When it comes to buying and selling investment properties, using an SPV can be a game-changer. An SPV is a separate legal entity set up specifically to hold and manage assets, like commercial or residential properties. Instead of buying or selling the property itself, you buy or sell the shares of the SPV that owns it. The property remains in the ownership of the SPV throughout.
Why use an SPV?
One of the main reasons investors choose to buy property through an SPV is for the tax benefits. In the short term, the Stamp Duty Land Tax on investment properties is up to 5% on commercial properties and up to 15% on residential properties, whereas the Stamp Duty on the shares in the SPV is currently a flat 0.5% on the full price. This nearly always results in a lower initial tax bill. Longer term, income received by the company is subject to corporation tax, and SPVs can benefit from lower capital gains tax rates and help with deductions on expenses related to the property, like maintenance and interest payments.
Another major advantage is the limited liability that comes with using an SPV. Since the SPV is a separate entity, it shields your personal assets from any liabilities or legal issues tied to the property. If something goes wrong with the property, the risks are contained within the SPV.
SPVs can also make securing financing easier. Lenders often like the fact that when property is held in an SPV, the risk is limited to the property itself, rather than other aspects of a borrower’s financial situation. Although, some lenders will still ask for personal guarantees from the individuals behind the SPV.
Risks When Buying Property Through an SPV
Buying through an SPV isn’t without its risks. One of the biggest concerns is that when you purchase an SPV, you’re inheriting any existing liabilities, like outstanding loans or tax liabilities that the entity might have. Additionally, the SPV could be involved in ongoing disputes or have unresolved regulatory problems related to the property or its own management.
If these aren’t disclosed or identified in due diligence, you could be facing costly surprises after the purchase. Thorough due diligence on the SPV is necessary, both from a legal and an accountancy perspective, and the share transfer documentation will need to contain extensive safeguards for the purchaser and this can be supported by insurance in some cases.
Why Sell Property Through an SPV?
Selling property through an SPV has its own perks. As mentioned, in some cases, the sale of shares in an SPV may be subject to lower capital gains taxes compared to selling the property directly. Another benefit can be the liability protection it provides. If there are any ongoing legal issues or potential liabilities related to the property, they remain within the SPV, keeping your personal or business assets safe.
Selling through an SPV can also be appealing to buyers, particularly institutional investors, as any tenancies in the property are undisturbed because the SPV remains the landlord before and after the sale.
Things to Consider
While an SPV can be a useful tool, there are some costs involved in setting it up and maintaining it, such as legal fees, accountancy fees and administrative expenses. These can add up, so it is essential to weigh them up against the benefits. SPVs are not for everyone.
The due diligence involved in any SPV transfer is more involved. This is because you have all the due diligence of a property transaction alongside a company share sale. This does result in higher legal and accountancy fees for a buyer, but these are nearly always more than offset by the SDLT savings – if they are not, then an SPV might not be appropriate for the transaction.
Ultimately, it is crucial to get the right legal and financial advice. Ensuring everything is structured properly will help you avoid legal or tax issues down the line.
For more information – contact me or any member of Dawson Hart’s commercial property team for a free initial consultation today on 01825 762281.