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A Special Purpose Vehicle (SPV) is a standard limited company or partnership created to isolate a specific business objective or activity, such as ring-fencing assets or investing in property. In contrast, a typical limited company or partnership engages in more generic and varied business activities, such as buying and selling goods or services.
In this article, we cover the basics of Special Purpose Vehicles, shedding light on their purposes, their benefits and limitations, and how to set up an SPV company in the UK.
What is a Special Purpose Vehicle?
A Special Purpose Vehicle is a separate legal entity formed by an individual, an organisation, or a group of investors. Typically, an SPV is set up as a company limited by shares or a limited liability partnership (LLP), either as a standalone entity or a subsidiary of a parent company.
They are designed to deal solely with specific, narrowly focused, or temporary objectives, such as projects or investments, that may be challenging to achieve through an existing business. With an SPV, you isolate the specific activity or asset(s) to that entity, ensuring it remains legally and financially separate from you (as an individual) or your primary business.
This separation means that, while connected, the SPV is free from any pre-existing obligations and liabilities that may exist. It has its own accounting, tax, and reporting obligations, and it is responsible for its own assets and liabilities.
Common uses of Special Purpose Vehicles
In the UK, Special Purpose Vehicles are most commonly used by property investors and buy-to-let landlords when purchasing, letting, and developing properties. In fact, many mortgage lenders insist on SPVs rather than trading companies because they’re easier to understand and simpler to underwrite.
As a separate entity with a specified sole purpose, an SPV can isolate financial risk, raise finance, and improve tax efficiency. In property investment, SPVs can also facilitate succession and inheritance planning.
In both the private and public sectors, a Special Purpose Vehicle is also frequently used for:
- holding and managing an asset or portfolio of assets
- project financing
- pooling investments in startups through structures like pledge funds and syndicates
- joint ventures
- business disposals
- mergers and acquisitions
When setting up an SPV, the entity’s governing document (e.g. the articles of association for a limited company) should clearly state its specific objective and that it is a Special Purpose Vehicle.
Benefits of a Special Purpose Vehicle
Special Purpose Vehicles can offer several valuable benefits, such as isolating and managing risk, raising capital, and reducing tax burdens.
1. Reducing financial risk
Running a business or making investments involves various risks and liabilities. Individuals and parent companies can use Special Purpose Vehicles to isolate the financial risk associated with specific assets or projects. This limits their exposure to losses, liability, or insolvency should anything go wrong with the SPV.
Since the Special Purpose Vehicle is a separate legal entity, it is responsible for its own liabilities. This clear separation ensures that the assets of the individual or parent company are protected if the SPV faces financial difficulties or legal issues.
2. Protecting assets
Companies often create Special Purpose Vehicles to ring-fence valuable assets. This shields the assets from any potential losses or claims the parent company may encounter.
Where assets such as real estate and intellectual property are concerned, transferring them to a subsidiary SPV protects them from corporate risk in the event of the parent company’s insolvency.
3. Raising capital
If you need to raise funds for your business or investment opportunity, a Special Purpose Vehicle can help through asset securitisation.
Securitisation is when you pool illiquid assets (like mortgages, loans, and other receivables) into an SPV, convert them into tradeable securities (e.g. shares), and sell them to investors.
The securitisation strategy enables parent companies to unlock the value of certain assets, increase liquidity, and access new funding sources.
4. Facilitating joint ventures
Since SPVs help minimise financial and operational risk, they can be useful if you’re considering partnering with like-minded investors or businesses to achieve a specific, mutually beneficial goal.
With a joint venture through an SPV, each party to the business arrangement shares control of the venture, rights to the assets, and obligations for liabilities associated with the arrangement.
5. Improving tax efficiency
Special Purpose Vehicles can also help reduce tax burdens, especially for buy-to-let landlords, property developers, and investors disposing of real estate.
For example, with buy-to-let mortgages, landlords can offset their mortgage interest and arrangement fees against rental income if they own the property through an SPV company. Since the introduction of ‘Section 24‘ restrictions (informally known as the Tenant Tax), this option is no longer available to individual landlords.
On rental income profit, companies pay Corporation Tax at a maximum rate of 25%. However, if you own property in your personal name, profit from rental income is subject to Income Tax up to 45% (or 47% in Scotland) as well as National Insurance.
You can also reduce your personal tax liability on any profit you extract from a Special Purpose Vehicle company. This can be particularly advantageous if you’re a higher-rate or additional-rate taxpayer.
Limitations of a Special Purpose Vehicle
While Special Purpose Vehicles can be highly advantageous, there are also some potential risks to consider before creating an SPV.
1. Complexity
Creating and managing a Special Purpose Vehicle is more complex and costly than running a company with regular trading activities. You should seek expert legal and financial advice before venturing down this path.
2. Financing options
Your financing options could be limited because the credit rating of a new SPV will be lower than that of the parent company. However, you can overcome this obstacle by providing a personal guarantee on any commercial loans or buy-to-let mortgages you may require.
3. Tighter regulations
You could attract scrutiny from regulators depending on the reason you set up a Special Purpose Vehicle. They may want to inspect your SPV’s activities more closely to ensure legitimacy and compliance, especially if it’s involved in financial transactions.
4. Your credibility could be affected
Whilst an SPV is a separate legal entity, this doesn’t entirely remove reputational risk for you or the parent company. The association still exists. Therefore, your reputation could be at risk if anything were to go wrong with the SPV.
How to set up a Special Purpose Vehicle in the UK
The most common structure for a Special Purpose Vehicle is a private company limited by shares. However, depending on your requirements and goals, other structures (such as a company limited by guarantee, an LLP, or a trust) may be more appropriate.
First, we advise speaking to an experienced accountant to discuss your needs and determine the best legal structure for your Special Purpose Vehicle.
If you decide to set up an SVP company, the process you’ll follow is essentially the same as when setting up a company for regular trading purposes. You will be required to submit a company formation application to Companies House with the following information:
- Unique company name
- Registered office address
- Details of every shareholder and director – you must have at least one director and one shareholder (the same person/people can hold both positions)
- The SVP’s defined objectives and activities – these should be set out in bespoke articles of association and/or a shareholders’ agreement
- Issued shares (minimum of one share per shareholder)
- Details of people with significant control (PSCs)
- The appropriate SIC code (Standard Industrial Classification) for your SPV
If the Special Purpose Vehicle is a subsidiary organisation, the parent company will own and control all (or part) of the SPV as a corporate shareholder and PSC.
Multiple corporate or individual shareholders and PSCs may exist where an SPV is set up as a joint venture or pooled investment project.
Set up your SPV company with Rapid Formations
When you’re ready to form an SPV company, Rapid Formations can help. Please contact our expert team on 020 7871 9990 or via this quick request form. Please post any questions on this topic in the comment section below.
