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Buy-to-let: SPV or personal: which one is best?

Since the phasing out of tax relief for mortgages back in 2016, buy-to-let investors have seen their earnings decrease. And, in an effort to maximise their investment, they began exploring alternative options.

That journey of exploration has mostly led to SPV, otherwise known as a limited company (ltd). The idea behind SPV sees investors buying a property as a company rather than an individual, in an effort to be more tax efficient.

But is it that simple? And are there any other benefits to getting a buy-to-let mortgage as an SPV? Most importantly, though, should you borrow as an SPV or stick with the traditional method of doing it without registering as a company?

In this guide, we’re taking a deep dive into getting a mortgage, either as an SPV or personally. So read on and find out what it is, how it works, how SPV compares to other options, and everything else you need to know about getting a mortgage as an SPV or personal.

What is an SPV

SPV stands for Special Purpose Vehicle, which is a mortgage industry term applied to limited companies used for buy-to-let. Unlike a personal purchase, where you buy the property as an individual, SPV sees you buying a buy-to-let as a company.

An SPV company will need to specify the appropriate SIC (standard industrial classification) codes so that it relates to the correct industry.

  • 68100, Buying and selling of own real estate
  • 68209, Other letting and operating of own or leased real estate
  • 68320,  Management of real estate on a fee or contract basis

You can set one up by completing a form at Companies House, instruct your accountant to arrange one on your behalf or employ an agency to take care of the process. You will need to incorporate an SPV before applying for a buy-to-let mortgage.

How is tax calculated for SPV?

In 2000, there were just 5,000 SPV companies set up. Fast forward to 2017 – one year after the announcement to phase out mortgage tax relief – and there were 35,000 SPVs set up. SPV became an overnight hit, with investors looking to save money on tax.

The reason for this is because investors in the higher tax bracket found themselves owing thousands more per year, as they were unable to claim mortgage interest relief. SPV works differently from a personal purpose, taxing you as a company rather than an individual.

The primary difference between buy-to-let SPV and personal is that you pay corporation tax for an SPV buy-to-let. When you’re investing personally, you pay income tax. For an SPV, relief restrictions associated with personal (the phasing out of mortgage interest tax relief) don’t apply because you’re paying corporation tax.

This can be good news for higher-rate taxpayers who stand to save the most from using an SPV. To give you an example, let’s compare a landlord earning £1,250 per month from their property as a higher tax rate payer with a buy-to-let SPV and personal.

SPV vs Personal

SPV Personal
Yearly rental income: £15,000 Yearly rental income: £15,000
Assumed mortgage interest rate: 3.49% at £7,852.50 yearly Assumed mortgage interest rate: 3.49% at £7,852.50 yearly
Taxable profit calculation: £15,000 – £7.852.50 = £7,174.50 Taxable profit calculation: £15,000 x 40% = £6,000
Corporation tax due: (17%) £7,147.50 x 17% = £1,215.08 Tax due: £6,000 – £1,570.50 = £4,429.50
Net profit calculation: £7,147.50 – £1,215.08 = £5,935.42 Net profit calculation: £15,000 – £7852.50 – £4,429.50 = £2,718

A property achieving £15,000 per year in rental income could see you make a net profit of £5,935.42 as opposed to £2,718 if you owned the property personally. That’s an extra £3,217.42 per year.

The disadvantages of SPV

Getting a buy-to-let with an SPV sounds like a no-brainer, right? Unfortunately, it’s not that straightforward. The calculations in our table are purely based on higher-rate taxpayers. Basic rate taxpayers only need to worry about the extra 40 per cent tax rate once earnings surpass £40,000. If their earnings are below the threshold, you won’t be classed as a higher-rate taxpayer.

However, if your buy-to-let investment acts as additional income to your main job, you could find yourself pushed into the higher tax bracket as all your earnings are taxed together, no matter where they come from. An accountant will be able to help determine if you could end up becoming a higher rate taxpayer.

It’s also important to remember that the profits and cash held in an SPV belong to the limited company and there will be further tax payable to draw down profits into shareholders’ hands (the property owner or owners).

The majority of the time, higher-rate taxpayers will see savings, but you will need a tax specialist to advise you on the exact amount owed and how much you could save.

Which one should I choose: SPV or personal?

Unfortunately, there’s no hard and fast rule for choosing an SPV or personal. It will come down to your personal circumstances, which vary from case to case. Some landlords will benefit from SPV, as they will be able to save on tax, while others are better off buying personally.

Having all the information to hand is necessary to provide you with more clarity over the options available. However, you should always talk with an accountant if you’re looking for advice about whether to choose buy-to-let SPV or personal.

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