Setting up an SPV company can streamline your investments and isolate financial risk. This article provides a focused look at setting up SPV company; from its definition and benefits to a step-by-step setup guide, we’ve got you covered.

Key Takeaways

• An SPV (special purpose vehicle) is a financially independent legal entity established for specific objectives such as asset securitization and property investment, distinguished by separate assets, liabilities, and often taking the form of a limited company.
• SPVs offer benefits like tax efficiency due to lower corporation tax and the ability to offset mortgage interest against income, while enabling better risk management by isolating financial risk from the parent company, but come with potential challenges and drawbacks.
• Setting up an SPV involves several steps including consulting with an accountant, choosing a unique company name, selecting an SIC code, registering with Companies House and HMRC, and ensuring accurate documentation and compliance with legal obligations.

Understanding SPV Companies: Definition and Purpose

An SPV, or special purpose vehicle, is a separate legal entity with its own legal status, complete with distinct assets and liabilities, created by an organization for a specific objective. These entities operate with more freedom due to fewer regulations compared to their parent company. Typically, investors establish SPVs for structured finance activities such as asset securitization, joint ventures, and specifically, property investments.

SPVs can take various forms, including trusts, partnerships, or, most commonly, an spv limited company.

Key Features of SPV Companies

One of the core features of an SPV is its financial independence. The financials of the SPV, including its assets, liabilities, and equity, are maintained separately from the parent company, providing clear financial independence. This structure allows SPVs to share and transfer risk, contributing to enhanced risk management strategies among investors.

Common Uses in Property Investment

SPVs are commonly used for the securitization of asset-based financial products. This helps attract equity and debt investors, making them particularly attractive for property investment. For SPVs involved in property investment, specific Standard Industrial Classification (SIC) codes denote their primary business activities. These codes include:

• 68100 for buying and selling of own real estate
• 68209 for other letting and operating of owned or leased real estate
• 68320 for management of real estate on a fee or contract basis
• 68310 for real estate agencies.

Understanding these codes is crucial for landlords to make informed investment decisions.

Benefits and Drawbacks of Establishing an SPV Company

Establishing an SPV can be a cost-efficient process due to minimal government authorization required and lower creation costs in certain jurisdictions. Moreover, SPVs can benefit from more generous rental cover calculations from lenders, allowing them to borrow more compared to individual borrowers for the same rental income.

However, while SPVs offer numerous advantages, they also come with their own set of challenges and potential drawbacks that investors should consider.

Tax Efficiency

One of the major advantages of SPVs is their tax efficiency. SPVs benefit from a lower tax rate of 19% corporation tax, which is often more advantageous than the higher personal income tax rates that individual landlords may face. Furthermore, SPVs are able to offset mortgage interest payments against rental income, making them a tax efficient choice for higher rate tax payers.

Each shareholder in an SPV can also receive up to £2,000 in dividends tax-free, contributing to the tax efficiency of the SPV structure. Properly structured dividend distributions can lead to significant tax advantages.

Risk Management

SPVs also play a crucial role in risk management. They provide protection for a parent company’s assets and liabilities, helping to isolate financial risk and shielding the parent company against bankruptcy and insolvency risks.

In addition, an SPV is often used as an affiliate to the parent corporation, allowing for the sale of assets off of the parent’s balance sheet, which acts as an indirect source of financing.

Step-by-Step Guide to Setting Up an SPV Company

Are you wondering about the process of setting up an SPV company? I can provide you with some guidance. The process begins with seeking advice from an accountant to ensure proper structure and compliance. The cost of setting up a new SPV ranges from £12 to £500, making it a financially accessible option for investors. The process involves choosing a unique company name, selecting the appropriate SIC code, and registering with Companies House and HMRC. However, it is recommended to seek professional assistance when setting up the SPV to avoid issues with HMRC and mortgage restrictions in the future.

The memorandum and articles of association must also be tailored to clearly outline the business purpose of the SPV company.

Choosing and Registering a Company Name

Choosing and registering a company name is the first step in setting up an SPV. Here are some guidelines to follow:

1. The company name chosen must be unique and not too similar to any existing name registered with Companies House.
2. Names must also refrain from implying governmental or public authority affiliation.
3. Avoid including sensitive words or phrases without proper authorization.
4. It is essential to ensure the chosen name does not infringe on any existing trademarks, as this could lead to legal challenges.

To check the availability of a company name, you can utilize the Companies House WebCheck service. This service displays a list of existing companies with similar names to help determine uniqueness. After confirming the name is unique and available, you can reserve it at the time of incorporating the company.

SIC Code Selection

Choosing the right SIC code is another important step in setting up an SPV. The SIC code stands for Standard Industrial Classification, which categorizes and classifies businesses based on their primary economic activities. For an SPV company, the correct SIC code denotes what the company’s primary business activities will be.

Understanding SIC codes assists landlords in:

• Identifying trends and monitoring economic performance within their industry sector
• Accurately determining and using the appropriate SIC code
• Accessing the most relevant resources, support, and information related to their industry.

Registration Process and Documentation

After choosing a company name and SIC code, the next step is to register your SPV with Companies House, necessitating the submission of annual accounts and clarification of company ownership proportions. The registered address of an SPV company is the official location where Companies House will send correspondence.

After incorporating an SPV company, it is mandatory to register with HMRC for corporation tax within three months. Ensuring compliance with these requirements is crucial to the successful operation of your SPV.

Involving Family Members: Share Allocation and Gifting

Involving family members in the operations of an SPV can be beneficial, but it also requires careful planning. When shares of an SPV company are gifted to family members without consideration, no stamp duty is required. However, if consideration is received, stamp duty at 0.5% applies for transactions over £1,000.

Gifting shares may increase lender risk, possibly leading to the breach of lending terms. It’s also worth noting that family members who own more than 25% of an SPV company’s shares are classified as persons with significant control, necessitating public registration.

Share Types and Allocation

SPV companies may issue various types of shares such as ordinary shares, alphabet shares (e.g., ordinary A shares, ordinary B shares), and other specialized classes depending on specific company needs. The articles of association for an SPV company define the division of shares into different classes along with the attached shareholder rights for each class.

During the registration of an SPV company, it is necessary to specify the percentage of shares allocated to each shareholder. Non-voting ordinary shares can be issued to stakeholders such as employees and family members, allowing them to receive dividends without granting them decision-making power in the company.

Tax Considerations

Gifting shares to family members also has tax implications. Here are some key points to consider:

• Gifts to spouses are not subject to tax.
• Gifts to children or other family relations are not exempt and carry potential tax consequences.
• Gifting shares is considered a disposal for tax purposes, which may trigger capital gains tax liabilities.
• However, Capital Gains Tax obligations on the gift of shares can potentially be deferred using Gift Hold-over Relief until the recipient sells the shares.

Shareholders may also incur capital gains tax instead of income tax on their share of funds distributed as a result of an SPV company being wound up, possibly resulting in a lower tax rate than if they had to pay tax, specifically pay corporation tax.

Obtaining a Mortgage for Your SPV Company

Obtaining a mortgage for your SPV company can be a complex process. To acquire a mortgage for an SPV company, lenders consider various criteria such as the BTL landlord experience, the number of properties owned, and details of the company structure including directors and shareholders. Non-traditional properties, such as those not built with standard materials, can pose challenges in obtaining a mortgage for an SPV, potentially requiring specialist lenders due to increased risk perceptions.

It’s also worth noting that SPV companies usually need a higher deposit for property purchases, with a typical requirement starting between 20-25%, which is higher than the maximum 85% loan-to-value ratio offered for individual buy-to-let mortgages.

Mortgage Broker Assistance

Working with a mortgage broker can greatly simplify the process of obtaining a mortgage for an SPV. Here are some benefits of working with a mortgage broker:

• Mortgage brokers with expertise in SPV company mortgages often have extensive knowledge of the lending market and experience in finding suitable mortgages based on a client’s unique situation.
• A mortgage broker can assist with selecting the appropriate mortgage product for an SPV.
• A mortgage broker can ensure the application process with lenders is managed efficiently.

Working with a knowledgeable mortgage broker can increase the likelihood of obtaining a competitive mortgage deal for an SPV company, especially when facing challenges like fewer lender options and higher rates. Professional SPV mortgage brokers can also provide valuable assistance throughout the property buying process, from initial contact to post-completion check-ins.

Lender Requirements and Approval Factors

Lenders scrutinize various factors when considering a mortgage application for an SPV. They examine:

• The credit history of directors
• Personal guarantees from all directors for SPV mortgages
• Directors being the sole shareholders
• The property’s loan-to-value ratio
• The property type
• Factors such as director and shareholder numbers
• Directors’ personal credit ratings
• Property profitability

These factors influence the mortgage eligibility for an SPV company.

It’s important to note that SPV mortgage applications are often declined if the deposit comes from loans from other companies; however, directors’ loan repayments or dividend payments from other limited companies may be acceptable.

Legal Obligations and Record-Keeping

Once your SPV is set up and operational, it’s crucial to understand and fulfill your legal obligations and maintain proper records. SPV company directors are legally responsible for:

• Ensuring the company’s compliance with governance, asset management, and financial reporting regulations
• Timely and accurate tax filings
• Submission of annual returns

Fulfilling filing obligations under various tax reporting legislations is a mandatory duty for SPV company directors. Thus, adhering to best practices, including regular training for accountants, is crucial for SPV financial record-keeping to ensure quality and compliance.

Annual Accounts and Corporation Tax

Just like any other corporation, SPV companies are subject to certain requirements:

• They are subject to Corporation Tax on their profits.
• They are required to track all income and expenses as part of their financial statement preparation.
• The financial statements of SPV companies must be audited annually by an independent auditor.

Complying with these requirements is crucial to the legal and financial health of your SPV.

Record-Keeping Best Practices

Maintaining accurate financial records is essential for SPV companies to ensure compliance with various tax laws and the preparation of statutory financial statements. Directors of an SPV are responsible for maintaining up-to-date financial records in compliance with local law and accounting standards. SPV management should commit to the regular review and update of transparent and accurate financial records.

Furthermore, accurate ledgers recording all cash movements, transactions, accruals, and capital movements should be maintained by SPVs in an agreed format.

Summary

In conclusion, setting up and managing an SPV can seem like a daunting task, but with a clear understanding of the process, benefits, and responsibilities, it can be a powerful tool for property investment. From understanding the basics of SPVs, considering the benefits and drawbacks, setting one up, involving family members, obtaining a mortgage, to fulfilling legal obligations and record-keeping, each step requires careful consideration and planning. So, are you ready to embark on your SPV journey?

Frequently Asked Questions

What is an SPV?

An SPV, or Special Purpose Vehicle, is a separate legal entity formed for a specific purpose, often used in structured finance activities and property investments.

What are the benefits of an SPV?

Setting up an SPV can be cost-efficient and require minimal government authorization. It also offers tax efficiency and improved risk management for investors, making it an attractive option for certain jurisdictions.

How do I set up an SPV?

When setting up an SPV, it’s important to choose a unique company name, select the appropriate SIC code, and register with Companies House and HMRC. Professional assistance is advised to ensure proper structure and compliance.

Can I involve family members in the SPV?

Yes, it is possible to involve family members in the operations of an SPV, but it’s important to carefully plan any share gifting to mitigate increased lender risk and potential tax implications.

What are the legal obligations of an SPV?

The legal obligations of an SPV include ensuring compliance with governance, asset management, financial reporting regulations, as well as timely and accurate tax filings and submission of annual returns. Directors are accountable for these responsibilities.