How are SPV companies used for property investing?
The fundamentals of using a Special Purpose Vehicle to get a BTL limited company mortgage are straightforward:
- The SPV purchases and owns the buy to let property
- The SPV receives the rental payments and pays corporation tax on its profits
- Buy to Let mortgages are taken out by the SPV, 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 a SPV mortgage?
There are several advantages to buying residential investment property via a SPV mortgage including:
Tax efficiency
A SPV has major tax benefits for higher-rate taxpayers. For example, the 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 gross rental income has to be declared on your tax return, it can inadvertently push you into a higher tax bracket, increasing your tax bill.
Lower interest coverage ratio requirements
A major advantage of investing via a SPV is that mortgage lenders use a lower Interest Coverage Ratio (ICR) on a SPV mortgage to purchase a rental property.
That's because mortgage lenders work on the basis that you'll pay less tax overall investing via a SPV compared to your personal name.
Many BTL SPV mortgage providers assess rental income for SPV mortgages on an ICR of 125%. In other words, the gross rent needs to exceed the monthly 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 with a SPV
As a SPV limited company director, there's scope to build your investment property portfolio faster by retaining profits in the company for future investment. And, of course, buying multiple properties via an SPV can help mitigate the risks of void periods.
In fact, there's no limit on how many properties you can own within an SPV business structure.
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, SPV mortgages tend to be easier for lenders to assess and underwrite.
For that reason, banks, building societies, and other providers usually prefer offering limited company mortgages to a SPV rather than a 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.
What are the 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:
High costs for transferring property into an SPV
If you want to transfer a BTL investment property from your personal name into your SPV, you are executing a sale and purchase as the Special Purpose Vehicle company is it's own legal entity.
The SPV then becomes liable for stamp duty on the purchase, and you may also be liable for Capital Gains Tax on the sale. Potentially making the transaction commercially unviable.
That's why it's always better to setup a SPV company before investing in property.
A personal guarantee may still be required
Should your investment not go according to plan, using a SPV offers the ability to ring-fence your liability. However, the lender will often require personal guarantees from the company 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 mortgage 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'll be asked to provide one.
Company costs
You'll need to pay to set up the SPV at Companies house and for ongoing accounting and other costs and obligations associated with running a limited company.
Higher mortgage rates
Compared to a standard residential Buy to Let mortgage, spv mortgage rates can be slightly more expensive, though often not significantly.
Deciding if an SPV 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.
