A Special Purpose Vehicle (SPV) is set up to be a tax-efficient way for landlords holding a single or 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).
The removal of mortgage intertest tax relief has had a significant effect on the buy-to-let market. It has never been more important to understand the tax implications that affect an SPV mortgage. With this in mind, Kent Reliance, together with EY have put together a guide that contains information on who the rules affect, a reminder of the previous rules, what the current rules are, an explanation of the finance costs involved and the key implications. This guide could support you in understanding the decisions you need to make about running your rental businesses. Download the guide here.
Is a Limited Company the Answer for Higher Rate Tax Payers?
- Pay 19% Corporation Tax on profit (20/21 tax year).
- Offset all interest payments as a business expense.
- Utilise £2000 tax-free dividend allowance.
- Inheritance planning.
- Retain the net profit within the company and utilise it to fund additional property purchases, without suffering higher rate income tax.
- Higher borrowing for the same rental income compared to a personal buy to let.
- Tax efficient funding of the deposit.
How to form a Limited Company/SPV
It is simple to form a Limited Company/SPV. The company must be incorporated specifying the appropriate SIC codes to match lenders requirements:
- 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.
Read our blog for further information on renting out your existing house and buying another.
Buy-to-Let properties can also be bought by an existing trading company rather than an SPV but the choice of lenders is more restricted.
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).
- Remortgage on existing personal BTL.
- Remortgage of existing residential property (offset mortgages are tax efficient).
- Inter-Company loan (from trading company to SPV).
- Holding Company.
The other advantage of limited company buy-to-lets is that lenders offer higher lending for the same level rent compared to a personal buy to let.
- Fixed/discounted rates less than 5 years = 125% at 5.5%.
- Fixed rates for a minimum of 5 years = 125% at 2.95%.
This means that properties that offer lower rental but higher capital growth can still be purchased.
Personal rental coverage varies from lender to lender but the guide below should help:
- 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 5.5% = £1145 per month rent required
- Fixed rates for a minimum of 5 years. 125% at 2.95% = £614.58 per month rent required
- Fixed/discounted rates less than 5 years. 145% at 5.50% = £1329 rent required
- Fixed rates for a minimum of 5 years. 145% at 5.00% = £1208 rent required
You can have up to a maximum of four applicants on one mortgage application, though with a reduced choice of lenders. I recommend you take advice on the percentage shareholding allocated to each applicant/director.
Shareholding can be amended in the future to reflect changing circumstances but lenders maybe need to be informed.
Remortgage an existing SPV mortgage
The personal buy-to-let market is more mature and there is intense competition betwenn lenders offering free valuation and free legals as standard. This is starting to develop in the SPV market with free valuations and cash back towards solicitors’ costs.
We currently tend to recommend five-year fixed rates as remortgaging to a new lender from an expired 2-year product is unlikely to be viable due cost. The exceptions to this is where you want to access increased equity by home improvements or significant house price growth.
The Financial Conduct Authority have introduced new criteria as of 01/10/2017 for landlords increasing their portfolio from three to four mortgaged buy-to-let properties or remortgaging a portfolio with four or more mortgaged properties. Rather than underwrite the property being purchased, the lender will underwrite the landlord’s existing portfolio to ensure overall rental coverage/loan-to-value is within criteria. You can find more information about PRA 2 Changes to Portfolio Landlords here.
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 rates paid on onward residential purchase.
Sell Existing Buy-to-Let Property into SPV/Ltd Company
You cannot remortgage your existing property into an SPV. It will be treated as a purchase and you will be liable for stamp duty and legal costs.
The reason is that there is a change of ownership from yourself to the SPV.
- Lenders will treat the equity as a full deposit.
- You can raise funds at the same time.
- You may benefit from Incorporation Relief S162.
As the limited company BTL market has matured, there are now lenders who offer more specialist products via an SPV:
- Airbnb/Short Let Mortgages – See our Airbnb Mortgage blog for the latest criteria.
- Green Mortgages.
- Refurbishment buy-to-let.
- Inter-family sale.
- Multi-unit block.
- Day 1 Remortgage.
- Products with no early repayment charge.
- Trading Company.
- First time buyer/First time landlord.
Annual Tax on Enveloped Dwellings (ATED)
Most residential properties (dwellings) are owned directly by individuals. But in some cases a dwelling may be owned by a company (or other collective investment vehicle). In these circumstances the dwelling is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’.
ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.
Relief is available from ATED where a single-dwelling interest is exploited as a source of rents or other receipts in the course of a qualifying property rental business.
If purchasing a property over £500,000 via an SPV, please seek independent tax advice for up-to-date advice on this area.
New Company Bank Account
Remember to open a new current business bank account in your new company’s 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.
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
What Our Clients Say
What you see is what you get with Neil Soundy FS! Very professional, very experienced and always on time. Securing mortgages on 2 properties simultaneously using SPV was unbelievable and amazing. We would always recommend Jake, a man that knows his onions, very brilliant at his job!
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.