What is an SPV (special purpose vehicle)?

SPV meaning: what "special purpose vehicle" means for landlords

An SPV, or special purpose vehicle, is a limited company used for a single defined purpose. For property, that purpose is buying and renting out property and nothing else.

It's an ordinary limited company in every legal sense. The "special purpose" part simply means it exists to hold property rather than to run a trading business. When landlords talk about a property investment company, an SPV is usually what they mean.

What is a limited company?

A limited company is a legal entity that's separate from you as an individual. It can make contracts in its own right, such as buying a property, and it's liable for its own business debts. That separation is what protects your personal assets: the company's debts are the company's, not yours.

When you set up a limited company as an SPV and buy a buy-to-let property through it, the company owns the property. You own the company, or a share of it if there's more than one shareholder.

If this is all new, it helps to see the whole picture before you get into the detail.

What's the difference between personal and SPV-owned property?

Personally owned

When you buy a property personally, the deeds are in your name and the mortgage is in your name. You personally pay Income Tax on rental profits, you're responsible for the mortgage repayments, and you personally carry the risk if anything goes wrong.

SPV (limited company) owned

When you buy through an SPV, you own the company, or a portion of it if there's more than one shareholder. The company buys the properties, the mortgages are in the company's name, and the company pays corporation tax on rental profits.

What is Section 24?

One of the top reasons for choosing an SPV is the ability to claim mortgage interest relief, an area affected by Section 24.

Section 24 refers to changes in tax legislation that restrict the tax relief landlords can claim on mortgage interest.

Before these changes, landlords who were higher and basic rate taxpayers could claim 100% of their mortgage interest costs as an expense. Now the amount they can claim personally is restricted to 20%, which increases the tax paid on rental income.

Limited companies, however, are unaffected by Section 24 and can still claim 100% of mortgage interest costs. This is why many landlords find an SPV more tax-efficient, particularly if they pay the higher or additional rate of Income Tax.

Our Intro to Property Tax Guide looks at the specific tax differences between limited companies and personally owned property in more detail.

Running an SPV

When you set up your SPV, you become a director, and this comes with certain legal responsibilities, including:

• keeping accurate financial company records

• filing the company accounts and other annual forms with Companies House

• submitting the corporation tax return to HMRC

• paying the right amount of tax to HMRC

For personally held portfolios, many landlords are confident submitting tax returns themselves. Limited company accounts can be more complicated, and many landlords use a property accountant, like Provestor, to support them.

With Provestor, you can manage your company's compliance yourself. The property tax software is linked directly to Companies House and HMRC, so you can submit your company accounts and tax returns through the app.

The importance of correct company structure

When setting up or incorporating a limited company, you, or your accountant, will register your company at Companies House.

There are a few decisions you'll need to make when you set up an SPV:

• You'll choose a unique company name

• You'll appoint yourself and possibly other people as directors and shareholders

• You'll decide on your company's registered address, which goes on the public register at Companies House

• You'll define your company's business activities using SIC codes

• You'll assign shares, allowing your shareholders to be paid a percentage of the profits in dividends

Structuring your company correctly to align with your investment goals matters. We cover this in more detail, including different tax-efficient share structures, in chapter 3.

We'd always recommend getting property tax advice from an expert. Many property portfolios end up worth seven-figure sums, so it's worth making sure your company foundations are right and that you don't store up tax problems for the future.

Choosing a SIC code for your SPV

When you set up your SPV, you'll need to select a standard industry classification code (SIC code). This describes what your company's business activities will be.

It matters which SIC code you choose, as this signals to lenders that your company is an SPV for property investment.

If you're building an investment portfolio and plan to apply for a buy-to-let mortgage, these are the relevant SIC codes:

• 68209 - 'Other letting and operating of own or leased real estate'

• 68100 - 'Buying and selling of real estate'

Some mortgage lenders prefer you to have both of these SIC codes attached to the company, even if you're only doing one of those trades. It's worth checking this with your mortgage broker before you set your company up.