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What is a Special Purpose Vehicle? (SPV)

A special purpose vehicle (SPV), as the name suggests, is a legal entity created for a defined purpose -mostly to isolate financial risk from parent companies and directors.

Because SPVs are recognised as a separate legal entity, they can carry on even if the parent company goes belly up. It helps to think of SPVs as a distinct company with their own assets, liabilities, and legal status.

A limited company can be formed as an SPV, or structured into an SPV by making changes to a company’s articles of association. An SPV can be set up for the purposes of financing properties, acquiring other businesses, and raising capital, among others.

Following recent changes to UK tax law, there has been a significant increase in requests for SPVs for owning properties.Owing to their special legal structure, SPVs are the perfect entity for financing Buy-to-Let properties.

In the context of buying properties, limited companies can offset all the mortgage interest against rents when calculating corporation tax. This makes it beneficial to put properties into a limited company SPV and is the main reason why the entity has become so popular.

Why Mortgage Lenders Like SPVs

Mortgage lenders prefer to lend money to SPVs because the objects in the articles restrict the company from other areas of business. As a result, lenders have more loose restrictions when it comes to rental calculations. This allows borrowers to maximize their borrowing capabilities.

It can be more difficult for a trading company, which has other business interests as well as property, to obtain mortgage finance. This is because it has too many liabilities and risk – and lenders would rather not associate themselves with this arrangement.

Pros and Cons of SPVs

Mortgage lenders prefer to work with limited company SPVs because it’s easier for them to understand their lending risk. The SPV is free from any debts, charges, pre-existing obligations, and legal claims. Moreover, the SPV is separate and distinct from its directors, for the purposes of accounting and taxes.

Note: Lenders usually review the finances of the company owners. The SPV often won’t have any assets of its own. They will probably require guarantees from the directors of an SPV before approving mortgages.

It is worth noting that mortgage rates for limited company SPVs are not very competitive. Most lenders do not offer limited company mortgages. Those that do often charge higher interest rates than is usual.

However, they may require a lower interest cover ratio than regular buy-to-let mortgages. This is why it’s more viable for investors to purchase buy-to-let properties at high mortgage rates even if their rental income is low.

Other benefits of forming an SPV

  • An SPV can be used to reduce business risk. For example, if your trading company fails, this doesn’t affect the assets placed within the SPV. Conversely, if the property SPV fails, it will not affect the trading company.
  • SPVs provide a practical way of raising capital from investors on property projects while isolating you and your other business interests from the associated risks.
  • You can form multiple SPVs for different projects, all of which will remain independent of each other. SPVs can be dissolved (by selling the property) and new SPVs can be formed for new projects.

Note: Properties in an SPV are subject to any further changes in legislation. And as we all know, the UK tax landscape can be unpredictable.

If you are considering the merits of setting up an SPV, make sure to work with your accountant and lawyer to weigh the pros and cons of setting up SPVs to achieve specific goals.

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