All About SPVs
by Digital Zone digital marketerThe
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.
1. Form a limited company yourself and
register it with Companies House. You can either ask your accountant or simply
go to the Companies House
website and set the company up yourself. You may prefer to use a limited
company formation service, solicitor, or accountant to do this for you to
achieve the full benefits. An SPV limited company costs £12 to set up, and if
done online, it will take just a few minutes to arrange. As long as you intend
to use the company just for property letting going forward, there is nothing
more complicated to it!
2. Make it clear that the company is an SPV
for the purpose of property business. This is essential to obtain a limited
company mortgage or mortgages.
3. You may wish to transfer funds into a
property SPV from an existing trading company. However, investigate the most
effective way to do this and consider tax implications.
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.
To Summarise,
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
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Created on Mar 23rd 2021 01:31. Viewed 265 times.