How using an SPV can enhance UK property investments.

Dot provides global property investors with seamless one-click buying through the “Buy with Dot” button. This means vetted properties inclusive of finance, insurance, furnishings and ongoing management; delivered seamlessly using an instant and legally binding ownership mechanism called a Dot Container SPV (which is a UK Ltd Company ‘Special Purpose Vehicle’ set up specifically for Dot investors).

Dot’s COO, Fraser Armstrong-Watters, chatted to Compass and explains why using an SPV is the most efficient method for investors both in the UK and overseas to access and prosper from the UK’s lucrative property market.

After 6 years in management consulting and investment banking, Fraser relocated to the UK in 2014 to take up an Advisory role at Legal & General, where he built asset management operations in the UK, US and Hong Kong. Before joining Dot, he spent 18 months establishing the finance and operations function at Settled (the online estate agent). Fraser is a CFA Charterholder and holds both Psychology and Finance degrees from Macquarie University, Sydney.

Disclaimer: This discussion contains general information and is not to be considered individual expert tax advice. Dot work directly with global accounting firms and can arrange for tax consultation, as required.

Dot take care of everything from sourcing and finance to design and full management. 

Compass: Thank you for joining us this morning Fraser. Let’s begin simply with what a UK Limited Company is?

Fraser: Sure! A UK Limited Company is a limited liability private company that has been incorporated in England & Wales by Companies House, the government body that manages all corporate entities. 

A limited company is completely separate from its owners, can enter into contracts in its own name and is responsible for its own actions, finances and liabilities. The owners of a company are protected by ‘limited liability’, which means they are only responsible for business debts up to the value of their investments or what they guarantee to the company.

Compass: What role does it play when it comes to investing in property?

Fraser: A typical example would be when the property is purchased in the company’s name, with the investor owning 100% of the company shares (either solely or say 50/50 with their partner). The investor is the beneficial owner of the company (and therefore property) with rights and control over the company and its assets.

Compass: Is this limited to UK investors, or can a company structure be utilised when buying from overseas?

Fraser: Overseas investors and non-UK nationals have no restrictions in buying property via a UK Limited Company.

Compass: What are the benefits of using a Company Structure?

Fraser: There are many benefits relating to profit taxation, mortgage interest relief and managing inheritance tax. Let me walk you through some of those benefits.

1. Income Tax

  • By owning a property in a company, the profits (net rental income) will be liable for Corporation Tax. If you own the property in your name, the profits will be added to your other earnings (such as employment) and taxed as income.

  • Corporation tax is approximately half that of the higher-rate of income tax (United Kingdom).

  • Tax will however be due on dividends / wages if you take income out of the company, but there is flexibility: you can time your dividends to maximise tax-efficiency; leave the profits in the company to buy your next property; take drawings through repayment of previous Directors’ loans (ie your equity); spread wages across family members etc.

2. Mortgage Interest Relief 

  • As of April 2020, mortgage interest will not be an allowable expense for property investors who own in their personal name (they will only be able to claim a basic rate allowance). For companies, mortgage interest is an allowable expense. 

  • The removal of mortgage interest offset for individual property investors means that the tax bill will be higher for higher rate income taxpayers. 

3. Inheritance Tax Planning

  • Holding property within a company structure may offer more options when it comes to managing inheritance tax. It opens up the use of trust structures, establishing different types of share classes (eg for children), employing family members and many other bespoke options to suit your family’s needs. 
Our solution is suitable for global investors looking to build a managed property portfolio.

Compass: Is there anything else that should be considered?

Fraser: For investors that are looking to build a leveraged portfolio I believe the pros far outweigh the cons, but there are some things to consider. These include fewer mortgage options, dividend taxation and more admin/paperwork, which I’ll happily take you through now.

1. Reduced mortgage options

  • The number of mortgage products on offer for limited companies is lower than for individuals. However, as the Ltd Company structure becomes the default option for professional and portfolio property investors we’re seeing lenders opening up more options as the market grows.

2. Dividend Taxation when you withdraw money

  • If you’re leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up (which can be used to acquire more properties). If you’re looking to consistently take out income (to spend on your own living costs, for example), you’ll be taxed on these – that means you’ll be paying corporation tax first, then dividend tax second. 

3. Paperwork

  • Albeit not significant, there are typically higher accountancy costs and time associated with filing company accounts compared to an individual filing. This is an area where Dot’s fixed-fee arrangements with EY adds value.

Compass: What happens when I want to sell my investment?

Fraser: An investor typically engages an estate agent and they will market the property for sale. If the new buyer doesn’t want to use the existing SPV structure, the property can be sold by the company and the Ltd Company can be dissolved quickly and easily. At this point any capital gains will be crystallised (so tax will be due).

Compass: Could I simply sell the shares to another investor?

Fraser: Yes, another option available to investments within a company structure is that the investor can choose to sell ownership of the SPV (shares) to a new investor with the price being the net asset value of the SPV (typically the property’s current value, less any mortgage/creditors). This is set to become a more common sales method as it significantly reduces the level of stamp duty for the new buyer and the sale can be completed very quickly via a straightforward stock transfer.

Global property investors get seamless one-click buying through the “Buy with Dot” button.

Compass: That sounds good, but how easy is it to find a suitable investor when choosing to sell these shares?

Fraser: This is an area that Dot is working on – our investors can re-market their properties for sale on the Dot marketplace as an SPV, in addition to more typical marketing via print, social, Rightmove and Zoopla where Dot would act as a traditional estate agent. As such, investors can sell their property simply and easily and the buyer can choose to transact the way that they want to.  

Compass: Are there any instances where you feel the Company structure simply isn’t the right choice?

Fraser: The decision to use a company structure should be made prior to acquiring new property. It is harder to justify when existing investments are already held in your personal name (as stamp duty and capital gains tax would be triggered on the sale of assets into an SPV). 

Compass: Where does an investor begin the process of establishing a Company Structure?

Fraser: There’s only one answer I can give to that! Simply click the “Buy with Dot” button and we take care of the entire process on their behalf – and that includes the paperwork!
Compass: Thanks very much for your time Fraser.


By: Fraser
Armstrong-Watters
COO
Dot Residential
dotresidential.com

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