The term Special Purpose Vehicle is used for a subsidiary company / legal entity created for a specific purpose or activity. SPV's are formed by the parent company in order to isolate financial risks. So if either the parent company or the SPV entity gets into financial difficulty, one will not affect the other as both are separate legal entities / companies.
SPV Limited Companies allow existing entities or directors to undertake potentially financially risky & diverse projects while mitigating the risks associated if the project results in failure as each is a standalone legal entity with respect to accountancy, tax and insolvency and free from any pre-existing commitments or debts.
Put simply, a Special purpose vehicle (SPV) is a regular Limited Company which is used for a specific purpose.
For example, in terms of property investment, SPV's are used to purchase and rent out Buy-to-Let properties.
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How can an SPV be used?
Common functions of an SPV include, but are not limited to the following:
- SPV's can be formed as a limited company or a limited liability partnership
- The SPV's financials will not appear on the parent company's balance sheet. Instead, it will have its own balance sheet, it is a standalone/isolated legal entity.
- It is possible to form several different SPVs for different projects to keep projects independent & isolated.
- If you place a property within an SPV, your property can be sold or transferred if you choose to sell or transfer ownership of the SPV.
- SPVs can be used to conceal company debt. If you are looking at investing in a company, ensure you study any associated SPVs to ensure you get the full picture of the companies finances.
- SPV's can be used in order to make transfer of assets simpler and to mitigate taxes when selling property
- SPV's are quick to underwrite and easy to understand.
- You only need to pay corporation tax at 19% on the rental profits and gains from selling property in the case of limited company buy-to-let.
- SPV's can help reduce income tax liability.
- SPV's can be benefit from Members Voluntary liquidation (MVL) assisting shutdown of an existing company.
- Personal loan investments in an SPV allows you to draw back the amount by way of a director's loan (tax-free).
- SPV's are able to claim full relief on mortgage interest as its an allowable expense, tax relief can also be claimed on repairs & service charges.
- Buy-to-let mortgage lenders offering to corporate entities prefer SPVs as they are easy to underwrite and simple to understand.
- SPV's can help mitigate and control personal tax paid on property income, there is also no income tax due on retained profits, which could give you more to reinvest in additional properties.
Setting up a Special Purpose Vehicle Frequently Asked Questions
A:Special Purpose Vehicles are companies/legal entities created for a specific purpose and can help businesses when they need to:
- Secure and isolate assets (asset securitization), operations or investment / financing of a project
- Create joint ventures or partnerships for specific projects
- Perform certain financial transactions
- Mitigate risks to parent company
SPV's are popular with entrepreneurs & commonly used when structuring and setting up a company in the UK, especially by property investors when purchasing properties & real estate or for buy-to-let purposes.
A:Special Purpose Vehicles are often setup by business owners and parent companies to secure financing by allowing investors to collectively pool funds in the SPV rather than invest directly in the parent company. The investors SPV funds can then be used for bulk investment in the parent company or to fund associated projects and initiatives.
This model allows investors to collectively invest in large companies as the amount of funds required by each individual investor can be lower as to funding the large parent company directly. It can also help mitigate investment risks in new start-up companies or high risk projects, which is why the model is often popular with entrepreneurs looking to secure risk-averse sponsors and investors.
A:As with most business ventures there is an associated amount of risk, the same is true of SPV's which is why its important to understand when they should be used.
- Mortgage lenders tend to charge more when lending to an SPV and may ask directors to provide personal guarantees. There are also less lenders willing to offer mortgages to SPV's.
- When transferring existing properties to an SPV, Stamp Duty Land Tax, Capital Gains tax, and legal costs may be owed.
- SPVs do not benefit from capital gains allowance on sale of property
- Depending on how rental profits are drawn dividend tax may be owed.