SPV and holding company |

SPV and holding company

A record number of landlords have set up limited companies to purchase buy-to-let properties this year, in a bid to reduce tax on their investments. Between January and September this year, 46,449 buy-to-let companies were set up, a rise of 23 per cent on the same period last year. That is according to analysis of Companies House data by the property firm Hamptons.

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SPV and Holding Company model

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If you already have a business and want to reinvest surplus funds into property, then it will be worth considering a restructure where trading company will become a 100% owned subsidiary of holding company by acquiring 100% of your shares in the trading company. Holding company will not pay you anything for your shares but will instead issue you with 100% shares in the holding company as consideration.

The Holding Company will reinvest the funds received from Trading Company into Special Purpose vehicle (SPV).

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Pros and Cons

1. Tax treatment of profits

If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (dividends, salary) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

The rate of Corporation Tax is 25% - 19%

You will still be taxed on the dividends if you take profits out of the company. However if you just leave the profits in the SPV for the deposit for another property.

2. Tax treatment of mortgage interest

As of April 2020, higher rate tax payers cant offset full mortgage interest against the rental income. This can make the yield of buy to let properties lot lower especially when the interest rates are going up.

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Why not invest through a limited company?

1. Mortgage availability

This used to be a major drawback: mortgages for companies were limited, expensive and had lower borrowing limits.

The number of products on offer for limited companies is still much lower than for individuals, but it's changing rapidly: as ever more investors are moving in this direction. However you won't find quite as many options and the rates and fees are likely to be higher.

2. Dividend taxation when you take the money out

If you're leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties or invest in pension.

But if you're taking the money out , you'll be taxed on the dividends you take. That means you'll be paying corporation tax first, then paying a dividend tax on what's left.