Special Purpose Vehicle (SPV) is set up to be a tax-efficient way of landlords holding a portfolio of buy-to-let properties. The term SPV is a mortgage industry term for a limited company specifically set up to buy and rent properties.
It is a Limited Company with restricted trading.
Further information on how to exactly set up an SPV/Limited Company can be found on our blog: How To Set Up A Special Purpose Vehicle (SPV) Limited Company To Purchase Buy To Let Properties
Lenders have introduced new criteria as of 01/10/2017 for portfolio landlords with 4 or more mortgaged buy-to-let properties, you can find more information here.
Is a Limited Company the Answer?
- More advantageous tax breaks for mortgage interest relief from 2017 onwards.
- April 2018 utilise £2000 tax-free dividend allowance (reduced from £5,000). For PAYE clients there is no further tax liability.
- Add your adult son/daughter as a shareholder of the company to utilise their dividend allowance.
- Retain the net profit within the company and utilise it to fund additional property purchases, without suffering income tax on the retained amount.
What is a Special Purpose Vehicle (SPV)?
A definition of a Special Purpose Vehicle is a UK-incorporated company that has been established by private individual(s) for the sole purpose of BTL activities i.e. the purchase/remortgage of residential properties for letting.
This is confirmed by the Standard Industry Classification (SIC) codes registered at Companies House and will be checked/evidenced for lending purposes by a full Company Search being carried out by the lender.
How to form a Limited Company/SPV
The company must be incorporated specifying the appropriate SIC codes:
- 68100 Buying and selling of own real estate
- 68209 Other letting and operating of own or leased real estate
- 68320 Management of real estate on a fee or contract basis
You have 3 options:
- Complete a registration with Companies House
- Instruct your Accountant to arrange.
- Employ an agency. A popular choice for landlords is Companies Made Simple.
Further information on how to exactly set up an SPV can be found on our other blog.
Buy-to-Let properties can also be bought by an existing trading company not set up as a SPV but the choice of lenders is more restricted.
The other advantage of limited company buy-to-lets is that lenders offer more lenient rental coverage.
- Fixed/discounted rates less than 5 years = 125% at 3.85%.
- Fixed rates for a minimum of 5 years = 125% at 3.49%.
- This means that properties that offer lower rental but higher capital growth can still be purchased.
From the 01/01/2017 the new personal rental coverage is:
- Fixed/discounted rates less than 5 years = 145% at 5.50%
- Fixed rates for a minimum of 5 years = 145% at 5.00%.
The effect is shown below:
Rental coverage - Limited Company vs Personal Name, based on £200,000 borrowing
Based on borrowing £200,000 (25% deposit) on an interest-only basis the following rents are required to satisfy lending criteria. The difference is quite startling.
- Fixed/discounted rates less than 5 years. 125% at 3.85% = £802.08 rent required
- Fixed rates for a minimum of 5 years. 125% at 3.49% = £727.08 rent required
- Fixed/discounted rates less than 5 years. 145% at 5.50% = £1329.16 rent required
- Fixed rates for a minimum of 5 years. 145% at 5.00% = £1208.33 rent required
- Paragon / Maximum advance 75% loan to value
- Aldermore / Maximum advance 80% loan to value / Trading & SPV
- Shawbrook / Maximum advance 75% loan to value / Trading & SPV
- Kent Reliance / Maximum advance 85% loan to value
- Fleet Mortgages / Maximum advance 75%% loan to value
- Interbay / Maximum advance 85% loan to value / Trading & SPV
- Cambridge & Counties / Trading & SPV
- Foundation / 80% loan to value / SPV
- Metro Bank / 75% loan to value / SPV
- Precise / 80% loan to value / SPV
- National Counties / 65% loan to value / SPV
- Vida Homeloans / 80% loan to value Trading & SPV
- Axis Bank / 75% loan to value / SPV
- Norwich & Peterborough/Family Building Society / 75% loan to value / SPV
- Landbay / 75% loan to value / SPV
- The Mortgage Works - TMW / 80% loan to value / SPV
- State Bank of India / 80% loan to value / SPV
- West Bromwich Building Society / 75% loan to value / SPV
- West One / 65% loan to value / SPV
- Saffron Building Society / 75% loan to value / SPV
At present, the only specialist lenders offer SPV mortgages. The mainstream buy-to-let lenders (BM Solutions, Santander, Coventry, Virgin etc.) are reviewing whether they will enter this marketplace. The effect of these lender advancing to SPV's should drive down interest rates and fees.
Interest rates & Lenders Arrangement Fees
As only specialist lenders are active at present in the SPV marketplace the rates are not as competitive as a personal buy-to-Let. In September 2016 the rates are starting to improve. Funding a purchase with a 25% deposit the rate for a 5 year fixed is now from 2.99%.
Arrangement fees are still higher compared to a personal buy-to-let mortgage. On a personal buy-to-let mortgage the fees are usually fixed amount eg £995 / £1495 and not linked to the level of borrowing. The lender's fee on SPV mortgages is usually a percentage of the borrowing. Currently, most lenders are charging a fee as a percentage of the borrowing. Due to recent market pressure, some lenders are now charging a fixed fee of £999. This fee can be added to the mortgage.
Remortgage an existing SPV mortgage
The personal buy-to-let market is more mature and there is intense competition with lenders offering free valuation and free legals as standard. This is starting to develop with free valuations and cash back towards solicitors costs for SPV mortgages. We currently tend to recommend a variable rate for term or longer fixed rates as remortgaging to a new lender from an expired 2-year product is unlikely to be viable. There is only one lender currently is offering on remortgages assistance with legal fees and a refund of valuation fees for properties up to £500,000.
Deposit for SPV/Ltd Co
The deposit for the SPV/Ltd Co can come from:
- Equity when property is gifted from parent to sibling (no deposit required as equity treated as full deposit)
- Existing personal savings
- Gifted savings from a family member (reduced choice of lenders)
- Savings/profit accrued from other existing Ltd Co.
- Remortgage on existing personal BTL.
- Remortgage of existing residential property. (offset mortgages are tax efficient)
- Inter-Company loan (from trading company to SPV)
All deposits are shown as a Directors Loan
You can have up to 4 applicants on one mortgage application. I recommend you take advice on the percentage shareholding allocated to each applicant/director.
With regards to lenders, all directors are underwritten but not all shareholders are. Dependent on lender a shareholder can own up to 24% without being underwritten. This is useful where a shareholder is required to fund deposit but is not interested in the running of the company.;
Shareholding can be amended in the future to reflect changing circumstances but lenders maybe need to be informed.
TMW's view is:
The company must advise of any proposed changes in the directors of the company or the shareholding more than 5%. If this condition is not followed TMW may take legal action.
Retain Existing Main Residence as a Buy-to-Let
You have the ability to sell your existing main residence to your SPV as a buy-to-let and capital raise towards the deposit at the same time for onward purchase.
The benefits of this are:
- Buy-to-let held in tax efficient structure
- No capital gains tax on this sale
- Standard stamp duty paid on onward residential purchase
Remortgage Existing Property into SPV/Ltd Company
You cannot remortgage your existing property into an SPV. The reason is that there is a change of ownership from yourself to the SPV. It will be treated as a purchase and you will be liable for stamp duty and legal costs.
Lenders will treat the equity as a full deposit.
You may benefit from Incorporation Relief S162.
Refurbishment Buy-to-Let Mortgage Using Your SPV/Ltd Co.
Clients often see a property that offers good value but is un-mortgagable as it cannot be rented in its current state of repair.
The normal route is to purchase via short term bridging finance, refurbish the property and remortgage to a Ltd co./SPV lender at the increased value and increased rent. As you are remortgaging at the increased value you can withdraw the funds you invested in the property.
The common areas where this product is appropriate include:
- Properties needing works to meet minimum EPC rating, such as boiler replacement.
- Properties purchased at auction that require light refurbishment to be acceptable for mortgage purposes.
- Landlords choosing to refurbish in order to maximise the rental yield of their property.
- Properties bought under valuation.
The traditional route is to have a separate provider for the bridging and a separate provider for exit mortgage. However, Lenders now offer a lower risk option of providing the bridging with a pre-agreed future mortgage offering a guaranteed exit at the increased future value.
We have lenders who will accept short-term lets and Airbnb tenants. This is a new evolving business area. See our AIRBNB Mortgage blog for the latest criteria.
New Company Bank Account
Remember to open a new current business bank account in your new companies name. Lenders will not issue a mortgage offer without this. Some lenders will expect you evidence your new account via an opening statement.
Solicitors and Accountants
As SPV lending is more specialist we recommend you speak to a solicitor and accountant before proceeding. If you do not have your own solicitor or account or feel that they do not have the specialist knowledge we can recommend one for you. They will happily discuss over the phone your options and the implications of buying via a SPV/Ltd Co.
The mortgage market is constantly changing. Contact me to discuss your circumstances.
We can arrange Ex-Pat mortgages and remortgages up to 75% loan to value.
AIRBNB / Holiday Let mortgages and remortgages up to 65% loan to value.
There are minimum income requirements and restrictions on acceptable countries.
Why Use Neil Soundy Financial Services For Your Mortgage Advice?
- We are experts in SPV / Ltd Co lending.
- Your initial consultation is free with no obligation
How Much Will It Cost Me For Your Advice?
A fee of £395 is payable on completion of the mortgage and Neil Soundy Financial Services Ltd will keep the commission received from the lender for arranging the mortgage
Neil Soundy Financial Services Ltd is an appointed representative of HL Partnership Ltd which is authorised and regulated by the Financial Services Authority.
We do not give or imply legal or taxation advice. We recommend you contact a solicitor or account for advice in these areas
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.