21 Aug 2014
So you’ve accumulated a decent sum of money in the company reserves and you’d like to invest in property with it, but to do it very tax efficiently. Could a Special Purpose Vehicle (SPV) be the answer?
What is an SPV?
A Special Purpose Vehicle Limited Company is a UK-incorporated company that has been established by another trading company or private individual(s) for the sole purpose of BTL activities i.e. the purchase/remortgage of residential properties for letting.
Why you should use an SPV
If you are a limited company owner and are trying to be tax efficient, you will probably withdraw up to the basic rate ceiling for tax purposes (around £41k per person per year) and leave the rest in the company. The problem here is that the retained profits will sit in a bank account an earn about 2% per annum if you’re lucky. In order to maximise the return on this income, you might wish to invest in property, but the options are limited: It is often not a good idea to put assets into a trading company and generally we would advise against doing so in order to protect, or ring-fence, the asset.
One option could be to set up an SPV, which would then become a shareholder in the trading company. A special dividend can be declared and the required funds transferred into the SPV. These funds are now protected from any trading or commercial risks of the original company and the SPV is free to use the funds to invest as it sees fit, for example in a buy-to-let portfolio.
Tax implications of an SPV
There are a few implications that require careful consideration:
No tax is payable on the special dividend as corporation tax has already been paid on the profits by the trading entity. Conversely, if the director/individual received the dividend, there would typically be an additional 25% payable*
The SPV would pay CT on the profits generated by the portfolio.
If the assets are already held - either by the trading company or the company directors - there will be Stamp Duty payable on the transfer and there may be Capital Gains Tax payable.
When the property is disposed of, the company will pay corporation tax on any gain made, less any indexation allowance. This will be at the prevailing rate, currently 20%.
When the property is disposed of, the proceeds can be retained in the company and withdrawn in a tax efficient manner - either in a phased draw-down or as capital, while claiming entrepreneurs’ relief.
Why not use the trading company to invest?
There are some good reasons why you shouldn’t use your trading company:
The asset is exposed to commercial risk. If the business fails, then the asset could ultimately be sold to pay off creditors. Keeping the asset in a separate business entity protects you from this risk.
If you want to sell, close down, or otherwise transfer your trading company, there would be asset implications.
The ownership percentages of the asset can be varied. For example, a spouse, or children (normally through a trust) can easily hold shares in the SPV, whereas it may not be appropriate for this to be the case in the trading company.
Why not invest in the portfolio personally?
First and foremost: tax. To get your hands on the excess reserves, the company will have to declare a dividend. This will most likely involve higher rate tax and an additional 25% payable.
Transferring the property can be difficult, time consuming and expensive. In an SPV, as the ownership of the property would be retained within the SPV itself, only shares would need transferred which is generally simple, quick and inexpensive.
Upon disposal, there is very little flexibility: You receive the money, you pay tax on the capital gain. There is no potential for phasing the draw-down and there is no entrepreneur’s relief.
Downsides to using an SPV
Yes, there are some. The main problem is the availability of funding options. While most mainstream lenders shy away from these types of arrangements, there are still options available. Typically, the loan-to-value percentage expected of the investor will be higher, as will the rates available.
Consider also that the SPV is a limited company and has the same legal obligations as your trading company. Accounts will be required, bank accounts will need to be maintained etc. And of course, there will be fees for this. Typically an SPV can be set up for around £300 and our annual accounting fees are in the region of £595.
Remember that this is a very complex issue and you should seek specialist accounting and /or legal advice before proceeding. If you have a buy-to-let portfolio at the moment, or are considering going down this route in the near future, please feel free to contact us for a more detailed explanation on how SPVs work and what the upsides and downsides would be for you.