SPV Structures for Property Development: Limited Company Finance

A Special Purpose Vehicle, or SPV, is a limited company formed specifically to hold a single development project. It has no trading history, no other assets, and no liabilities beyond those related to the development. In the context of development finance, approximately 85% of lenders require the borrower to be an SPV rather than an individual or an existing trading company. The reason is straightforward: an SPV ring-fences the development project from the developer's other activities, creating a clean and transparent legal structure that simplifies security, administration, and, if necessary, enforcement.

From the lender's perspective, an SPV ensures that the development site and the loan facility are the only significant assets and liabilities within the borrower entity. This means there are no competing creditors, no unrelated debts that could trigger cross-default provisions, and no risk of the borrower's other business activities contaminating the project. If the developer runs a separate construction company that becomes insolvent, the SPV holding the development site is unaffected because it is a separate legal entity.

For developers, the SPV structure provides limited liability protection. If the development fails and the lender enforces its security, the developer's personal assets are protected, subject to any personal guarantees given. The SPV structure also makes it easier to bring in joint venture partners or equity investors, as their investment can be structured as shares in the SPV with clearly defined rights and obligations. We have arranged facilities for SPV structures ranging from simple single-director companies to complex multi-layered structures with holding companies and multiple project SPVs.

Setting up an SPV for a development finance transaction requires attention to specific details that lenders will scrutinise. The company should be incorporated at Companies House as a private limited company, with a memorandum and articles of association that are appropriate for a property development business. Standard model articles are usually acceptable, but some lenders have specific requirements around director appointments, share transfers, and the company's objects clause.

The SPV's name should clearly identify it as a project-specific entity. Names like '123 High Street Developments Limited' or 'Oakfield Residential SPV Limited' are common. Avoid names that are misleading or that could be confused with established businesses. The registered office address should be a genuine business address, not a virtual office, as some lenders view virtual offices unfavourably. The company should be registered for Corporation Tax with HMRC and, if applicable, registered for VAT.

Directors and shareholders need careful consideration. The developer should be a director of the SPV, and in most cases the sole shareholder or majority shareholder. If there are joint venture partners, the shareholding structure should be agreed before the SPV is incorporated and documented in a shareholders' agreement. Lenders will require details of all directors and persons with significant control as part of their know-your-customer checks. Setting up the SPV typically costs between £50 and £500 depending on whether you use an off-the-shelf company or instruct a solicitor to incorporate a bespoke entity. We advise developers to have the SPV ready before submitting their finance application, as this avoids unnecessary delays.

One important point that developers often overlook is that the SPV needs a bank account before the lender will complete. Opening a business bank account can take two to six weeks depending on the bank, and some banks are reluctant to open accounts for newly incorporated SPVs with no trading history. Start the account opening process as soon as the SPV is incorporated.

The tax treatment of development profits through an SPV differs significantly from development in a personal name. When an SPV sells completed units, the profit is subject to Corporation Tax, currently 25% for profits above £250,000. If the developer then extracts profits from the SPV as dividends, they pay additional income tax on the dividend, resulting in an effective combined tax rate that can exceed 45% for higher-rate taxpayers.

However, there are legitimate tax planning strategies that can make the SPV structure more tax-efficient. If the developer plans to retain completed units as rental investments, they can be transferred to a separate holding company at market value, with the development SPV paying Corporation Tax on the development profit and the holding company benefiting from ongoing rental income within a corporate structure where mortgage interest relief is not restricted as it is for individuals. For a scheme generating £500,000 in profit, the tax planning strategy can make a material difference to the developer's net return.

Stamp Duty Land Tax also needs consideration. When the SPV purchases the development site, SDLT is payable at the standard rates for a company purchase, which includes the 5% surcharge for corporate purchasers of residential property above £250,000. This additional cost should be factored into the development appraisal from the outset. VAT is another consideration; some development activities are zero-rated for VAT purposes, new residential construction specifically, while others are standard-rated or exempt. Incorrect VAT treatment can result in unexpected liabilities. We always recommend that developers take specialist tax advice before committing to an SPV structure, as the optimal approach depends on the individual's wider tax position and long-term investment strategy.

Capital Gains Tax versus Corporation Tax is another consideration. Individuals pay CGT on property disposal profits at rates of up to 24%, while companies pay Corporation Tax at 25%. For some developers, particularly those undertaking occasional one-off projects rather than a series of developments, personal ownership may be more tax-efficient. However, most development finance lenders will still require an SPV regardless of tax preferences.

When two or more parties come together to develop a property, the SPV structure becomes essential for defining each party's rights, obligations, and profit share. A typical equity joint venture involves one party providing the development expertise and project management, while the other provides the equity capital. Both parties become shareholders in the SPV, with their respective shareholdings reflecting their agreed profit share.

The shareholders' agreement is the key document governing the relationship between the joint venture parties within the SPV. It should address capital contributions and the timing of those contributions, decision-making authority and what constitutes a reserved matter requiring unanimous consent, profit distribution mechanics, deadlock resolution procedures, exit provisions including tag-along and drag-along rights, and the circumstances under which a party can be removed as a director. In our experience, disputes between joint venture partners almost always arise from ambiguity in the shareholders' agreement. Spending £3,000 to £7,000 on a properly drafted agreement is a worthwhile investment.

The SPV's articles of association should be tailored to reflect the shareholders' agreement rather than relying on model articles. This ensures that the company's constitutional documents are consistent with the commercial deal. The lender will review the shareholders' agreement and articles as part of their due diligence, and any provisions that could interfere with the lender's security or its ability to enforce will need to be addressed. Common issues include pre-emption rights on share transfers that could prevent the lender from appointing a receiver, and deadlock provisions that could result in the company being wound up during the development.

For more complex arrangements involving mezzanine finance alongside senior debt, the SPV structure may involve a holding company sitting above the project SPV. The mezzanine lender takes security over the shares in the project SPV held by the holding company, while the senior lender takes the first legal charge over the property. This layered structure requires careful legal documentation to ensure that the intercreditor arrangements between the senior and mezzanine lenders are properly documented.

Once the development is complete and all units are sold, the SPV needs to be wound up. The most common method is a Members' Voluntary Liquidation, or MVL, which is appropriate when the company is solvent and has distributed or is able to distribute all remaining assets to shareholders. An MVL requires the appointment of a licensed insolvency practitioner as liquidator, who oversees the distribution of the company's assets. The cost of an MVL typically ranges from £2,000 to £5,000 plus VAT.

The tax advantage of an MVL is significant. Distributions made during an MVL are treated as capital distributions, subject to Capital Gains Tax rather than income tax. For a basic-rate taxpayer, this means paying CGT at 18% on residential property gains, compared to dividend tax rates that can reach 39.35% for additional-rate taxpayers. If the developer qualifies for Business Asset Disposal Relief, formerly Entrepreneurs' Relief, the effective CGT rate can be as low as 10% on the first £1,000,000 of qualifying gains. This can save a developer tens of thousands of pounds compared to extracting profits as dividends.

Alternatively, if the developer plans to undertake further projects, the SPV can be retained and reused, although most lenders prefer a clean SPV for each new project. Strike-off is a cheaper alternative to MVL for companies with assets below £25,000, but it does not provide the same tax advantages and is not appropriate for companies that have traded actively. We always recommend discussing the wind-up strategy with a tax adviser before the development completes, as some strategies require advance planning. If you are planning a development and want to ensure your SPV structure is optimised from the outset, submit your deal for a confidential discussion.

The most common mistake we see is developers using an existing trading company rather than a dedicated SPV. This creates unnecessary complexity for the lender, who must assess the company's existing debts, creditors, and contractual obligations alongside the development project. It also exposes the developer to the risk that problems in their other business activities could affect the development. A builder who uses their construction company to borrow development finance risks losing the development site if the construction company encounters financial difficulties on other contracts.

Another frequent error is failing to maintain proper corporate governance within the SPV. Development finance lenders expect the SPV to maintain proper accounting records, file annual accounts and confirmation statements at Companies House on time, and comply with all statutory obligations. A late filing penalty or a threat of strike-off can trigger a default under the facility agreement. In our experience, developers who appoint a qualified accountant to manage the SPV's statutory obligations from day one avoid these problems entirely.

Finally, some developers set up multiple SPVs for a single project, typically because they acquired the land in one SPV and want to develop it in another. This creates an unnecessary transfer requirement, potentially triggering additional SDLT and complicating the legal structure. Unless there is a specific tax or commercial reason for a multi-SPV structure, we recommend keeping it simple. One project, one SPV, one clean structure that the lender can understand and underwrite efficiently.