Property purchase using an SPV

A special purpose vehicle is often a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt - but for property investors, its main attraction is greater tax efficiency.

The government's changes to the tax position of buy to let investment left many landlords with property portfolios that generated tax liabilities rather than profits. One solution for the problem is an SPV - or Special Purpose Vehicle limited company. A special purpose vehicle is commonly a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt - but for property investors, its main attraction is one of greater tax efficiency.

Special purpose vehicles (SPVs) are limited companies that can be used in a number of ways, but one of their main strengths is to isolate property investment risk from other business interests.

For buy-to-let investors, SPVs only hold the property as an asset and channel the income and expenditure of their buy to let activities. Many landlords are now purchasing rental property via an SPV limited company as changes to tax relief substantially increase finance costs for individual landlords.

An SPV can be set up easily online in a few minutes with a relevant SIC code. The Standard Industrial Classification of Economic Activities (SIC) is used to classify businesses by the type of work they do and most property investors require a SIC code from Section L: Real estate activities.

Buy to let lenders offering mortgages to corporate vehicles mostly prefer SPVs to trading limited companies because they are easier and quicker to understand and underwrite, and are perceived as being lower risk.

Setting up an SPV

Many more landlords are now purchasing rental property via an SPV limited company because it can be more tax-efficient now that the changes to tax relief on finance costs for individual landlords have been phased in.

They are very easy to set up - you can either ask your accountant about setting one up or go to the Companies House website and set the company up yourself. An SPV limited company costs £12 to set up and, if done online, it will take just a few minutes to arrange. As long as you intend to use the company just for property letting going forward, it would automatically be classed as an SPV. 

Lenders will look at the structure of a company used to buy a property and will expect to see:

• SIC code for letting property: The Standard Industrial Classification of Economic Activities (SIC) is used to classify business establishments by the type of economic activity in which they are engaged. You will need a SIC code when filing the SPV’s Annual Return with Companies House. Most investors require a SIC code from Section L: Real estate activities.
• No sign of any revenue from anything other than letting property: If the company has traded in another field in the past, some of the lenders will still lend to the company as long as this is historic, the company has the right SIC code and the accountant can confirm the company will only be letting property in future. If there is any doubt it may be simpler to set up a new company.

However, there are other complications to be aware of - for example, capital gains tax may be significant when a property is sold - so it’s important to speak to a chartered accountant or specialist tax adviser about your longer-term plans for your property portfolio before deciding to set up an SPV. You need to make your decision at the outset, as restructuring your business later on can attract additional costs in transferring the ownership of properties from personal to company ownership with both legal fees and tax liabilities.

Buy to let mortgages for SPV limited companies

If your company trades in something other than property you can still get a buy to let mortgage but your options may be restricted to fewer specialist lenders as lenders prefer lending to companies set up as an SPV.

This is because when it lends to a trading company, the lender will need to look at the performance of the business as a whole and assess the strength of it its balance sheet, outgoings and projections because, if the primary activity of the company suffers in a downturn, a competitor brings out a better product or the company loses its biggest client, it might be unable to make its mortgage payments.

But for an SPV, none of this matters. There is no risk from other trading activities all it does is hold the property, so there's no risk from its owner's core business activity running into difficulties. 

However, the company has no financial standing at all because, if it's buying its first property, it has never done anything. A lender will, therefore, take a personal guarantee from each company director. This just means that if the company ceases trading or is unable to pay its debts, the lender can pursue the directors personally for the money owing.

This is particularly important in the case of an SPV because the company doesn't have any ability outside of the property to generate cash to pay its obligations. It's the ability of the directors to pay their debts rather than the company, the lender will look at your income, credit history and all the other factors in exactly the same way as they would if you were taking out the mortgage in your own name.

Getting the buy to let mortgage you need for your SPV

As business funding experts, we work with all types of property finance - including mortgages for SPVS.

This means that we can help you secure the funding you need. Our knowledge of the approach of the different lenders can be crucial to your profitability - many do not advertise their SPV mortgages and we can secure the funding you need for your SPV at a cost below what you may expect.

Unlike residential property purchase, commercial property funding rates are based on an individual assessment of the value of the property and the potential of the business. Rates will vary substantially between different lenders and we frequently negotiate with lenders to secure the lowest rates and the most favourable terms for our clients.

Buying any business with property involves high costs and so it is important to have expert help to get the kind of funding that is right for your plans.

Rates are crucial. Even a fraction of a percentage point can make a substantial difference to what you will actually repay each month, and understanding fees and penalty charges is also vital to extra cost. 

Borrowing can be made more challenging because you may have multiple lenders who may be prepared to offer the funding your business needs. Each has their own approach to interest rates and fee arrangements and comparing them all may require expert knowledge to fully understand what is really being offered.

At Rangewell, we work with lenders across the market - and we can call on the expert knowledge you need. It means that you have the financial solutions you need when you are considering a business purchase. Our knowledge can not only help you secure the funding you need - but it can also save your business a great deal of cash.

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.