deduct all financing costs, interest, service charges and maintenance expenditures from their profit and loss account – before the Corporation Tax calculation.
Paying Taxes on Rental Property Profits
If you own a rental property (or have a portfolio), you pay Corporation Tax instead of Income Tax on your profits if held in an SPV.
Corporation Tax sits at 19%, which might be a considerably lower tax rate if you pay a higher or additional rate Income Tax, at 40% or 45%.
SPV owners can pay themselves dividends from the business with a tax-free allowance of £2,000, so they have several ways to distribute earnings while minimising tax exposure.
You can also choose to leave your profits in the business and reinvest in improvements or perhaps another portfolio asset.
Transferring Ownership of Buy to Let Properties
Individual landlords or property investors incur Capital Gains Tax if they ever decide to give a rental property to a family member – charged at 18% or 28%, depending on your tax bracket.
That changes for SPV companies because you can add the beneficiary to the business as a shareholder.
When they inherit the property, you simultaneously reduce your Inheritance Tax exposure.
Expanding a Rental Business Through an SPV
Limited companies can own several rental properties, and although some lenders have a maximum amount they’ll lend per client, there is no limit on the size of your portfolio.
With higher borrowing allowances and lower tax, landlords with an SPV tend to expand much faster than private landlords.
Disadvantages of Owning Buy to Let Property Through an SPV Limited Company
While we’ve explored several benefits, it’s worth doing your research before incorporating a new SPV and changing your trading structure.
There are some downsides you should know, which we explain below.
Mortgage Competition for SPV Buy to Let Companies
Lenders usually charge higher fees and interest rates for SPV mortgages – generally more than you’d pay for a standard buy to let product.
You have less choice of lenders, although new mortgage providers are introducing SPV products since this trading style has been growing in popularity since the government changed the tax relief system.
Owner Guarantees on Ltd Company Buy to Let Mortgages
Mortgage providers may request a director’s personal guarantee before they will offer a limited company buy to let loan to an SPV business.
That document means that the signatories are liable to repay the debt if the company can’t repay the loan in full.
In this scenario, it’s wise to proceed with caution as it could negate some of the big advantages of investing in property through an SPV.
Managing a Limited Company Buy to Let Business
Another pitfall is that you must adhere to all the reporting duties and deadlines to file accounts set by Companies House and HMRC for all incorporated businesses.
You may also need to pay Stamp Duty, increased tax, legal charges and sometimes Capital Gains Tax if you already own a property and want to transfer ownership to an SPV.
It’s therefore essential to seek independent advice to work out all the costs, weigh up the pros and cons, and make decisions based on what would work best for your buy to let business.
This is a guest contribution.