An SPV is a legal entity set up to accomplish a specific objective while isolating financial risk and liability. It is also called a Special Purpose Entity (SPE) or a limited company (ltd). The SPV functions independently from its parent company. However, only after carefully contrasting the upsides and downsides of SPV vs Personal Ownership can an investor discreetly choose which is better for property investment.
This asserts that if the SPV incurs any liability (i.e., it goes insolvent) the parent company will remain immune /unaffected. Apart from isolating risks and liabilities from the parent company, SPVs also allow investors to pool their capital into a single entity.
Subsequently, the SPV can pursue riskier ventures whilst the investors can be certain that no financial or other liability will be passed on to them.
If you are interested in discovering the costs involved in an SPV’s creation, read our blog: A comprehensive guide to the costs of setting up an SPV in the UK.
Furthermore, SPVs’ popularity has soared in view of the numerous benefits they offer over personal ownership in buy-to-let property investments.
In this blog, we will elaborate on the differences between an SPV and personal ownership, benefits and tax implications connected with each. Accordingly, the reader will be confident at the end about which option is more aligned with their requirements.
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Corporation vs Income Tax:
For starters, the primary difference between an SPV and personal ownership lies in the type of tax each has. With an SPV, an investor pays corporation tax on the rental income or profits generated from the property. Moreover,
The current UK Corporation Tax rate is set at 25% for all limited companies for the year 2024/2025.
On the flip side, the personal ownership of property is subject to income tax. That is, individuals owning rental properties must pay income tax on their rental profits or gains. For further explanation, income generated from rental properties is subject to income tax calculated according to personal income tax bands, while capital gains tax will apply upon selling the property.
Plus, this income tax rate can spike as high as 40% for those categorised as higher-rate taxpayers.
In brief, considering the structural differences in taxation, higher-rate taxpayers shall face financial implications under personal ownership. Therefore, setting up an SPV can offer significant benefits to higher-rate taxpayers in that scenario.
Tax efficiency:
As explained above, the corporation tax paid on the rental income/profit yielded from the property under an SPV. It results in considerable savings and more profit, particularly for higher-rate taxpayers.
An SPV also offers the benefit of taking out the profit by withdrawing dividends. Dividends are often more tax efficient than drawing salaries since they are taxed at lower rates. Moreover, there is a tax-free dividend allowance set at £500 for 2024/25.
Consequently, an investor can withdraw £500 without incurring any tax liabilities. Therefore, the option of an SPV is appealing to investors seeking to minimise tax implications while maximising their income.
Contrarily, being a higher-rate taxpayer under personal ownership means that you will pay the tax at your personal income tax rate, which can be unpleasantly costly.
Mortgage interest tax relief:
Under an SPV, there is no limitation enforced on mortgage interest tax relief. To exemplify, investors can deduct their mortgage interest costs in whole when calculating their taxable profits for corporation tax. Subsequently, it benefits the investors by allowing them to leverage debt without facing the same restrictions as personal ownership.
By contrast, in a personal ownership case, the property investors face restrictions on mortgage interest tax relief. This policy has been gradually terminated. It indicates that higher-rate taxpayers can no longer claim full relief on their mortgage interest payments when calculating their taxable income.
Rather, they can only receive or claim a basic rate tax credit on their income. As an outcome, it significantly reduces the tax advantage of holding mortgage debt.
Administration:.
Investors contemplating the feasibility of an SPV vs personal ownership should also consider the administration involved in SPV’s creation. More specifically, investors buy property as a company rather than an individual with an SPV.
It means that the company must be registered with Companies House, the official UK government company register. Following registration, the company must file and submit all the necessary paperwork and documentation, like financial statements and tax returns, to ensure compliance with legal obligations.
Additionally, the costs involved in hiring the administration staff (bookkeeping and accounting ) for the company are also there. Hence, the investors must deal with the hassle of registration and management if they opt for SPV.
Opposed to that, although there is still administration to deal with under personal ownership, like capital gains reporting and personal tax returns, the overall administrative burden becomes significantly less, for there are no additional layers of corporate governance.
Ultimately, while options involve administration, owning and running an SPV entails more thorough and rigorous paperwork and documentation.
Liability protection:
If you purchase a property under personal ownership, all the property activities and mortgage will be in your name. It indicates that you will have direct liability for any debts and legal issues that may emerge.
On the other hand, purchasing a property via an SPV sets the company as a distinct legal entity with its own assets (property). As a result, it is the SPV that owns the property rather than an individual, meaning the assets including property remain protected against business debts or legal issues.
Portfolio diversification:
Portfolio expansion is another key consideration when deciding on an SPV vs personal ownership. An SPV bolsters investment capacity and cash flow for property investors.
How?
One significant benefit of an SPV over personal ownership is the retention of profits within the company. It acts as an imperative financial tool for an investor to reinvest those profits and fund future property purchases.
Besides, it enables them to defer tax liabilities until they choose to withdraw the profits from the company while simultaneously expanding their portfolio. Thus, it grows the company’s investments more rapidly without promptly incurring tax payments.
In comparison, personal ownership does not offer any such benefit since any profits earned are usually taxed in the year they are generated/produced. This contrast highlights the potential of an SPV for profit retention and portfolio diversification.
Inheritance planning benefits:
When comparing property purchase through an SPV vs personal ownership, one major advantage of an SPV company is that it offers more viable options for inheritance tax planning. For instance, transferring businesses (properties) to family members and future generations under an SPV structure is a tax liability-free deal.
Further elaborating, since the property is held/owned by the company rather than individuals, it remains safeguarded from inheritance tax liabilities, like stamp duty, inheritance tax, and capital gains tax. Hence, owning a property under an SPV structure is a more tax-efficient way of protecting your assets and passing them on to family members.
On the contrary, personal ownership of property offers no such benefit. That is, upon the transfer of properties to family members, individuals are directly liable to taxes.
Ultimately, SPV holds an edge over personal ownership in terms of asset protection and tax optimisation.
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Bottom line:
In summary, the choice between using an SPV and personal ownership for property ownership hinges on understanding the tax advantages and implications of each option. By choosing the most optimal structure for your investment, you can accomplish your financial goals more effectively.
However, for hassle-free and seamless processes involved in creating an SPV, keeping it running, navigating complex transactions, and acquiring tax and accounting services, Visit Accountingfirms today. The adept accountants on our website are ready to ensure you have the confidence to make the right decisions with adequate and accurate information.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.