SPV Company For Buy-To-Let Property – An Insight

In order to know the benefits of a purchase of a buy-to-let property through an SPV, we first have to understand what exactly an SPV company is. Below we have discussed the meaning, disadvantages and some benefits that are making this limited company gain popularity with time.

Business Relief for Inheritance tax

Business relief is a way of reducing the tax charges as a result of leaving the business to the next generation. Rates ranging from 50% to 100% can be claimed in such situations as the continuation of a business is seen as favorable to the economy. In order to qualify for the relief the person must run the business for at least 2 years prior to gifting it to the next generation or his expiry.

What are SPV or Special-Purpose Vehicle Companies?

A special purpose vehicle company is a limited company that is solely set up to buy and manage properties in the real estate industry. Purchasing a buy-to-let property through a limited company eliminates the risk during the purchase because it has its own assets, legal status and liabilities. Hence, landlords can hold multiple properties and expand their empire with an SPV company.

Difference between a buy-to-let private and limited company mortgage

Commonly a mortgage is a legal agreement between the lender and a sole buyer that involves borrowing of money for the purpose of purchasing a buy-to-let property. But an SPV mortgage is an agreement between the lender and a SPV company for the funding of the purchase of a buy-to-let property. In other words, an SPV mortgage allows you to purchase a buy-to-let through a limited company, rather than purchasing it in your own name.

Reasons for increasing popularity of SPV

Previously operating through a limited company was rare as the taxpayers claimed mortgage payments to reduce tax bills. However, since April 2020 the landlords are unable to deduct mortgage expenses from their rental income for the reduction of tax bill. So, the SPV has made it easy for the small investors to buy property without the risks involved.

Disadvantages Of SPV Company

Although there are far more benefits than disadvantages of an SPV company, the below points will help in an informed decision making while purchasing a buy-to-let property through an SPV company. .

● Higher charges for SPV mortgage than personal mortgage due to volume of paperwork.
● Strict deadlines to meet with regard to filing and reporting duties
● Additional costs for transferring existing property to SPV like higher tax rates, legal fees, and more.

Benefits Of Special-Purpose Vehicle Company

Listed below are some of the outstanding benefits of owning a property through an SPV company.

Tax relief on mortgage interest

Since April 2020, it was made a rule that landlords cannot deduct mortgage expenses from their rental income, which meant that for higher rate landlords mortgage interest was not tax-deductible. But this was not the same for landlords who purchase or hold property via SPV company. It allowed SPV company landlords to reduce the tax bill and also to claim relief on repairs and service charges.

Lower tax rates on profits

Undeniably the main reason for landlords’ use of SPV’s to buy-to-let property is the lower rate of tax on the profits.

It means the landlords do not have to pay Income Tax, rather the SPV will have to pay 19 percent Corporation Tax on their profits. Therefore, for higher rate taxpayers, the benefits of holding a property through a limited company is quite profitable. Also owning a property through an SPV helps a landlord to choose how to distribute his profits and use the tax free dividends to his benefit. He can also choose to leave the profits to be later reinvested for more properties.

All these advantages will not be available to individual landlords.

Transferring of ownership to lower the Inheritance Tax

If you are an individual gifting your property to your children or grandchildren, it will be taxable under the Capital Gains Tax. However, if the SPV company owns the property, giving away ownership to a family member could lower the Inheritance tax. You can also add a beneficiary easily to inherit your property later as a shareholder.

Limited liability and increased credibility

Since the SPV has its own liabilities, legal status and assets, and is kept separate from personal liabilities, in case of financial hurdles, either the company ceases trade, becomes insolvent or you lose all your properties. But if you own a property personally, you could have to pay significant debts from personal assets in such situations. This makes landlords more confident to borrow more and expand their property empire.

If you are a landlord looking for help with regard to your tax claims, buy-to-let mortgage or anything related to expanding your business in a tax-efficient way at CoreAdviz we have a team of expert financial advisors to offer end-to-end guidance that specifically suits your needs.