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The SVP or Special Purpose Vehicle has become more popular as a way to invest in property in recent years. In this article, we will look at what SPVs are, how property investors can use them, and how to form an SPV.
What is an SPV?
A special purpose vehicle(SPV) or a special purpose entity (SPE) is a business entity that is formed for, as the name suggests, a specific and limited purpose. A property investor usually forms an SPV to purchase Buy to Lets or for a property development project. SPVs can be formed for other purposes too.
An SPV is usually formed as a private company limited by shares, although it doesn’t have to be. It can be any kind of business format, including a limited liability partnership (LLP) or a public limited company (Plc).
There are usually no offices, management, or employees. SPEs often consist of a set of legal documents. They can be financing subsidiaries, or a holding company, a limited liability company, a new corporation, a trust, or a partnership. Only imagination is the limit.
What are the Reasons for Using an SPV?
In the property industry, investors may choose to form an SPV for their plans to re-sale easier in the future, arrange finance on a property and keep the asset and liability clear or for tax reasons, such as the aim of reducing tax bills.
Many more landlords are now purchasing rental property via an SPV limited company because it can be more tax-efficientnow that the changes to tax relief on finance costs for individual landlords have been phased in.Finance (No. 2) Act 2015 Introduced restrictions on the amount of mortgage interest that could be claimed as allowance. The amount of the allowance has gradually been reduced in recent years and is now zero.
Rental profits are being taxed with a maximum deduction at a 20 rate%. This has made some investments, including Buy to Lets unviable or even loss-making for many sole traders property investors.
Limited companies are still able to claim tax relief on the mortgage interest they pay, making them a more financially attractive way of operating a property business. It is important to note, however, that legislations are subject to change.
What are Some Drawbacks with SPVs?
Even though the market for limited company mortgages is smaller and less competitive than standard mortgages, many mainstream lenders do not offer limited company mortgages. With the lenders that do, the interest rate is usually higher and a lower LTV or loan to value may be applicable too.
You will have to do paperwork in things such as filing accounts with Companies House and then a tax return to HMRC. The filing requirements make it tricky for the average person to do without the extra cost of a professional account.
What are Some Benefits of SPVs?
One advantage is that limited company mortgages may only require a lower level of rental coverage or interest cover ratio than regular Buy to Let mortgages. Rental coverage is the amount by which the monthly rental income must exceed the monthly mortgage payment, making it possible to invest in properties even if the rental income potential is low.
The reality is, mortgage lenders prefer limited company SPVs because it is easier to understand the lending risk involved. A newly formed SPV will be free from any pre-existing obligations, charges, debts, etc.; as well as be separate from its owners for tax purposes.
Lenders will generally look at the financials of the SPV company directors, rather than the SPV itself. They may ask for personal guarantees for the mortgage too.
SPVs are usually “bankruptcy remote”. If the sponsoring firm has financial problems, its creditors cannot seize the assets of the company. Thus, separating and reducing business risk
They also offer flexibility. You can form several different SPVs if needed, in order to keep projects independent. An SPV can be formed for one or many projects, dissolved and more formed for further projects.
How to Form an SPV?
You can’t register an SPV the way a limited company or partnership does. The way to form an SPV is to form and register a limited company but as a special purpose vehicle.
Are special purpose vehicles (SPVs) legal?
SPVs are perfectly legal, and almost all major corporations use them. It is not the SPV itself; instead, it’s the way it is used that can be illegal.
Special purpose entities are used in financial risk management, as they are excellent ways to segregate specific activities (risks) from a firm’s core operations. SPEs definitely can help both, firms and investors.
According to the European System of Central Banks (ESCB), SPEs can be investment funds, financial vehicle corporations, financial corporations engaged in lending, financial holding corporations, security and derivative dealers, and “others”.
SPEs can be illegal and can be used for tax evasion, avoidance of regulatory restrictions, money laundering, misstatement of earnings, and concealment of problems.
Even though using an SPV can offer many advantages to property investors, it is absolutely essential to take professional advice on the overall implications of using an SPV before going ahead so it is tailored and specific to your individual needs.
Contact Independent Mortgage Brokers for more information and for online mortgage advice