Special purpose vehicles, or SPVs, are a category of limited company commonly set up by buy to let landlords looking for trading structures that offer liability protection and tax efficiencies. Anybody can incorporate an SPV, provided their business is primarily based on property sales, rentals or management – whether a first-time landlord or an experienced portfolio investor.
Given the changes in recent years to tax deductions for landlords, the use of SPVs as a trading vehicle has grown dramatically. While this type of mortgage remains a specialist sector of the buy to let mortgage market, an increasing number of lenders will consider SPV applicants, and limited company buy to let mortgages.
Think Plutus explains all the ins and outs of SPV mortgages, why the eligibility criteria may differ from conventional buy to let mortgages, and when this financing solution may be beneficial.
Special Purpose Vehicle Companies for Buy to Let Landlords
SPV mortgages are similar to any other buy to let mortgage, although designed for business applicants who have incorporated a limited company as an SPV. When you register a limited company, you must specify the nature of the business to be assigned a category code and can select an SPV if your business is concentrated on any aspect of property investment or management.
Landlords often choose to trade as an SPV because a limited company is a standalone legal entity, mitigating some of the risk exposure of the individual owner – the company is responsible for its liabilities and assets rather than the director or main shareholder.
There are also varied SPV formats where you can set up a company that trades as a limited liability partnership or LLP.
Applying for a mortgage as a limited company means that the borrower is the business rather than the landlord, and the company will be the property owner and the mortgage lender’s debtor. Rental income generated through a buy to let investment will also pass to the company, although owners can access profits through dividend drawdowns or PAYE.
Incorporating an SPV
The process of setting up a limited company buy to let or SPV is pretty simple and follows the same process as incorporating any other limited company through Companies House. While you must have some mandatory documents, such as articles of association, you can use the standard format provided.
Before registering an SPV, you will need to select a company name and ensure this has not already been used – it is free to search the Companies House register to check that your chosen trading name is original.
Since the SPV is an incorporated, registered business, you will also need to:
- Appoint a company secretary and directors – although, for smaller owner-managed companies, these roles may be fulfilled by just one or two people.
- Choose a registered address, which could be your home address, an office space, or the correspondence address of an accountant.
- Determine who the shareholders will be and the proportion of the share capital they own. Again, you could have one shareholder with 100% of the company shares.
- Report any individuals with significant control, designated as any owner with 25% or more of shares and voting rights or anybody who exercises decision-making control over the company.
There are other ongoing requirements, such as filing annual accounts, paying Corporation Tax and fulfilling the fiduciary duties of a director, although these are the same as for any category of limited company.
Landlords often appoint an accountant to help them manage their reporting obligations and ensure they correctly declare taxable profits.
Applying for an SPV Mortgage
Once you have an active SPV, you can apply for a buy to let mortgage designed for commercial applicants. However, lenders may ask for personal guarantees from the company directors if the business is newly incorporated and does not have a credit history, trading record or established asset base to reduce their risk.
Lenders offering SPV mortgages cannot make an offer if you do not yet have an incorporated company since part of the due diligence process involves verifying the details provided on the application against the Companies House register.
Note that you can transfer ownership of a rental property to an SPV. Still, as the company is a separate legal entity, you will need professional advice since Stamp Duty applies. You must ensure the sale is made at an ‘at arm’s length’ value, comparable to the market valuation.
The assessment process from there is relatively straightforward, where a lender will evaluate your financial position, the value of the property and projected rental earnings, the proportion of the purchase price you wish to borrow, and personal circumstances such as your age and experience as a landlord.
Benefits of Buying a Rental Property Through an SPV
As indicated, one of the main reasons landlords opt to incorporate an SPV before mortgaging a buy to let investment is that tax efficiencies are available, which can improve their net profitability and reduce their overall tax exposure.
The company is responsible for its debts, which means the individual owner’s assets will not be exposed to risk if the property is repossessed and the business cannot keep up with the mortgage payments for whatever reason.
A caveat applies where the lender requires a personal guarantee, which means the directors put their own assets – such as a home – up as security against the funding agreement, which means they bear personal financial risk linked with the buy to let mortgage.
Commercial businesses tend to have access to higher borrowing values than self-employed landlords, so an SPV mortgage could be a solution if you wish to invest in a higher-value acquisition and need a sizable amount of financing to complete the purchase.
Further, buy to let mortgage lenders are more flexible when it comes to commercial borrowing. An SPV can own any number of properties up to any valuation. However, individual lenders may have caps on the number of agreements or value of mortgage borrowing they are prepared to extend to one company.
Tax Treatments of SPV Mortgage Interest Costs
The tax efficiencies occur because of a variance in how HMRC allows self-employed landlords and landlords trading as a limited company to claim their mortgage interest payments as expenses.
Buy to let landlords operating as private owners can claim up to a 20% tax credit against the interest paid rather than deducting the full cost from their income before arriving at a taxable profit. Businesses are unaffected and can deduct all the interest paid against the mortgage from their revenue before reporting a net profit subject to Corporation Tax.
Corporation Tax rates are also lower than personal income tax, with a top bracket of 25% for companies with net profits of £250,000 or above – compared to an upper income tax levy of 45% for individuals with earnings of £125,140 or more per year.
While personal income extracted from company profits remains subject to income tax, a landlord can effectively reduce their tax bill by drawing down only the financing they require and paying lower Corporation Tax with greater access to tax-deductible expenses.
Capital Gains Tax on SPV-Owned Buy to Let Properties
Landlords transferring ownership of a buy to let residence into a limited company are exposed to Stamp Duty. They will normally need to pay Capital Gains Tax if they gift their property to a family member – payable at 18% to 24%, depending on their taxpayer status.
However, rental investments owned by an SPV can be passed to the ownership of a family member or relative by gifting them shares in the company as a strategic way to reduce Inheritance Tax liabilities. As with any long-term financial decision, we recommend seeking independent advice about the right way to approach this.
Downsides of SPV Mortgages for Buy to Let Property Investments
Although buying a rental property through an SPV can be advantageous, landlords must also be conscious that running a limited business does have negative aspects, such as the requirements to file annual returns and declare profits for Corporation Tax purposes.
SPV mortgages can be available with more generous borrowing thresholds but are a niche product available from a smaller pool of lenders and with higher interest rates and fees that you might expect to pay against a buy to let product as an individual.
Your choice of lender may also depend on the lending criteria and policies of those mortgage providers that do offer SPV mortgages. We referred to personal guarantees earlier, which can be a sticking point for landlords primarily interested in reducing their direct financial liability.
If you already own a buy to let property, you must also factor in Stamp Duty and legal fees into the cost of transferring ownership to an SPV since these additional expenses, coupled with the higher interest rates on your mortgage borrowing, could impact the tax savings you stand to make.
Eligibility Criteria for SPV Mortgages for Buy to Let Acquisitions
The exact policies and rules applied to SPV mortgage applicants will differ between lenders, who will assess the personal circumstances of the company owner as well as the details of the business itself and the property in question.
While the thresholds and caps are often assessed on a case-by-case basis, SPV mortgage lenders will need to evaluate:
- The ownership and management structure of the SPV, including all directors and shareholders, and persons with significant control (PSCs). Lenders often stipulate that they will not consider SPVs with more than four active directors.
- The number of properties already owned by the SPV and the landlord as a self-employed owner and their experience in managing rental properties.
- The property’s value, the deposit available, and the borrowing required. Non-standard buildings may have lower LTV caps, given the increased risk to the lender if they need to repossess and sell an unusual construction as an insolvency sale.
- The credit reports and histories of the SPV and the company owner to assess any instances of adverse credit, such as CCJs or IVAs, which may impact their ability to lend.
Alongside these assessments, SPV lenders will also often consider the personal income of the primary business owner. While buy to let mortgage lending is mainly based on the anticipated rental income of the property, lenders may also implement a minimum individual annual earnings requirement.
Minimum Deposits for SPV Mortgage Borrowing
SPV mortgage lenders will generally need to see a deposit of at least 20%, although they may also require at least a 25% deposit depending on the risk profile of the SPV and its owner(s). Buy to let mortgages for individual landlords can have a slightly lower deposit minimum, usually starting at 15%.
If you can offer a larger deposit, this may increase the number of products and lenders you can consider and mean the interest rates offered are more appealing.
Likewise, higher-risk applicants who may be new to owning a rental property, have no secondary income source or have a low credit score will normally need a larger deposit to offset the lender’s risk.
Independent Support from the SPV Mortgage Experts
Think Plutus provides a full range of independent, private mortgage assistance for individuals, landlords and business owners looking for the most competitive borrowing solutions and bespoke advice to ensure they make informed decisions about the right way forward.
Whether you have an SPV and wish to compare available mortgage products or are evaluating the viability of purchasing a new property through an SPV or transferring a buy to let portfolio to a limited company, our experienced advisers can help.
Please contact us at our Tunbridge Wells or London offices at your convenience or complete our user-friendly enquiry form to hear back from us as soon as possible.
Frequently Asked Questions
Can I Apply for an SPV Buy to Let Mortgage Without Prior Landlord Experience?
Lenders prefer applicants with a proven track record in managing rental properties, but that does not mean you are excluded from all potential mortgage offers if you purchase a buy to let residence for the first time.
Provided the anticipated rental income and other aspects of the property are compliant with lending policies, you will normally be able to structure an agreement through our accomplished brokerage team, who can negotiate on your behalf with the lenders we feel are best suited to your requirements.
Which Lenders Offer the Lowest Rates on SPV Mortgages?
Rates are highly variable and dependent on the specifics of your application. We do not recommend one lender for every applicant since much relies on an assessment of your finances, the buy to let property you wish to purchase, and your trading status.
If you would like tailored suggestions or a like-for-like comparison of different buy to let mortgages available to SPV applicants, please get in touch.
Can I Buy a Non-Standard Buy to Let Through an SPV Mortgage?
Non-standard construction properties are generally perceived as riskier prospects for any type of mortgage. That is because if the lender were to repossess the property due to non-payment and need to sell it to recoup their outstanding debts, they would be less likely to achieve a high enough sale value in a liquidation sale to avoid making a loss.
Landlords interested in investing in a non-standard construction are advised to speak with a whole-of-market broker who can evaluate the lending options available to them and provide support throughout the application process.