What is a Special Purpose Vehicle?
What is a Special Purpose Vehicle?
A Special Purpose Vehicle is a broad term with many meanings but is often used to describe a situationwhere a limited company is set up for one specific purpose, such as investment purposes.
A Special Purpose Vehicle (SPV) is a broad term with many meanings but is often used to describe a situation where a limited company is set up for one specific purpose, such as investment purposes. It is common in property investing where a real estate investor may set up a limited company with the sole purpose of buying and holding a property and nothing else.
Is a Special Purpose Vehicle tax efficient?
Property investments held in limited companies may still be able to claim mortgage interest tax relief and therefore this can make them a more tax efficient way of managing a property investment rather than owning it directly.
However whilst there may be tax efficiencies you need to consider the whole picture. There may well be more costs involved in running an SPV that will outweigh the benefits. For example lenders may charge higher borrowing costs to limited companies, associated lending and legal fees may also be higher.
Additionally you will have to compliance requirements of running a Ltd company and this includes the preparation of annual accounts and filing of confirmation statements with Companies House.
There will be other tax factors that are different when operating an SPV and professional advice is recommended so that the implications of corporation tax and Capital Gains Tax are understood.
Advantages of a Special Purpose Vehicle
There are many advantages of operating through a SPV limited company
Financing a property
One of the main reasons for establishing a Special Purpose Vehicle is in order to arrange funding for a property. Buy to let lenders that lend to companies mainly prefer to deal with SPV’s due to their company structure, as it helps to isolate financial risks for property investors. This is because the entity is much quicker and easier to understand and lenders often perceive them to be lower risk, leading to lower finance costs.
An SPV can provide an easier sale as it is the only business in a company and so it does not need disentangling prior to a sale or alternatively the whole company can just be sold.
Reducing overall business risk
If you put a property in a separate SPV structure, you are separating it from any other business activities that you have and this reduces your overall risk. The SPV is its own legal entity and therefore the actions of company directors in other businesses or personally will not affect the SPV. For example, if you have a trading company and it fails then this would not affect any properties that you hold in an SPV.
An SPV means that you can work on a property investment with other investors but at the same time keep the investors away from your other business interests, hence protecting your personal assets.
Selling an asset in a SPV
When you come to dispose of an asset in an SPV you have flexibility because the business is separate from your other business activities and so easy to separate or a sale. In addition to selling the asset, when working with an SPV you also have the option of selling the SPV company with the asset in it. This may be attractive to people buying the asset who want the benefits of operating an SPV.
Transferring a property into a SPV
If you want to transfer a property into an SPV so that you can claim mortgage interest payments tax relief then you are normally able to do this by selling your property to your SPV. However, there are costs involved in doing this and you should evaluate all of the costs such as conveyancing, stamp duty, etc. before deciding this is a worthwhile course of action.
How do you form a SPV?
A Special Purpose Vehicle is not a recognised company so you cannot register a business as an SPV. To form a new SPV you form a regular limited company just as you would any other company. There is a section on this website about company formations. However when forming the company you should do it in a way that makes clear that it is an SPV, including selecting the correct SIC code and ensuring the properties are registered as the business’ own assets, not those of individual landlords.
The Memorandum of Association and the Articles of Association, should clearly set out what the business of the company is and also and make clear that the company is an SPV for the purposes of a property business. This step is important for seeking and getting approved for mortgages.
How Can Sherwin Currid help you?
We have many years of experience in helping clients operate SPVs with rental property just one type of business we are knowledgeable about. Our team of experts can offer you advice on how to collect rental income, minimise your income tax liability, set up your venture and much more.
All of our clients are welcomed with an initial call with their dedicated accountant who will take the time to understand your business and vision in order to best support you. We handle all of the necessary compliance associated with running a limited company so you can rest assured you are getting the best value out of your business without having to worry about the paperwork.