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Purchasing and manage buy-to-let property with a Special-Purpose Vehicle (SPV) company offers certain improved tax benefits which are not available to private landlords. Continue reading to discover everything you need to know about using an SPV to expand your property portfolio.

What are Special-Purpose Vehicle Companies?

An SPV is a limited company commonly used in the real estate industry to purchase and manage buy-to-let property. Using a limited company isolates the risk during the funding and purchasing of property because the company has its own legal status, assets and liabilities. SPV’s can hold multiple properties which allow landlords to expand their property empire quickly.

Why have Special-Purpose Vehicle Companies increased in popularity?

In the past, higher rate taxpayers could claim mortgage interest payments as an expense to reduce their tax bill and to operate via a limited company was rare. However, as of April 2020, landlords are no longer able to deduct any mortgage expenses from rental income to reduce their tax bill. Since the changes to interest and finance costs were announced, the SPV route has become far more appealing, even for smaller property investors.

Is a Special-Purpose Vehicle Company right for everyone?

Using an SPV company structure for a buy-to-let property is not suitable for everyone. SPV’s tend to be used by higher and additional rate taxpayers, and those who would have been basic-rate taxpayers but have been pushed into the higher rate bracket due to the changes. Using an SPV makes a massive difference for these individuals and can significantly reduce the amount of tax paid from their rental property income.

Benefits of using a Special-Purpose Vehicle Company for buy-to-let property?

Tax relief on mortgage interest

As of April 2020, mortgage interest is no longer an allowable expense, and landlords cannot deduct mortgage expenses from rental income to reduce their tax liability. Instead, you will receive a tax credit based on 20% of your mortgage interest payments. This effectively means up to 40% of the interest amount will no longer be tax-deductible for higher-rate taxpayers.

However, this change does not apply to landlords who hold property in SPV’s, which means limited company landlords can significantly reduce their tax bill. On top of the mortgage interest, you can also claim tax relief on service charges and repairs.

Lower tax rates on profits

Arguably one of the main reasons landlords use SPV’s for buy-to-let property is the tax treatment of profits. Instead of paying Income Tax as an individual, the SPV will pay 19% Corporation Tax on the profits. Therefore, the tax benefits of owning property through an SPV can be significant, especially if you are a higher rate taxpayer (40%) or an additional rate taxpayer (45%).

If you own and rent a property personally, you will be taxed on all income earned from the rental, regardless of its distribution. If you use an SPV, you can choose how to distribute the profits, and take advantage of tax-free dividend allowances (£2,000 per individual). Some years – you may decide to draw a larger dividend and a lower income or vice versa depending on circumstances. Or you can choose to leave the profits in the company to be re-invested in more properties.

Transferring ownership to reduce Inheritance Tax

Outside of a company structure, if you would like to gift your property to your child or children, this will be subject to Capital Gains Tax. If the property is held in an SPV, giving the property to a family member is relatively easy and could reduce your taxable estate for Inheritance Tax purposes. This is because the company owns the property, and therefore it is relatively easy to add the beneficiary as a shareholder to inherit the property at a later date.

Limited liability and increased credibility

SPV’s are often referred to as ‘bankruptcy-remote entity’s’ as the company has its own liabilities, assets and legal status. The financial risk only goes as far as the company and your liability is isolated to any investment you made in the company. If the company gets into financial difficulties and goes bust, then the worst that could happen is the company ceases trading and becomes insolvent and you lose all properties. However, for an individual who owned buy-to-let property personally, they would pay outstanding debts from their personal assets. As the SPV is kept separate from your own personal liabilities, lenders tend to offer a more generous mortgage calculation. Therefore, it is easier for landlords to borrow more and expand their portfolio whilst keeping the SPV separate from any personal liabilities.

Quickly expand your property portfolio

An SPV can hold multiple properties and can be used to quickly expand your property portfolio as there is no Income Tax due on the retained profit, giving you more capital to re-invest.

Disadvantages of using a Special-Purpose Vehicle Company

Mortgage availability

The rates and fees for SPV buy-to-let mortgages are often higher than for a personal buy-to-let mortgage due to the additional paperwork required. You may also find that there is a small choice of lenders who offer SPV buy-to-let mortgages. However, this is continually changing as SPV’s continue to gain popularity.

Reporting duties

An SPV is a limited company. As a result, there are specific reporting duties and filing deadlines you must adhere to. For example, you must file annual accounts with both Companies House and HMRC.

Additional costs and taxes to consider

If you are considering using an SPV to manage your property portfolio, it is advisable to set up the SPV before buying property. If you transfer existing property into the SPV, you will incur additional costs for Stamp Duty Land Tax, legal fees, higher rate tax brackets, and potentially Capital Gains Tax. You would also have to sell the property to the SPV at market value effectively.

There may be occasions where you wish to draw rental profits from the company as income. If this is the case, Corporation Tax is applicable at 19%, and then you will incur personal dividend tax charges of either 7.5% (basic rate), 32.5% (higher rate) or 38.1% (additional rate).

Finally, when an individual sells a property, they benefit from a £12,300 tax-free allowance (2020/21), whereas when a company sells a property, there is no Capital Gains Allowance.

Did you know Bluebird Accountancy has a specialist Landlord Accountancy service?

As part of our dedicated landlord accountancy service, you will be given access to your own FreeAgent business portal. The dashboard will provide you with real-time information about your SPV company’s finances and give you all the tools to manage your business effectively. Our expert team will be on hand to set up your SPV company for free and complete all registration with HMRC. You will also have a dedicated Account Manager who will be on hand to offer support and guidance throughout your time with us.

For more information about our landlord accountancy service, please give our team a call on 0808 301 2389. We look forward to speaking with you!

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