Operating a buy-to-let special purpose vehicle (SPV) or holding property personally is one of the choices a landlord must make. For many landlords, an SPV offers tax advantages, but for others the additional administration and financing implications outweigh the benefits. This article explores what a buy-to-let SPV is, why landlords might use one and how to set it up.
What is a buy-to-let SPV?
A buy-to-let SPV is a company established specifically to own rental property. Many landlords choose to create an SPV so that their investment portfolio is held separately from personal assets. The structure takes the form of a limited company that may hold one or more rental properties. Under this arrangement, the landlord owns shares in the company rather than the property itself directly. The SPV owns the property, takes out a mortgage against it, collects rent, pays expenses and fulfils the limited company’s tax and administrative obligations.
Why landlords consider a limited company for buy-to-let
1. Tax position
One of the primary reasons landlords consider an SPV is for tax efficiency. In recent years, changes to the taxation of individual landlords have made personal ownership less attractive. Income tax on rental income can be relatively high, as it can no longer be set off fully against mortgage interest costs. This is even more so for higher-rate taxpayers. Holding property in a limited company means taxable profits are calculated after the full deduction of mortgage interest and are subject to corporation tax. For many landlords, this results in a lower effective tax rate on rental income. This encourages landlords, particularly those with larger portfolios, to examine the tax efficiency of SPVs.
2. Retaining profits in the business
A limited company for buy-to-let allows landlords to keep profits inside the business to fund further acquisitions without immediately extracting the funds personally. This can be beneficial for growth-focused landlords. Reinvesting profits through the company means tax only applies on withdrawals for dividend purposes and not on the profit retained and used for new purchases, although the latter could still be subject to stamp duty.
3. Separation of personal and business risk
Using a buy-to-let SPV can help separate personal assets from investment portfolios. If the property is held in a company, creditors have recourse to the company's assets in the event of default rather than to the landlord’s personal assets. This may provide an added sense of protection, particularly when holding multiple properties. However, it is important to bear in mind that many lenders ask company directors to provide personal guarantees as well.
Disadvantages of a buy-to-let SPV
While an SPV can offer tax advantages, it is not suitable for every landlord. There are some potential drawbacks to consider alongside the benefits.
1. Increased administration
Running a limited company involves more administration than owning property personally. The company must comply with Companies House requirements, prepare annual accounts, and file corporation tax returns. Some landlords might view this administrative burden as a significant downside.
2. Mortgage availability and cost
Not all lenders offer buy-to-let mortgages to SPVs and those that do may have stricter criteria than those applied to personally owned properties. SPV mortgages often require larger deposits and come with higher interest rates. Landlords may also face a more complex application process.
3. Personal tax on withdrawal of retained profits
Although a limited company for buy-to-let can reduce tax within the company, extracting profits for personal use can trigger personal tax liabilities. Dividends and salaries from the company are taxed at personal income tax rates.
Who should consider a buy-to-let SPV?
1. Large portfolios or growth-focused landlords
Landlords with multiple properties or those looking to scale their portfolio tend to benefit most from SPV structures. The tax advantages of retaining profits for further investment often outweigh the administrative and financing costs for such investors.
2. Landlords with higher incomes
Higher rate taxpayers are often better positioned to benefit from a limited company for buy-to-let purposes if the profits are retained within the company, as the difference between effective personal and corporation tax rates can be substantial.
3. Those seeking separation between personal and investment finances
Investors who want a formal separation of their personal finances from their property business may find the SPV structure appealing.
Who might not benefit from an SPV?
Not every landlord might benefit from using an SPV. Those with smaller portfolios or who want to keep their setup simple may find personal ownership more suitable. Some landlords may also prefer the flexibility of owning property personally if they plan to sell within a short time frame.
How to set up a buy-to-let SPV
Setting up an SPV is straightforward, in principle, but it may still require careful planning.
1. Incorporate the company
The first step is to register a company with Companies House. You will need a company name, registered address, directors and shareholders.
2. Open company bank accounts
Once the company is registered, open a business bank account in the company's name. This account will be used for rental income, expenses and loan payments.
3. Arrange finance
Approach lenders that offer SPV mortgages. Expect a requirement for a larger deposit, often 25% or more. Detailed financial information and company structure documentation might also be required to support the application.
4. Register for tax
You must register the company for corporation tax and submit annual tax returns. If you plan to pay directors, register for the appropriate PAYE processes.
5. Maintain compliance
Compliance with Companies House and HMRC rules includes filing annual returns and annual accounts, and corporation tax returns. Many landlords engage accountants to manage these responsibilities on their behalf.
Tax considerations with SPVs
1. Corporation tax and profits
One of the main appeals of a limited company for buy-to-let investors is the tax treatment. Rental profits after allowable expenses, including all mortgage interest costs, are subject to corporation tax. This can reduce the immediate tax burden compared to personally owned buy to let properties and facilitate profit retention for investment.
2. Capital gains tax
When an SPV sells a property, the company is liable for corporation tax on any chargeable gain. This may be lower than personal capital gains tax.
3. Dividend tax
Profit extraction from the SPV by way of dividends or salaries triggers personal tax. The effective cost of taking profits out of the company is a key component of overall tax planning and should be factored into any decision to use an SPV.
Weighing the benefits and disadvantages
Choosing between a buy-to-let SPV and personal ownership requires a balanced assessment of tax efficiency, administrative burdens, financing availability and costs, and long-term goals.
Key potential advantages:
- Lower tax burden within the SPV compared to personal taxes
- Ability to retain profits for reinvestment
- Legal separation of personal assets and investment property portfolio
- Potential for tax-efficient exit strategies
Key potential disadvantages:
- More administrative and compliance obligations
- Specialist finance with higher deposit requirements and interest rates
- Tax on dividends when profits are extracted
- Not all lenders will provide SPV mortgages
Professional advice is recommended to determine the right approach.
Conclusion
The use of a limited company for buy-to-let investments is an effective structure for many landlords. It offers tax efficiency, separation of personal and business finances, and potential advantages for growth-focused investors. However, the decision is not straightforward for everyone. Administrative responsibilities, financing constraints and personal tax outcomes must be considered carefully with professional advice. With the right planning and advice, a buy-to-let SPV can be a powerful tool in a landlord’s investment strategy.
FAQs
Q. What is a buy-to-let SPV?
A. A buy-to-let SPV is a company established specifically to own, finance and manage rental property investments.
Q. Why do landlords use a limited company for buy-to-let?
A. Landlords often use limited companies for buy-to-let to benefit from tax efficiency, the ability to retain profits for investment, and separation of business and personal assets.
Q. Do all lenders provide SPV mortgages?
A. Not all lenders offer mortgages for SPVs and those that do may apply higher interest rates and require larger deposits compared to personal investments.
Q. Are there tax advantages to using an SPV?
A. Rental profits within an SPV can be fully offset against mortgage interest costs and are subject to corporation tax, which can be lower than personal taxes on rental income. Corporation tax on any chargeable gain may also be lower than personal capital gains tax.
Q. What are the disadvantages of a buy-to-let SPV?
A. Disadvantages include increased administrative and compliance obligations, and financing challenges.
Q. How do I set up an SPV?
A. You must register a company with Companies House, open business accounts, arrange finance, register for tax and maintain compliance with all statutory requirements, including annual returns, annual accounts and tax returns.
Q. Is an SPV appropriate for small portfolios?
A. An SPV may not deliver enough benefits to outweigh costs and complexity for small portfolios.
Q. Does borrowing against property through an SPV reduce personal liability?
A. Holding investment property in a company separate personal assets from SPV investment risk. However, lenders typically seek personal guarantees from company directors.
Q. What deposit is typically required for SPV mortgages?
A. SPV mortgages often require larger deposits than personal buy-to-let mortgages, sometimes 25% or more.
Q. Should I seek professional advice before establishing an SPV?
A. Accountants, lawyers and mortgage brokers experienced with SPVs can help tailor the structure and financing suited to your circumstances.
Additional sources:
https://www.nrla.org.uk/news/should-you-set-up-a-buy-to-let-spv
https://www.taxd.co.uk/blog/setting-up-spv-for-buy-to-let-what-is-it-and-how-do-you-start-one
https://www.ybs.co.uk/commercial/guides/benefits-drawbacks-of-spv
https://www.themortgagehut.co.uk/expert-articles/buy-to-let-mortgages/247/spv-mortgages
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