How are SPV companies used for property investing?
The fundamentals of using an SPV company for property investing are straightforward:
- The SPV company purchases and owns the property
- The SPV receives the rental income and pays corporation tax on its profits
- Mortgages are taken out by the SPV company, not the directors
- Shareholders, (usually the directors) own the SPV
- Directors run and manage the SPV, just like they would any other Limited company.
What are the advantages of using a SPV company for BTL property investment?
There are several advantages to buying residential investment property via an SPV. Some of the key benefits include:
SPVs tend to be more tax-efficient for higher-rate taxpayers. With an SPV, buy-to-let mortgage interest payments and other finance costs can be deducted as a business expense, significantly reducing your corporation tax bill.
By contrast, private landlords are no longer able to deduct mortgage interest against rental income.
Instead, they must first declare their full rental income, before receiving a tax credit worth just 20% of their annual mortgage interest payments.
This can mean a significantly increased tax bill for higher-rate taxpayers.
Worse still, because the rental income (before mortgage interest) has to be declared on your tax return, it can push you into a higher tax bracket.
Lower interest coverage ratio requirements
Another advantage is that the Interest Coverage Ratio (ICR) required on a rental property tends to be less onerous if you invest via an SPV.
That's because lenders assess that you'll pay less tax because the rent is received into a Ltd company.
Many BTL mortgage providers assess rental income for SPVs on an ICR of 125%. In other words, the gross rental income needs to exceed the mortgage interest payments at the stress-test rate by 125%.
By comparison, the ICR for higher tax rate private landlords can often be as high as 145%.
Grow your portfolio more quickly
There's scope to build your investment property portfolio faster by retaining profits in the company for future investment. And owning multiple properties can help mitigate the risks of void periods of course.
Keeping profits in your SPV also allows you to control your personal tax liability.
Lenders prefer BTL investment via SPVs
As a dedicated property investment company, Buy to Let purchases through SPVs tend to be easier for mortgage lenders to assess and underwrite.
For that reason, banks, building societies, and other providers usually prefer offering BTL finance to SPVs over regular limited companies that might have a trading history in an unrelated industry.
Limited liability (in theory)
A special purpose vehicle company, in theory, protects your personal liability, as the downside is restricted to your investment in the company.
If the worst were to happen, your other assets held outside the company (such as your family home) could be protected. However, the reality is somewhat different, as explained below.
Disadvantages Of An SPV
Whilst SPVs offer several advantages for BTL landlords, there are some potential drawbacks as well. Here are some things to consider before setting up a SPV company:
A personal guarantee may still be required
Should your investment not go according to plan, using an SPV offers the ability to ring-fence your liability. However, in most cases, the lender will usually require personal guarantees from the director(s).
From the lender's point of view it's completely understandable, given that without a guarantee, they would have no recourse if the SPV missed payments.
Even more so, when lenders are often asked to provide property loans to brand new SPVs with no trading history.
If the loan to value is very low, at around 30% or less, then the lender may be happy to provide funding without a guarantee. But it's always prudent to assume you will be asked to provide one.
You'll also have all the setup and ongoing accounting and other costs and obligations associated with running a limited company.
Higher Mortgage Rates
Compared to a standard residential BTL mortgage, limited company buy-to-let mortgage rates tend to be slightly more expensive.
Deciding if An SPV Limited Company Is Right For You
As you can see, there are pros and cons to SPV mortgages and you should consult with your accountant or a specialist property tax advisor to determine if an SPV is a good choice for your particular circumstances, goals, and preferences.