Smart Property Investments: Tax Benefits of Using SPVs

Investing in property can be a lucrative venture, and using a Special Purpose Vehicle (SPV) to purchase properties offers several tax advantages. An SPV is a limited company set up specifically to hold property assets. This blog will explore the various tax benefits of using an SPV for property investment, providing detailed explanations and calculation examples to illustrate these advantages.

1. Lower Corporation Tax Rates 

Using an SPV allows you to benefit from lower corporation tax rates compared to personal income tax rates. As of 2025, the corporation tax rate in the UK is 19% for profits up to £50,000 and 25% for profits over £250,000, with a tapered rate for profits between these amounts.

Example Calculation:

Profit: £100,000
Corporation Tax:
First £50,000 at 19%: £50,000 * 0.19 = £9,500
Remaining £50,000 at tapered rate (approx. 23%): £50,000 * 0.23 = £11,500
Total Corporation Tax: £9,500 + £11,500 = £21,000

By using an SPV, you can take advantage of the lower corporation tax rates, which can result in significant tax savings compared to paying higher personal income tax rates. This is particularly beneficial for higher-rate taxpayers who would otherwise pay up to 45% on their rental income. For example, if an individual landlord earns £100,000 in rental income, they could be taxed at a higher rate, resulting in a tax liability of up to £45,000. In contrast, using an SPV could reduce this tax liability to £21,000, providing substantial savings.

2. Mortgage Interest Relief

SPVs can deduct the full amount of mortgage interest as a business expense, unlike individual landlords who are limited to a 20% tax credit.

Example Calculation:

Rental Income: £30,000 Mortgage Interest: £10,000
Taxable Profit: £30,000 - £10,000 = £20,000
Corporation Tax (at 19%): £20,000 * 0.19 = £3,800

For individual landlords, the reduction in mortgage interest relief means they can only claim a basic rate tax credit on their mortgage interest. In contrast, SPVs can deduct the full mortgage interest, reducing their taxable profit and resulting in lower tax liability. This can be particularly advantageous for properties with high mortgage interest costs, as the full deduction can significantly reduce the taxable income and, consequently, the tax payable.

3. Flexibility in Profit Extraction 

SPVs offer flexibility in how profits are extracted. Owners can take dividends, which may be taxed at a lower rate than income tax. Additionally, profits can be retained within the company for reinvestment.

Example Calculation:

Profit After Tax: £20,000 (from the previous example)
Dividend Extraction:
Dividend Allowance: £2,000 (tax-free)
Remaining Dividend: £18,000
Dividend Tax (at 8.75% for basic rate): £18,000 * 0.0875 = £1,575
Total Tax on Dividend: £1,575

This flexibility allows SPV owners to optimize their tax position by choosing the most tax-efficient way to extract profits. They can also retain profits within the company to fund future property acquisitions or other investments. For instance, if the SPV generates significant profits, the owners can choose to reinvest these profits into additional properties, thereby growing their property portfolio without incurring immediate tax liabilities.

4. Capital Gains Tax (CGT) Benefits 

When selling a property, SPVs pay corporation tax on the gain, which is lower than the higher rates of CGT for individuals.

Example Calculation:

Property Purchase Price: £200,000
Sale Price: £300,000
Capital Gain: £300,000 - £200,000 = £100,000
Corporation Tax (at 19%): £100,000 * 0.19 = £19,000

For individual landlords, capital gains tax rates can be as high as 28% for residential property. By using an SPV, the gain is subject to corporation tax, which can result in significant tax savings. For example, an individual selling a property with a £100,000 gain could face a CGT liability of £28,000, whereas an SPV would only pay £19,000 in corporation tax, saving £9,000.

5. Inheritance Tax Planning 

Using an SPV can provide advantages for inheritance tax planning. Shares in the SPV can be transferred to heirs, potentially reducing the inheritance tax liability.

Example Scenario:

Value of SPV Shares: £500,000
Inheritance Tax Threshold: £325,000
Taxable Amount: £500,000 - £325,000 = £175,000
Inheritance Tax (at 40%): £175,000 * 0.40 = £70,000

Transferring shares in an SPV can be a more tax-efficient way to pass on property assets to the next generation, as it may reduce the overall inheritance tax liability. For example, by gradually transferring shares over time, it may be possible to utilize annual gift allowances and other reliefs to minimize the inheritance tax burden.

6. Limited Liability and Asset Protection 

SPVs offer limited liability protection, meaning the company's debts are separate from the personal assets of the shareholders. This provides an additional layer of security for investors.

Details on Limited Liability:

Protection of Personal Assets: In the event of financial difficulties or legal claims against the SPV, the personal assets of the shareholders are protected. The liability is limited to the amount invested in the SPV.
Risk Isolation: By isolating the property investment within an SPV, any financial risks associated with the property are contained within the SPV. This means that the parent company or individual investors are not directly exposed to these risks.
Bankruptcy Remote: SPVs are often referred to as "bankruptcy-remote entities" because their financial obligations are separate from those of the parent company. This structure ensures that even if the parent company faces bankruptcy, the assets and liabilities of the SPV remain unaffected.

For example, if an SPV owns a property that incurs significant liabilities due to unforeseen circumstances, such as legal disputes or environmental issues, the personal assets of the shareholders remain protected. This limited liability structure provides peace of mind and reduces the financial risk for investors.

7. Annual Tax on Enveloped Dwellings (ATED)

ATED is an annual tax payable by companies, partnerships with corporate partners, and collective investment schemes that own UK residential property valued over £500,000.

Example Calculation:

Property Value: £1,500,000
ATED Charge for 2024-2025: £8,450

While ATED can be a consideration for high-value properties, the tax benefits of using an SPV often outweigh the ATED charges, especially for properties that fall below the £500,000 threshold. For properties above this threshold, it is essential to factor in the ATED charge when assessing the overall tax efficiency of using an SPV.

Example: Selling an SPV and Stamp Duty Land Tax (SDLT) Exemption When you sell an SPV, the buyer is purchasing the shares of the company rather than the property itself. This means that the transaction is subject to stamp duty on shares, which is currently 0.5%, rather than SDLT, which can be significantly higher.

Example Calculation:

Property Value within SPV: £1,000,000
SDLT on Property Purchase: £1,000,000 * 5% = £50,000 (assuming a 5% SDLT rate for simplicity)
Stamp Duty on Shares: £1,000,000 * 0.5% = £5,000

By purchasing the SPV, the buyer saves £45,000 in tax (£50,000 - £5,000). This significant saving can make the SPV an attractive option for buyers and sellers, facilitating smoother transactions and potentially increasing the marketability of the property.

Conclusion 

In summary, using an SPV for property investment offers numerous tax benefits, including lower corporation tax rates, full mortgage interest relief, flexibility in profit extraction, and reduced capital gains tax. Additionally, SPVs provide advantages for inheritance tax planning, limited liability protection, and potential savings on stamp duty land tax. These benefits make SPVs an attractive option for property investors looking to optimize their tax position and protect their assets. By carefully considering the use of an SPV, investors can enhance their overall investment strategy and achieve greater financial efficiency.

 

*The information provided in this blog is for general informational purposes only and does not constitute professional investor or tax advice. Tax laws and regulations are subject to change, and their application can vary based on individual circumstances. It is recommended to consult with a qualified tax advisor or financial professional before making any decisions based on the information provided.