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What is an SPV?

If you're in the property world either looking to invest in a project or involved in developing properties for a profit, then you've probably come across the term 'SPV'.

SPV stands for 'Special Purpose Vehicle'. When used in the context of a property deal it essentially is a posh name for a Limited company!

The term SPV is generally used to reflect an understanding that a project will be run through a separate legal entity set up for that particular project only.

Why use an SPV?

SPV's are commonly used for property development projects where an investor or investors may be involved. Typically a property developer or a property speculator would source a property which could be developed for a healthy profit. They would then look for potential investors / lenders to become involved in the project to spread the risk and reward.

The deal is structured through an SPV for the following reasons:

  1. Investors money is ring-fenced for the project
  2. Security / charges by a lender are limited to the assets held by the SPV
  3. SPV can facilitate a desired profit share between the parties involved
  4. Tax efficiency

Ring-fencing

Property development can be a risky activity particularly if sites are bought on a speculative basis i.e without any planning permission.

Lenders or investors getting involved would want security over the assets of the SPV whilst the developer would want to minimise the risk to their existing personal or business assets.

An SPV allows for the property deal to be run through a separate legal entity completely thereby restricting risk and reward to the activity of the SPV only.

Profit sharing

It is common for there to be differing risk and reward sharing ratios between the parties involved in an SPV.

Given that an SPV is essentially a limited company, this gives flexibility around how profits can be shared among the shareholders. It may be that the investor is putting in all the money in return for a 50% share of profit on eventual sale after all costs. This can be worded into a shareholders agreement and separate classes of shares can be set up to facilitate this commercial arrangement between the parties.

A shareholders agreement can go into as much detail as required to determine 'who gets what' depending on what's left at the end of the project. For example, a staged profit share can be built in to give the investor a fixed initial return for his risk capital prior to a balance being shared out between investor and developer.

So what are the tax benefits?

Property development is seen as a trade by HMRC. As such it is possible to qualify for Entrepreneur's Relief providing other conditions can be met (two year holding period for shares amongst others). This means that a gain made on the sale of shares of the SPV could be taxed at just 10%.

However, it is unlikely that a buyer purchases the shares of an SPV. What normally happens is that the property / properties are bought by a buyer /s. That means the proceeds of sale come into the SPV and are subject to corporation tax on the increase in value from purchase.

The SPV then has a pile of cash in it which the shareholders could then access tax efficiently by putting the SPV into a voluntary liquidation (rather than take a dividend taxed at 38%). The cash received by the shareholders by way of a liquidation would then be treated as a capital receipt and potentially be eligible for ER i.e paying only 10% tax.

Contrast this with personal ownership where income tax rates are 45% and capital gains tax rates on residential property can be up to 28%.

If you're involved in property development projects and require some help in structuring deals tax efficiently, feel free to get in touch.

Hope that was helpful :-)

Reza


 

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