Should I set up an SPV?
An SPV is a popular way to invest in property – find out whether it's right for you.
The UK buy-to-let market has been popular with investors for years, and the tax changes introduced by HMRC in 2017 have affected how landlords need to manage their finances. These changes have led to growing interest in buying property through limited companies, particularly SPVs (Special Purpose Vehicles). In this article, we take a closer look at what an SPV is, what benefits it offers and why more and more investors are choosing to invest this way.
What is an SPV (Special Purpose Vehicle)?
An SPV is a type of limited company set up for one specific purpose: generating income from letting property. Its main features are:
- AssetsThe SPV owns the rental properties, which are its main assets.
- Source of incomeThe SPV's only source of income is the rent from these properties.
- Limited activityThe SPV carries out no other business activity, so its purpose is clearly defined, which can bring tax advantages.
Why set up an SPV when investing in property?
1. Tax benefits
One of the main reasons investors choose an SPV is that the tax rules are more favourable than when investing as an individual. Since April 2017, HMRC has restricted the tax relief landlords can claim on mortgage costs. Individual landlords must pay tax on all of their rental income, without being able to deduct their mortgage interest. Limited companies, including SPVs, can still deduct these costs as business expenses, which can significantly reduce their tax bill.
2. Reduced risk
Setting up an SPV allows you to keep your property assets separate from your other personal or business assets. This helps investors limit the financial risk of investing in property while protecting the rest of their wealth. This works as a form of legal protection: a limited company is a separate legal entity, so any financial liabilities of the company do not affect the owners' personal assets.
3. Preferential mortgages
Some lenders offer preferential mortgage terms to SPVs, which can make financing your investment easier and cheaper. Bear in mind, however, that not all lenders will lend to limited companies that don't operate as SPVs, so it's important that your company has the right SIC code, showing that its business is letting property.
What steps do you need to take to set up an SPV?
- Register a limited companyThe first step is to register the company with Companies House under the appropriate SIC code (usually 68100 or 68209). It's important that the company's purpose of letting property is clearly defined.
- Decide on the financial structureThink carefully about how the company will be funded. It's worth speaking to a financial or mortgage adviser to choose the best way to finance your investment.
- Speak to a tax adviserAnother important step is to consult a tax specialist, who can help you understand all the tax implications of running an SPV.
- InsuranceProperty investment comes with risks, so it's essential to take out the right insurance for both the properties and the letting business.
When is it worth considering an SPV?
Setting up an SPV isn't always the best option. It depends on many factors, including the size of your investment, the number of properties you own and how your income is structured. If you plan to buy several properties and let them on a larger scale, an SPV can bring significant tax and financial benefits. However, if you own just one rental property, the costs and responsibilities of running a company may outweigh the benefits.
Summary
Investing in property through an SPV can be an excellent strategy, especially for investors who want to make their tax position more efficient and limit their financial risk. If you're planning to enter the UK property market, it's worth considering this option and speaking to a tax adviser and a mortgage adviser to make sure it's the right choice for your needs and financial goals.
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