In recent years, there has been a significant shift among property investors towards using limited companies, commonly structured as Special Purpose Vehicles (SPVs), to hold their buy-to-let portfolios. According to data from Companies House, in the 12 month period ending September 2024, there were 85,000 properties purchased by limited companies in England and Wales, a substantial increase from 32,000 in the same period in 2017.
This trend reflects the growing recognition amongst investors of the advantages that SPVs can offer. An SPV is not a one-size-fits-all solution, however, and investors should carefully consider their individual circumstances and the specific implications of using an SPV before making a decision.
In this guide, we will explore the pros and cons of using an SPV for property investment, the tax efficiencies it offers, and other factors for investors to consider.
What is an SPV?
A Special Purpose Vehicle (SPV) is a limited company established solely for the purpose of holding and managing property investments. Unlike a trading business, an SPV is typically used exclusively for buy-to-let properties.
Traditionally, there were fewer options from lenders for borrowers who wanted to use an SPV to hold their investment, but as the popularity of SPVs has grown, so have the lending options. Nowadays, most buy-to-let lenders are able to lend to both individuals and SPVs, with no discrimination between the two.
Benefits of using an SPV
1. Mortgage interest relief
One of the primary reasons landlords opt for an SPV is the ability to deduct mortgage interest as a business expense. Unlike individual landlords, who face restrictions in offsetting mortgage interest costs against rental income, limited companies can fully deduct these expenses, potentially resulting in significant tax savings.
2. Corporation tax rates
In April 2023, the corporation tax rate for limited companies in the UK was increased to 25% for profits exceeding £250,000. For profits between £50,000 and £250,000, the rate is tapered between 19% and 25%, calculated according to the specific profit made for that year.
Holding investment property in an SPV structure can therefore provide a more tax-efficient framework for higher-rate taxpayers compared to personal income tax rates, which can be as high as 45%.
3. Greater tax planning flexibility
An SPV allows investors to control how and when profits are drawn. Instead of taking all rental income as personal income, which may push an investor into a higher tax bracket, shareholders can opt to receive dividends at a more tax-efficient rate or retain profits within the company for reinvestment.
4. Limited liability protection
Holding properties within an SPV provides a clear separation between personal and business finances. If the SPV encounters financial difficulties or legal issues, the personal assets of the shareholders are typically protected, offering an additional layer of security to investors.
5. Estate planning advantages
For investors considering their long-term legacy, transferring shares in an SPV to heirs can be more tax-efficient than transferring individually held properties. With careful tax planning and the guidance of a specialist adviser, it may be possible to mitigate potential inheritance tax liabilities.
Considerations before using an SPV
1. Personal tax on withdrawals
While corporation tax on profits may be lower within an SPV, investors need to consider the tax implications of withdrawing funds and taking money out of the company via salary or dividends which can result in additional personal tax liabilities.
2. Capital Gains Tax (CGT)
Unlike individuals who benefit from an annual CGT allowance (currently £12,300), companies do not have this exemption. When an SPV sells a property, it must pay corporation tax on any gains. Additionally, if the remaining funds are distributed to shareholders, they could be subject to further personal tax. This layered taxation requires careful consideration and planning.
3. Additional administrative costs
Operating an SPV involves additional responsibilities, including annual filings with Companies House, corporation tax returns, and statutory accounting requirements. While these tasks can be outsourced to professionals, they add to the overall cost of managing a property portfolio.
4. Costs of transferring existing properties
Transferring personally owned properties into an SPV is treated as a sale for tax purposes, which could trigger both Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). These costs can be substantial, so investors should carefully assess whether the long-term benefits of transferring existing properties into an SPV outweigh the immediate tax liabilities.
5. Mortgage product availability
The range of mortgage products for SPVs has increased, but there are still fewer options compared to individual buy-to-let mortgages and some lenders may offer different pricing for limited company mortgages compared to those made to individuals.
Final thoughts
Using an SPV for property investment can offer significant tax efficiencies, greater financial flexibility, and long-term planning advantages. However, it's not suitable for every investor and it’s important that your clients seek the advice of specialist property tax expert.