Understanding Property SPV Mortgages: Financing Options for Your Property SPV

A Special Purpose Vehicle (SPV) is a separate legal entity formed by an organisation with its business and legal status, assets and liabilities. They are generally designed with a specific goal in mind often to mitigate the financial risk.

SPV can raise capital by issuing shares. It offers flexibility to create multiple types of shares for effective control. Moreover, holding property through an SPV means that the property and the related contracts can be sold through an isolated vehicle avoiding complexities of extensive contracts, licensing and government approval.

Use of SPV By Property Investors

In a property context investor may choose to form an SPV now in time, maybe for their plans to re-sale easily in the future, arrange finance on a property and keep the asset and liability clear or for tax purposes and with the aim of reducing your tax bill.

Property investors can use SPV to undertake a risky venture, because it can reduce the negative impact this might have on their parent company should the project. It protects all parties primarily, but it also makes it a little easier to secure funding from a financial institution.

How to Finance Property Purchases Through an SPV?

To own the property, an investor essentially sets up an SPV, which is note worthily a separate limited company.  Then, the SPV secures a mortgage to purchase the property. With the loan secured against the asset, the investor can fund the SPV through shared ownership.

Important Steps Involved

1. Creating the Property SPV – Firstly, an investor registers the SPV with the structure of a limited liability company. This limited company is specifically designed to hold the property investment.
2. Funding the SPV for Property Purchase – Once the SPV is registered, the investors should establish the funding structure. For instance, they can inject capital into the SPV limited company via shared subscriptions. The investors could raise the capital by contributing personal funds or obtaining capital from outside investors.
3. Securing an SPV Mortgage – After securing the capital, the investor seeks financing or funds through a commercial SPV mortgage. Now, the investor approaches lenders and submits an application.  
4. Purchasing the Property – After securing the mortgage, the SPV stands eligible to purchase the desired property. For greater clarity, the funds used to finalise the transaction come from the mortgage, coupled with the additional capital raised. Likewise, the title property is registered in the SPV’s name, since it affirms the limited liability benefits an investor can claim under the SPV’s structure.
5. Managing Rental Income – The SPV sill start yielding rental income after the acquisition of the property. All the rental income is collected and submitted to the SPV’s accounts. The primary purpose of this rental income includes covering up the ongoing mortgage payments (i.e. principal and interest) and generating profits for the investors involved.

The Mechanics of Property SPVs

Imagine a large corporation, Company X, that owns an array of assets. It decides to create an SPV, Company Y, to which it sells a specific group of assets. The proceeds from these sales are then used by company Y to issue securities that are sold to investors.

 The separation allows Company X to achieve various financial; objectives while protecting investors in Company Y’s securities if Company X faces financial distress.

Why are SPVs Used for Property Investments?

Buying a property involves an element of risk, especially if a property developer is trying to build a property portfolio. Each different project involves different funding, different costs and possibly different structure how to work and who to work with.

This can become quite complex and is a common reason for why an inexperienced property developer might make rash decisions or become embroiled in debt because they have taken their eye off the ball in the midst of keeping too many in the air.

A proper solution to this is the creation of a SPV, because this is a way in which you can protect your overall business and streamline finances towards an individual project-i.e. a new property-whilst limiting the risk to the individual project alone.

Selling a Property Investment to SPV

• Capital Gains Tax (CGT) – The sale of the property investment to SPV may trigger CGT for the seller, depending on the circumstances.
• Stamp Duty Land Tax (SDLT) – The purchase of property by the SPV may incur SDLT. The amount of SDLT payable will depend on the purchase price of the property and whether any exemptions or reliefs apply.
• Income Tax –  SPV may be subject to corporate tax on profit, if the property generates rental income.
• VAT Considerations – VAT is applicable If the property is commercial, so the transaction may need to account for VAT, either on the sale or the rental income.

Financials of a Property SPV

The financials of an SPV may not appear on the parent company’s balance sheet as equity or debt. Its assets, liabilities, and equity will be recorded only on its own balance sheet instead.

The SPV can therefore mask crucial information from investors who are not getting a full view of company’s financial situation. Investors must analyse the balance sheet of the parent company and the SPV before deducting whether to invest in a business.

SPV Mortgage

A SPV mortgage also known as limited company mortgages is specific Buy-to-Let mortgage where a company is formed to purchase the property, rather than it being a personal purchase. This provides landlords with improved tax planning and liability protection, enabling them to take their portfolio forward as a business.

With an SPV mortgage, it is the business that borrows the money to buy the property. The business owns the property, is liable to repay the mortgage and deals with tax liabilities as a business. Generally, SPV mortgages are excellent for property investors looking to:

• Build a property portfolio of multiple rental investments
• Leverage preferential business tax rates rather than pay personal tax liabilities
• Pass on the property portfolio to another once they retire or pass away
• Limit their personal liabilities and protect personal assets while investing in the property market

Who Can Have an SPV Mortgage?

SPV mortgages are designed specifically for use by a limited company, developed as a special purpose vehicle for property ownership. They are Buy-to-Let loans held against the property as collateral, providing businesses with the ability to develop a property portfolio.

Individuals cannot obtain an SPV mortgage as the product is specifically developed for limited companies in the UK, however, setting up an SPV for the express purpose of obtaining the mortgage is easy and can be done just prior to, or alongside the SPV mortgage application.

Advantages of SPV Mortgage

The main advantages of an SPV mortgage are:

• Building a Property Portfolio – Property Portfolio allows a greater flexibility when compared to multiple mortgages and present a way to leverage equity in existing properties to lower to lower the overall loan-to-value when purchasing new buildings.
• Improved Tax Position – An SPV ensures that the company pays only corporation tax, which stands at 25% for companies who make over £250,000 in profit and tapers down to 19% for those generating £50,000 or less. This means the corporation tax paid on rental profits is 25% compared to the likely 40-45% income tax-almost half the amount.
• Limiting Liability – Once the business is established, the directors will benefit greatly from the limited liability offered by SPV mortgages, distancing their personal finances and assets from those of the business.
• Inheritance Planning – Properties owned by the SPV are not a personal asset and as such is not liable for inheritance tax in the usual way for property. Instead, the shares in the SPV company will be passed on.

Disadvantages of SPV Mortgage

The main disadvantages of SPV mortgage are:

• Cost –  While costs for a small company are minor, they are not zero. Depending on the size of your SPV, there may be a need to employ the services of others.
• Stamp Duty Land Tax on Property Transfers – A landlord with existing properties may want to move the properties to SPV in order to take advantage of the tax and property portfolio benefits. In doing so, there may be need to pay Stamp Duty land Tax (in England and Northern Ireland) or the equivalent land transaction taxes in Scotland and Wales.
• Keeping Up with Legal Requirements – A company owner may be required to follow the appropriate regulations, including submitting annual accounts and tax returns.
• Losing Access to Individual Mortgage Products – While SPV mortgages often provide superior mortgages rates, there are fewer lenders offering limited company mortgages and fewer products per lender, meaning the options are narrower.

Requirements & Eligibility for SPV Mortgage

The main requirement for an SPV mortgage is to properly register the limited company as special purpose vehicle with Companies House, using the most appropriate SIC code.

Other common requirements are around:

• Deposit Size – Many lenders require a 25 to 30% deposit for Buy-to-Let mortgages, though it’s possible to find a mortgage with a 15-20% deposit.
• Portfolio Size – Some lenders will only offer portfolio mortgages to limited companies, meaning that your company would need to own three or more properties.
• Number of Directors: Some lenders will only lend to limited companies with a maximum of four directors.

Conclusion

SPVs are very easy to set up, but perhaps the biggest consideration is the business structure to be chosen to cover with an SPV. An SPV can be adapted to any business structure and is consistent in providing security from the risk involved in a project.

However, SPVs have been used in the past to alter company financials and misrepresent their financial health. It’s critical to analyse SPVs along with other aspects of a company’s financial statements before making any investments.

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FAQs

1. Is an SPV suitable for all types of properties?

Most property purchases (including both houses and flats) can be funded via an SPV mortgage. Certain properties may come with restrictions for certain lenders. These include House of multiple occupancy and multi-unit blocks.

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• Can I use an SPV limited company to purchase new Buy-to-Let properties if I already own properties in my name?

Yes. Certain limited company mortgage options will even enable you to bypass the limitations set on ‘portfolio landlords’

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• What is a SIC Code & why is it important for SPV mortgages?

A SIC code stands for Standard Industrial Classification Its a code that categorises that business activity of a company. This code informs mortgage lenders about your business type. It helps them understand if the understand if the company aligns with their Buy-to-Let mortgages criteria.

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