In last month’s blog – Accountancy services for property investors, we explained how we work with property investors and landlords to manage their tax liabilities and offer support if they decide to set up a limited company to manage their portfolio.
This article explains the advantages and disadvantages of setting up a limited company for property investors in a bit more detail.
What is a Special Purpose Vehicle (SPV)?
A Special Purpose Vehicle (SPV) is a type of limited company set up, especially for buy-to-let properties. If you are a landlord or property investor, you can manage buy-to-let properties using your personal name, or you can set up an SPV.
An SPV is treated as a separate legal entity and has to be registered with a specific SIC code under Companies House.
The main reason that people choose to set up an SPV is to reduce their tax liabilities. But it's worth understanding the pros and cons of setting up an SPV before you make the change, as everyone's circumstances are very different.
The advantages of setting up an SPV
If you own a property in your personal name and rent it to a tenant, you pay tax on any profit you make from the rental income that is not covered by your personal allowance; this will increase to £12,750 for the 2021/22 tax year. Therefore, the amount of tax you pay depends on which tax band your marginal rate is at.
When you operate as an SPV, you pay corporation tax rather than income tax as an individual. The main rate of corporation tax is currently 19%, and it will remain at that rate until 1 April 2023.
As an SPV, you can claim financial expenses related to a business, and the tax benefits can be significant, especially if you are a higher rate taxpayer.
Another benefit for property investors is that they can usually access finance more easily as they represent a lower risk to lenders.
The disadvantages of setting up an SPV
When you operate as an SPV, the market for limited company mortgages is less competitive than standard mortgages. Many of the mainstream lenders don't offer limited company mortgages. The lenders who do offer these mortgages often charge a slightly higher interest rate on these mortgages.
In the past, higher rate taxpayers could effectively claim mortgage interest payments as an expense and thereby reduce their tax bill. That is no longer possible to the same extent, and if you are a higher rate taxpayer, you will be negatively affected by this change.
When you sell a property as a Company, there is no Capital Gains Allowance. In contrast, if you are operating as an individual selling a property, you would have a £12,300 tax-free allowance.
As a Director, you need to submit annual confirmation statements to Companies House. Plus, filing accounts is more complicated than when you are submitting a personal tax return, but if you have a good accountant, they can manage this process for you.
We hope this article has helped you better understand what an SPV is and its advantages and disadvantages. As we mentioned earlier, every case is very different, so we take the time to understand your personal and business objectives when deciding on the best company structure for managing your portfolio.
If you are a landlord or property investor and would like to discuss your options, our property expert Haidee Watson will be able to support you and give you the advice best suited to your circumstances.
You can call 01623 490 120 or email