Buy-to-Let Bonanza: SPV vs. Personal Names – which path paves prosperity?

Investing in rental properties, a.k.a. Buy-to-Let, can be a lucrative path to financial freedom. But with varying tax landscapes and legal structures to consider, the journey requires thoughtful navigation.

One of the first questions we get asked by investors is whether to buy the property in a personal name or through a Special Purpose Vehicle (SPV) – Limited Company?

Let’s delve into the pros and cons of each approach, empowering you to choose the most profitable route for your property portfolio. It is important that you seek advice from your Accountant / Tax Advisor on which route is advisable for your individual circumstances.

Buying in your personal name:

Pros:

• Simple setup: no need for company formation, saving time and cost.
• Direct profits: rental income is paid to your account.
• Mortgage options: a wider range of buy-to-let mortgages are available and at potentially lower rates.

Cons:

• Limited liability protection: your personal assets/credit score are at risk if things go south with the property which could result in financial difficulty.
• Potentially higher taxes: rental income is added on top of any earned income which may increase the total taxable income and breach higher tax band limits.
• Removed mortgage interest relief – costs of mortgage payments are no longer deductible from gross rental receipts. Instead, a 20% basic rate tax relief is applied as a tax reducer only, thus potentially increasing personal tax payable.
• Inheritance tax implications: the value of the buy to let property is added to the value of your personal estate for Inheritance tax purposes potentially increasing inheritance tax for your loved ones.

SPV (Limited Company):

Pros:

• Limited liability shield: the SPV acts as a separate legal entity, protecting your personal assets.
• Tax optimisation: the corporation tax rate (currently 19% for small companies with profits below £50,000) can be more favourable than personal income tax for high earners, which are taxable at 40% & 45%.
• Easier portfolio expansion: SPVs can hold multiple properties, simplifying management and this could help with securing better mortgage rates with single applications for multiple properties at the same time available.
• Inheritance planning flexibility: transferring shares in the SPV can be simpler than transferring individual properties, offering greater estate planning options.
• Rental income can be taken as dividend income from the company which is taxable at lower bands (8.75%, 33.75 & 39.35%) than personal income.

Cons:

• Most lenders will require the Directors to give a Personal Guarantee for each mortgage.
• Setup and maintenance costs: company formation and accounting fees add to your initial and ongoing expenses.
• Mortgage challenges: mortgage options for SPVs can be more limited and require stricter financial criteria than traditional buy to let mortgages in personal names.
• Profit distribution: profits are retained within the SPV, requiring additional steps to access your cash (withdrawing as taxable dividend income).

So, which way is the best way?

There is no one correct answer or one size fits all solution. Which route to utilise depends on your individual circumstances, tax position & property goals. Advice should be sought from suitably qualified tax advisor on which option is best.

Here are some of the factors that you need to consider:

• Your tax bracket: if you are a higher rate tax payer already the potential lower corporation tax rates applicable to an SPV might be more attractive.
• Portfolio size and growth plans: an SPV shines for managing multiple properties and aiming for portfolio expansion.
• Risk tolerance: the limited liability shield of an SPV offers peace of mind if things go awry, but it comes at a cost.
• Financial resources: setting up and maintaining an SPV involves additional expenses, so ensure you have the financial cushion.

Remember: Consult with your Accountant & Mortgage Broker first and foremost; this is crucial before making investment decisions. We have helped new and established investors and their accountants in partnership to tailor a plan that maximises profit and minimises your tax burden, whether you choose the solo act of personal ownership or the collaborative stage of an SPV.

Ultimately, the path to Buy-to-Let prosperity lies in informed choices and meticulous planning. So, start with the end in mind. Choose the ideal structure for your investments, plan and review your strategy regularly and reap the rewards of being a successful landlord!