Tax changes that are being applied to people making their money in property are due to be phased in this spring, and the concerns these are raising have a lot of people discussing the formation of an SPV. Not entirely sure what an SPV is, exactly, we paid a visit to our old buddy at My Accountant Friend to ask, “SPVs? What’s that all about, Kenny?”
OK, Kenny. What’s all this SPV business about? It’s a kind of car, isn’t it?
Er, no. You’re thinking of an SUV, which is something entirely different. SPV stands for Special Purpose Vehicle, and it’s a company set up for a specific type of business such as property investment or rental in order to isolate risk away from any other business interests you may have.
Right, yes. I’m with you now. So it’s something a buy-to-let landlord might want to know about?
Yes, exactly. Glad we’re on the same page. It applies to buy-to-let properties, among other things, but what we are looking at here are the changes in tax applied to individuals from the 2017/18 tax year, during which not all mortgage interest can be claimed as an expense.
This could lead to paying tax on a loss-making rental property – not ideal for an individual, but a limited company would still receive full relief for the mortgage interest paid and, with the tax free dividend allowance and reduced corporation tax rates, could potentially reduce your personal tax bill as well.
It’s important to note, however, that the interest changes are for higher rate tax payers, so not everyone will be affected.
So, how does the SUV SPV system currently work?
A company is set up with the sole purpose of investing in property and then, either via personal loans or mortgages, it purchases a property to rent out to a third party with the aim of making a profit on the rent and increase in value of the property when it comes to selling it.
Sounds reasonable enough. Why are people getting hot under the collar?
The changes in personal taxation on rental income from the next tax year onwards, staged in over four years, mean that properties could make a loss while individuals have tax to pay on the further increasing loss. They may even be profitable, but the tax payable wipes out the profit resulting in a loss.
So, when will these changes take place, and what can we expect?
The government are phasing it in from April this year (2017). It’s probably best to show you how the changes will take place in a simple table. Do you mind?
Not at all, Kenny. Go ahead.
Well, here you go, then. The changes in a digital nutshell…
| Tax year | Percentage of finance costs deductible from rental income | Percentage of basic rate tax reduction |
| 2017 to 2018 | 75% | 25% |
| 2018 to 2019 | 50% | 50% |
| 2019 to 2020 | 25% | 75% |
| 2020 to 2021 | 0% | 100% |
What position are you taking on this at My Accountant Friend?
It depends on individual circumstances, and whether or not you’re looking to build a property portfolio. As such we would want to discuss the situation with each individual who comes to us and advise accordingly, but at present the formation of and SPV is looking like a good option for most property investors.
And if I’m concerned, who should I talk to?
You’ve probably guessed the answer already. I’d pick up the phone to My Accountant Friend. That would be a very good start indeed.
