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SPV Mortgages | Are They Worth It?
Special Purpose Vehicle (SPV) mortgages provide landlords with a powerful alternative to personal buy-to-let mortgages when building a property portfolio, but how do they work and what are their advantages?
At Clifton Private Finance we have the answers.
To speak to a specialist about arranging your own SPV mortgage, contact us today.
What is an SPV Mortgage?
Also known as limited company mortgages, an SPV mortgage is a specific buy-to-let mortgage where a company is formed to purchase the property, rather than it being a personal purchase.
This provides landlords with improved tax planning and liability protection, enabling them to take their property portfolio forward as a business.
With an SPV mortgage, it is the business that borrows the money to buy the property.
The business owns the property, is liable to repay the mortgage, and deals with tax liabilities as a business - for example paying corporation tax rather than personal income tax.
Generally speaking, SPV mortgages are excellent for property investors looking to:
- Build a property portfolio of multiple rental investments
- Leverage preferential business tax rates rather than pay personal tax liabilities
- Pass on the property portfolio to another once they retire or pass away
- Limit their personal liabilities and protect personal assets while investing in the property market
Who Can Have an SPV Mortgage?
SPV mortgages are designed specifically for use by a limited company, developed as a special purpose vehicle for property ownership.
They are buy-to-let loans held against the property as collateral, providing businesses with the ability to develop a property portfolio.
The Advantages of an SPV Mortgage
The main advantages of an SPV mortgage over a personal one are in four categories:
1 - Building a Property Portfolio
When looking to build a larger property portfolio, or ‘empire’, a limited company or SPV to hold the operations makes management and administration significantly easier.
Perhaps the greatest aspect to this is the portfolio mortgage, which a single SPV mortgage can easily be converted into.
Portfolio SPV mortgages are single mortgages for administrative purposes but cover multiple properties. They allow a far greater level of flexibility when compared to multiple mortgages and present a way to leverage equity in existing properties to lower the overall loan-to-value when purchasing new buildings.
For example, look at the following illustrative scenario where three properties are already owned, and another is wanted to be bought:
To purchase property D on a new mortgage, assuming all other affordability and stress tests were passed, a likely LTV is 70%, requiring a capital deposit of £120,000.
However a portfolio would combine all these mortgages together as follows:
Being able to leverage the equity already existing in the first three properties lowers the needed capital investment for the fourth property from £120,000 to £43,000 - £77,000 less, making the purchase a lot easier.
Additionally, the uniform rate on the portfolio SPV mortgage may well be lower than the individual rates on the existing mortgages, providing additional monthly savings.
While SPV mortgages do not need to be portfolio-based, the ease of moving from a single mortgage to a portfolio SPV mortgage in the future when building a portfolio can make them hugely advantageous.
2 - Improved Tax Position
Corporation Tax vs. Income Tax
Private individual landlords must pay income tax on any rental profits. Current tax brackets in the UK mean that it is extremely likely that profits from being a landlord will fall into the higher bracket of 40%, especially if you also have additional employment.
An SPV ensures that the company pays only corporation tax, which stands at 25% for companies who make over £250,000 in profit and tapers down to 19% for those generating £50,000 or less.
This means the maximum corporation tax you will pay on your rental profits is 25% compared to the likely 40%-45% income tax - almost half the amount.
Mortgage Interest as an Expense
Individuals cannot deduct mortgage interest as an expense. While they benefit from a 20% tax credit for mortgage interest, this is relatively negligible compared to the full level of expenses when calculating taxable profit for corporation tax that an SPV enjoys.
In addition to the lower rate of corporation tax, applying mortgage interest as a business expense can save thousands each year for SPV-based landlords.
Capital Gains Tax
Though changes to the CGT levels for businesses are imminent, current legislation means there are advantages for SPVs when selling properties as the tax on business capital gains is effectively lower than the impact to an individual.
This is especially important when developing a growth strategy, increasing the property portfolio through taking advantage of property sales and purchases to build a strong business.
VAT Registration for Commercial Properties
If you are renting out commercial properties, it is possible to opt to include VAT as part of the rental payments and register the SPV for VAT. This can result in additional savings, particularly if you undertake in regular renovation or construction projects.
It is also worth considering that properties rented out as holiday lets are considered commercial (business) lets, and thus are subject to VAT. Landlords who are renting properties primarily as holiday homes for periods shorter than 28 days at a time, may also benefit from VAT registration.
3 - Limiting Liability
Once the business is established, the directors will benefit greatly from the limited liability offered by SPV mortgages, distancing their personal finances and assets from those of the business.
It should be noted, however, that in the early days of the SPV or when the LTV is high, lenders may be looking to directors’ guarantees to mitigate some of the risk in addition to the primary security of the property itself.
In this way, the limited liability aspect of the SPV company is more effective once the business has developed.
4 - Inheritance Planning
Properties owned by the SPV are not a personal asset and as such is not liable for inheritance tax in the usual way for property. Instead, the shares in the SPV company will be passed on.
This will greatly reduce the overall level of inheritance tax due in most circumstances; especially if the SPV has grown to include multiple properties in its portfolio.
The use of SPVs to limit inheritance tax is a major consideration for many landlords looking to provide for their heirs.
5 - Additional Benefits
While the above four categories cover the majority of the benefits for SPVs, there are other niche advantages that further strengthen the viability of a limited company as a landlord, including:
- Improved credibility - Businesses are often taken more seriously than individual landlords, opening opportunities for better deals, improved financial development, and more. Maintenance service providers may be keen to offer lower rates to a business with potentially more properties and regular work; some mortgage lenders offer preferential SPV mortgage rates; tenants can feel better managed and looked after; rental management companies can offer superior deals, etc.
- Business funding - Once you are an established business, additional funding options become easier to secure. This may allow you to move from a one-man-band landlord to a larger company with administrative staff and a long-term growth strategy. Access to products such as bridging finance will make purchasing at auctions easier; cash flow finance can help you through periods where your are between tenants; business loans can help you with unexpected maintenance bills; and account-based financing at merchants can help you obtain much needed materials without needing immediate payment.
- Clear separation - By moving your landlord operations away from being intertwined with your personal life and finances, you will enjoy a better separation between being a landlord and a private individual. Many landlords enjoy a more relaxed time with this additional separation, improving their work/life balance and mental health.
The Downsides of SPV Mortgages
Like any financial product, SPV mortgages do have some negative aspects that should be properly considered.
If in any doubt, seek professional advice. Clifton Private Finance have a dedicated landlord team ready to provide you with clear and comprehensive help when making the decision to utilise a special purpose vehicle for your property letting needs.
Contact us with your questions for friendly support.
The following represent some of the cons when looking at SPV mortgages:
The cost of running a company
While costs for a small company are minor, they are not zero. Depending on the size of your SPV, you may need to employ the services of others, such as an accountant.
Stamp duty land tax on property transfer
If you are currently a landlord with existing properties, you may want to move them to your SPV to take advantage of the tax and property portfolio benefits. In doing so, you may have to pay Stamp Duty Land Tax (in England and Northern Ireland) or the equivalent land transaction taxes in Scotland and Wales.
This can be an expensive outgoing that negatively offsets any short term tax benefits.
Keeping up with legal requirements
As a company owner, you will have to follow the appropriate regulations, including submitting annual accounts and tax returns.
Losing access to individual mortgage products
While SPV mortgages often provide superior mortgage rates, there are fewer lenders offering limited company mortgages and fewer products per lender, meaning the options are narrower.
The complexities regarding obtaining clear cash profit in the bank
While the amount of profit obtained by SPV landlords is likely to be higher than a comparable individual, it can be difficult to determine the correct path and often an accountants in-depth knowledge and skill is needed to get the most out of the system.
How to Apply
At Clifton PF, we work for our clients to provide the finest mortgage advisory service for both businesses and individuals.
Thanks to our established relationships with the finest SPV mortgage lenders in the country, we can find the best rates and most beneficial terms for SPV mortgages, giving your rising property empire the boost it needs.
Contact us today to find out more.
