Since the changes to BTL tax relief in 2020, the prospect of buying through an SPV to save some hard-earned cash may be tempting. But before you commit, it’s worth knowing mortgage providers’ views on property purchases via SPVs.
This guide covers all you need to know about SPV mortgages: what they are, the benefits to property investors, typical lender eligibility criteria, and how to go about securing one at the most competitive rate.
What is a special purpose vehicle?In the mortgage world, a special purpose vehicle, or SPV, is an umbrella term for a legal entity created for the specific purpose of purchasing and holding residential BTL Using a SPV to fund the purchase of a property reduces liability for the investor because the risk will be isolated to the company itself, which has its own legal status, assets and liabilities.
An SPV is usually set up as a private limited company, but they can also be limited liability partnerships (LLP), public limited companies (PLC), or other types of business.
What is a special purpose vehicle mortgage?A SPV mortgage, or a ‘limited company mortgage’ allows borrowers to purchase a BTL property through a SPV company.
Applying for a mortgage via a SPV means that:
- Mortgages are taken out under the limited company name
- Ownership is via shares in the SPV.
- Properties are purchased and held by the SPV.
- Rental income is owned by the SPV.
Setting up a special purpose vehicleThe process of setting up a SPV is relatively straightforward; it can be done online in a matter of minutes, at a minimal cost. Alternatively, you might want to ask a solicitor or accountant to do it on your behalf.
The process to setting up a limited company via the government website is as follows:
- Check setting up a limited company is the right decision for you.
- Choose a company name
- Assign directors and a company secretary.
- Decide on company shareholders or guarantors.
- Identify people with significant control (PSC).
- Prepare documents agreeing how to run your company.
- Check what records you'll need to keep.
- Register your company.
What are the advantages of a SPV mortgage?There are a number of benefits to purchasing a property through a SPV rather than as a sole investor:
Limited liability and increased credibilityFor an individual BTL investor, your personal assets are liable for any outstanding debts. But the financial risk associated with an investment via an SPV only goes as far as the company, since they have their own legal status, assets and liabilities.
As such, many mortgage providers tend to grant more generous mortgages than they would for an individual, making it easier for investors to borrow more and expand their property portfolio, all the while keeping the SPV separate from their personal affairs.
Tax relief on mortgage interestMortgage interest is no longer an allowable expense for BTL landlords, nor can mortgage expenses be deducted from rental income. Instead, you receive a 20% tax credit based on your mortgage interest payments. For higher-rate taxpayers, this effectively means up to 40% of the interest will no longer be tax-deductible.
However, this doesn’t apply to landlords who hold properties in SPVs, which means limited company landlords may be able to significantly reduce their tax bill. It’s also possible to claim tax relief on service charges and repairs.
Lower rate tax on profitsInstead of paying Income Tax as an individual, an SPV will pay Corporation Tax on any profits made. Since Corporation Tax is charged at 19%, there can be significant tax benefits to owning property via an SPV, especially for higher- or additional-rate taxpayers, who are charged 40% and 45% respectively.
Using a SPV also allows you to take advantage of the £2,000 tax-free dividend allowances, and gives you more freedom as to how profit is distributed. Depending on your circumstances, you may decide to draw down a larger divided and lower income (or vice versa), or leave the profits in the company to be reinvested.
Ease of transferring ownershipAs an individual investor, you would usually be subject to Capital Gains Tax if you wanted to gift the property to a family member. For basic-rate taxpayers, this is charged at 18%, and 28% for higher- and additional-rate payers.
If the property is held in an SPV however, the beneficiary can easily be added as a shareholder, to inherit the property at a later date. This can also help reduce your taxable estate for Inheritance Tax purposes.
Fast expansionA SPV can hold multiple properties, and there is no limit on how many you can have in your portfolio at one time. Given the generous borrowing allowances and not having to pay Income Tax on the retained profit, SPV investors have the opportunity to quickly expand their portfolios.
What are the disadvantages of a SPV mortgage?While there are plenty of pros to investing via an SPV, setting up a business is not a decision to rush into. There are also limitations regarding the mortgage options available - consider the following before committing:
Mortgage availabilityGenerally speaking, rates and fees for SPV mortgages are higher than those for personal BTL mortgages (which can be significant in themselves).
There are also fewer providers offering SPV mortgages, so your lender pool may be limited. That being said, more and more options are popping up on the market to meet demand, which has gained traction since the tax relief changes.
Personal guaranteeSome lenders require a personal guarantee from the directors of the SPV limited company, meaning you (and any other shareholders) become liable for the debt if a mortgage is not repaid in full.
This somewhat negates some of the benefits of buying via a SPV, so be sure to read the lender terms thoroughly before agreeing to a deal.
Record keeping and reporting dutiesAs the owner of a SPV limited company, there are specific reporting duties and filing deadlines you must adhere to on an ongoing basis. For example, you have a legal obligation to file your annual accounts with HMRC and Companies House.
Transfer chargesIf you wish to transfer existing properties you own into your SPV company, you could be liable for Stamp Duty Land Tax (SDLT), higher rate tax brackets, legal fees, and potentially Capital Gains Tax. This is why it’s advisable to set up a SPV before investing in BTLs.
Additional costs and taxesWhen a company sells a property, there is no Capital Gains Tax allowance, whereas individuals benefit from a £12,300 personal allowance.
If you wanted to draw all your rental profits as income, Corporation Tax is applicable at a rate of 19%. On top of this, a director will be liable for Dividend Tax, which is charged at 7.5% standard rate, 32.5% higher rate, and 38.1% additional rate.
Am I eligible for a SPV buy-to-let mortgage?Every mortgage provider works to different eligibility criteria to determine whether they are willing to lend. For a SPV mortgage, this will be based on your personal circumstances as a borrower, as well as limited company-specific variables.
Mortgage providers are likely to take the following into consideration before coming to a decision - although this is by no means an exhaustive list of possible lending criteria:
- How much experience you have as a BTL landlord.
- How many properties you currently own (both personally and via a limited company).
- How many directors are listed on your application (most lenders cap at four).
- How many shareholders your limited company has.
- The property loan-to-value (LTV) - the higher your deposit, the greater the choice of lenders and more favourable interest rates you can expect.
- The type of property you want to buy - many non-standard construction types will require a specialist lender.
- Your credit history - including your credit score and details surrounding any instances of adverse.
- Personal income - although BTL mortgage eligibility is usually based on estimated rental income, some lenders have minimum personal income requirements (especially for inexperienced landlords).
Deposit requirements for a SPV mortgageThe maximum LTV for BTL mortgages is usually around 85% (15% deposit), although requirements for properties purchased through a SPV tend to be higher - 20 - 25% deposit is not an uncommon starting point.
Depending on your individual circumstances, paying a larger deposit out of choice may give you access to a wider range of lenders and more competitive rates.
If your application presents added risk to lenders, e.g. you’re a first-time landlord or have bad credit history, a higher deposit may be mandatory.
Landlord experience and SVP mortgagesIf you’re a BTL investor, mortgage providers tend to reserve the most competitive rates for experienced landlords with a solid track record in property management.
Since BTL mortgage eligibility is usually determined by projected rental income, the ability to find suitable tenants and maintain a property is key for mortgage repayment purposes. This is why lenders can view first-time landlords as higher risk than those with more experience in the field.
Some mortgage providers refuse to lend to first-time landlords, whereas others might counteract the perceived risk with higher interest rates, larger deposit requirements, or by taking your personal income and affordability requirements into consideration.
Non-standard construction properties and SPV mortgagesWith any mortgage application, eligibility is determined by mortgage providers’ appetite to lend. As a general rule, properties that fall outside of the ‘standard construction type’ are deemed riskier investments, and many mainstream lenders are unwilling to offer non-standard construction mortgages.
Any property that isn’t made of bricks and mortar or stone, with a slate or tiled roof is classed as ‘non-standard’. As such, a wide range of property types, from thatched roof cottages to high-rise flats, fall into this category. You can find out more in our guide to non-standard construction mortgages.
Finding a lender who is willing to accommodate both SVP applicants and unusual property types can be tricky, so it’s advisable to ask a broker which providers are best placed to approach to minimise your chances of rejection.
Speak to a SPV mortgage expertWhile it can be trickier to access the cheapest BTL mortgage rates when buying through a SPV, working with an experienced mortgage broker is a good way to boost your chances of securing a competitive deal.
Here at The Mortgage Hut, we have a number of specialists dealing in BTL mortgages for owners of limited companies. Using our extensive industry expertise, we can point you in the direction of suitable lenders offering the most favourable rates for your circumstances.
Save time, hassle and wasted rejections on your SPV mortgage: give us a call on 02380 980304 or submit an enquiry via our online form for a free, no-obligation chat.