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One of the remarkable things about the UK is the diverse range of investment opportunities and vehicles available to people. There is the Enterprise Investment Scheme (EIS), the Innovative Finance ISA and Venture Capital Trusts (VCTs). Another – perhaps less commonly heard of – investment channel is the Special Purpose Vehicle (SPV), which offers unique opportunities for investors to access promising returns whilst mitigating risk.
In this article, our investment team at Bure Valley Group outlines what SPVs are, how they work and reasons to consider including them within your wider portfolio. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
+44 160 334 0827
What is an SPV?
An SPV is, technically, a type of business – one set up for a “special” purpose. In short, it is a tax-efficient way for investors to hold a portfolio of assets which are “ring fenced” from a legal standpoint, and set apart for a particular investment project.
Traditionally, SPVs have been very popular with property investors. In particular, Buy to Let investors have often used them to build a tax-efficient portfolio of property investments. Since an SPV is typically set up as a limited company – with restricted trading – this lets investors purchase BtLs, or invest in property development projects, and receive rental income in a way that is very tax-efficient.
However, in more recent years, SPVs have also become more popular with tech investors. In this article, we will focus more specifically on this aspect of SPVs. Bear in mind that an SPV could be a limited liability partnership (LLP) or a public limited company (Plc). Moreover, their restricted trading rules mean that they cannot receive income from any other type of business activity – i.e. only from the specified purpose identified in the SPV documentation.
Reasons to set up an SPV
SPVs have traditionally been used for property. Now, they’re being increasingly used in tech to build out infrastructure and development projects. A recent example can be seen here at Bure Valley Group. One of our partners – NexGen Cloud – is a cloud infrastructure specialist seeking to leverage dormant computer hardware to power the enterprise cloud market. One of its goals is to penetrate specific cryptocurrency and blockchain markets. As such, an SPV was set up to set up a mining operation in Europe. Investors who wish to engage in this particular project can do so by investing in the SPV, taking dividend payments when profit comes in. For investors in NexGen, this isolates the risk and keeps the two business models legally separate.
One compelling reason to set up an SPV comes from doing so with a JV partner. Suppose you are committing all of the capital and your JV partner is doing all of the admin and maintenance work. You could then split the arrangement evenly – e.g. by setting up a limited company (splitting the shares 50/50) or by establishing a partnership agreement.
There are also tax advantages to an SPV to consider – particularly with regards to dividends. In 2021-22, if you want to draw all profits from an SPV as income, then corporation tax applies and the director pays dividend tax at 7.5% (basic rate), 32.5% (higher rate) or 38.1% (additional rate). Here, you can make use of your £2,000 tax-free dividend allowance each financial year. You could also add your adult son/daughter to the SPV as a shareholder and make use of their dividend allowance. Net profit within the company can also be committed to further asset purchases within the SPV, with no income on the retained amount.
Risks to consider
The tax benefits available under an SPV are set out by UK legislation and, as such, could be subject to change. It is possible that the rules may change in the future, leaving investors in the SPV in a difficult position. We suggest speaking with a financial adviser about how you can mitigate these risks (e.g. by diversifying your investment portfolio more widely).
With all of this said, an SPV can still be a great investment structure to consider. It is legally separate from its directors and owners for tax/accounting purposes, and a new SPV for a property development project will lack a trading history. This means it is not tied to any pre-existing debts, legal claims and obligations that may impact upon its lending choices.
Conclusion & invitation
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827