Landlords Are Starting to Buy the SPV Rather Than the Properties. The Mortgage Works Very Differently

A different way of acquiring buy-to-let portfolios is appearing more frequently in the specialist mortgage market. Instead of buying each property from the company that owns it, landlords are considering acquiring the shares in the property-owning SPV itself.

Keystone Property Finance says its team is encountering this type of transaction increasingly often as more rental property sits within limited companies. On the surface, the end result can look similar: the purchaser gains control of the same rental properties. Legally, financially and from a tax perspective, however, the transaction is fundamentally different.

The properties do not transfer to a new owner. The company remains the registered property owner while the ownership of that company changes. That distinction can affect the tax treatment, legal due diligence and, crucially, the mortgage arrangements already secured against the portfolio.

For professional landlords considering the structure, the finance needs to be tested alongside the tax and corporate advice rather than after the share-purchase agreement has effectively been committed.

Buying the Portfolio and Buying the Company Are Not the Same Transaction

Consider a landlord looking to acquire three properties worth £500,000 each from another investor.

Under a conventional asset purchase, the seller's company transfers each property to the purchaser or the purchaser's own SPV. Legal title to the land changes hands, the buyer arranges purchase finance against the properties and the relevant land-transaction taxes are considered by the buyer's professional advisers.

A share acquisition works differently. The existing SPV continues to own the three properties before and after completion. What changes is ownership of the shares in that company.

The buyer therefore acquires control of the company together with the portfolio it already owns. That can be commercially attractive in the right circumstances, but it also means the buyer is acquiring a corporate entity with a history rather than three clean property assets in isolation.

The Tax Difference Can Be Significant, but It Is Not Mortgage Advice

One reason these transactions are attracting attention is the different tax regime applying to shares and property.

HMRC's current guidance says that purchases of existing shares in UK companies will usually attract Stamp Duty or Stamp Duty Reserve Tax at 0.5% of the consideration. Land purchases, by contrast, fall within the separate SDLT regime where the relevant conditions are met.

That difference can create a substantial disparity in headline transaction tax on a valuable portfolio, which is why some landlords and advisers are examining company acquisitions more closely.

It would be wrong, however, to describe an SPV acquisition simply as a way to avoid SDLT or to assume that the 0.5% share duty is the buyer's entire tax cost.

The company can carry historic and future tax liabilities of its own. Keystone specifically cautions that deferred corporation tax and other liabilities may be relevant. The buyer's accountants and tax advisers therefore need to determine whether acquiring the company is appropriate and what the true economic cost of doing so would be.

The Mortgage Is Where the Structure Becomes Specialist

The financing problem is easy to miss because the properties themselves have not been sold. An investor might therefore assume that the mortgages already attached to them can simply remain in place when the shares change hands.

Keystone's explanation of the transactions it is seeing is different. It says that because ownership of the company changes, the existing loans attached to the properties must be repaid, making the funding exercise a remortgage rather than a purchase.

That distinction changes the mortgage process materially.

The new lender is not advancing money so that an SPV can buy three properties. It is refinancing properties already owned by a company at the same time as the shares in that company are being acquired by new owners.

The lender therefore needs to understand the complete transaction: what is being bought, who will control the company after completion, what debt is being redeemed, how much new borrowing is required and whether the existing portfolio produces sufficient rental coverage for the replacement facility.

Change of Control Needs to Be Checked Before the Share Purchase Is Committed

Existing mortgage agreements can contain provisions governing changes in ownership or control of the borrower. The precise wording and consequences depend on the lender and facility documents, so the buyer's solicitor needs to establish the position on each loan.

The crucial commercial issue is timing.

If the buyer signs up to acquire the company and only afterwards discovers that £1m of existing mortgage debt must be redeemed but very few lenders will provide the replacement finance, an apparently attractive corporate acquisition can become difficult to complete.

The safer process is to map the existing debt at the same time as the legal and tax advisers assess the proposed share purchase.

Why Only a Small Lender Group Currently Considers These Cases

A standard limited-company buy-to-let mortgage is now a well-established part of the specialist lending market. A share purchase of an existing property-owning company presents additional questions that are not present when a newly incorporated SPV simply buys a rental property.

Keystone says very few lenders currently consider share-purchase transactions and that lenders supporting them rarely publish rigid criteria because each case can look materially different.

That makes manual underwriting particularly important. A credit team may need to understand the company being acquired, its historic conduct, the incoming shareholders and directors, existing property loans, rental performance, loan-to-values and the wider reason for the transaction.

You Are Buying the Company's History as Well as Its Properties

This is arguably the biggest distinction between purchasing the assets and purchasing the SPV.

When a newly incorporated company buys three rental properties, its corporate history is normally limited. When an investor acquires an established SPV, they inherit ownership of a company that may have traded, borrowed, entered into contracts and incurred liabilities for years.

Keystone highlights the importance of clean credit histories and notes that legal costs are likely to be higher because of the additional due diligence required.

The buyer's corporate solicitor and accountants therefore need to investigate the company itself rather than focusing only on the title, leases and physical condition of the properties.

The finance adviser should not duplicate that work. The lender does, however, need sufficient comfort around the company and incoming owners to approve the replacement debt.

The Portfolio Can Be Excellent Even If the Company Is Not

A useful way to understand the lender's position is to separate the property risk from the corporate risk.

Three well-located rental properties can produce strong rent, conservative loan-to-values and excellent tenant demand. That does not automatically mean the existing SPV will be acceptable to every lender.

Issues in the company's credit history, historic borrowing, filings or wider corporate position can change the underwriting outcome even though the properties themselves would normally meet ordinary BTL criteria.

The reverse can also apply. A clean company structure does not overcome properties that fail lender valuation, rental stress or security requirements.

Both sides of the transaction therefore need to work.

This Could Become More Common as Limited Company BTL Matures

The reason Keystone expects this niche to grow is the sheer volume of rental property now held inside companies.

The lender cites Hamptons research showing that a record 66,587 buy-to-let limited companies were created last year, taking the total to 443,272. That is almost five times the number recorded in 2016. Around 1.5 million rental homes are estimated to sit within company structures.

As those portfolios mature, transactions involving the companies themselves become more likely.

Some landlords will want to sell entire portfolios. Others will consolidate. Families may reorganise ownership between generations. Business partners may separate. One shareholder may acquire another's interest. Professional landlords may see value in acquiring an established company containing several tenanted properties rather than assembling the same portfolio asset by asset.

That creates a set of financing requirements that look less like conventional BTL purchasing and more like the intersection of corporate acquisition and property refinancing.

A Family Landlord Succession Could Produce the Same Problem

Consider parents who have built a substantial BTL portfolio inside an SPV over many years and now want the next generation to take control.

The legal and tax advisers may examine several possible routes depending on the family's circumstances. If the eventual transaction involves a material transfer or acquisition of shares, the existing property debt cannot simply be ignored.

A lender that originally approved the company when it was controlled and guaranteed by the parents may not automatically consent to materially different ownership, directors or guarantors.

The financing needs to be tested against the proposed succession structure before the parties assume that the mortgages can remain unchanged.

Shareholder Buy-Outs Can Also Require a Property Refinance

The same principle applies where two landlords jointly own an SPV and one wants to buy the other out.

Economically, the transaction may be described as one shareholder acquiring the other's interest. From the mortgage lender's perspective, however, the ownership and potentially the guarantees supporting a company containing mortgaged assets are changing.

Depending on the existing facility and the replacement lender's requirements, the financing solution may involve refinancing some or all of the property debt at the same time as the corporate transaction completes.

That means the value of the shareholding, the portfolio equity and the mortgage structure can all become connected.

The Replacement Mortgage Still Has to Pass Normal BTL Tests

The unusual corporate transaction does not remove the ordinary fundamentals of buy-to-let underwriting.

The replacement lender will still need to be satisfied with the underlying properties, valuations, rental income, loan-to-values and the borrower's ability to meet its criteria.

For a larger portfolio, the lender may assess the properties individually and in aggregate. Portfolio landlord rules, overall leverage, background properties and rental coverage can all become relevant.

If the buyer needs to borrow more than the existing mortgage balances in order to fund part of the share acquisition, that can add another layer of complexity. The lender will need to understand the purpose of any additional capital and whether its permitted loan structure can support it.

Do Not Assume the Share Price Equals the Property Equity

A property-owning company's value is not necessarily as simple as market value of the properties minus mortgage balances.

The business can have cash, creditors, tax liabilities, shareholder loans and other assets or obligations. Professional advisers may also need to consider latent tax within the company when determining the economics of the acquisition.

That matters to the finance because the replacement mortgage is secured against the properties, not against an informal calculation of what the buyer believes the shares are worth.

The buyer therefore needs separate but coordinated workstreams: corporate valuation and due diligence on the share acquisition, property valuation for the lender and mortgage underwriting against the portfolio.

Why This Needs More Legal Work Than an Ordinary BTL Purchase

In a conventional property acquisition, the buyer's conveyancer investigates title, searches, leases, tenancy matters and the other legal issues relevant to the land transaction.

A company acquisition requires additional corporate due diligence because the shares themselves are being purchased.

The legal team may need to examine the company's accounts, contracts, liabilities, corporate records, security, historic transactions and warranties being provided by the seller. The precise exercise depends on the transaction and should be determined by the corporate advisers involved.

Keystone notes that this additional due diligence is one reason legal costs can be higher.

For the mortgage, those additional workstreams also need to be coordinated with the lender's solicitor so that the share acquisition, redemption of existing loans and completion of new mortgages all occur in the correct sequence.

The Existing Lender Position Should Be Mapped Property by Property

A portfolio held within one SPV can still have several different mortgages. One property may be fixed for another three years, another may be on a variable rate and another may have a facility approaching maturity.

If all existing secured debt needs to be redeemed when the shares are acquired, the buyer needs to understand the cost of doing so before the transaction is priced.

Early repayment charges can be material. Different lenders may also have different redemption procedures and legal requirements.

A financing review should therefore start with a complete schedule of debt rather than simply the total mortgage balance.

Why This Should Be Tested Before the Share-Purchase Agreement Becomes Binding

An attractive company acquisition can fail for a very simple reason: the buyer has structured the transaction around a level or form of debt that the lender market will not provide.

That risk is amplified in this niche because Keystone says only a small number of lenders currently support share-purchase cases.

If the buyer assumes a £1.2m replacement portfolio facility will be available and signs documentation based on that assumption, discovering later that appropriate lenders will only provide £950,000 creates an immediate capital shortfall.

The issue may be even more difficult where the buyer faces a fixed corporate completion date and existing lenders expect simultaneous redemption.

A preliminary finance assessment cannot guarantee final credit approval, valuation or completion. It can, however, establish whether the proposed debt requirement sits within a credible part of the specialist market before substantial legal and tax work becomes irreversible.

This Is a Case Where the Cheapest Mortgage May Not Be the Most Important Question

A conventional BTL remortgage can often be compared primarily around rate, fees, ERCs and rental stress. An SPV share acquisition introduces execution risk alongside those pricing considerations.

A lender with the lowest headline rate is of little value if its policy does not allow the company ownership transaction being proposed.

For this type of case, relevant considerations include whether the lender accepts share acquisitions at all, the ownership and director structure it will permit, the treatment of existing portfolio debt, required guarantees, legal process, maximum leverage and whether it can complete within the corporate timetable.

Once those points are satisfied, pricing can be compared between the genuinely viable options.

Could a Buyer Keep Some Existing Mortgages and Refinance Others?

That cannot be assumed. The answer depends on the relevant existing loan documents, lender consent and the exact structure of the transaction.

Keystone's description of the cases it is currently seeing is that existing property loans must be repaid as part of the ownership change. A buyer considering another arrangement should therefore have the legal position checked directly against the existing facilities rather than assuming debt can remain untouched.

For a multi-property company, this point is particularly important because the commercial attractiveness of the acquisition may depend on retaining low-cost historic mortgages. If those facilities have to be redeemed and replaced at current pricing, the economics of the share purchase may change significantly.

The Transaction Should Be Modelled After Refinancing Costs

That leads to an important point for professional landlords.

The apparent saving or advantage of buying the SPV should not be assessed without including the cost of replacing the debt. ERCs, new arrangement fees, valuation costs, lender legal fees, corporate legal costs and the new interest rate can all affect the economics.

The relevant comparison is therefore not simply property-purchase tax versus share-purchase duty.

It is the complete financial outcome after tax advice, corporate liabilities, legal costs and replacement finance have all been included.

Why Accountants and Corporate Lawyers May See These Cases First

A conventional mortgage enquiry usually begins because a landlord has identified a property to buy or a mortgage approaching maturity.

A share acquisition is more likely to originate with a corporate or tax discussion. An accountant may identify that a client is considering buying an existing landlord company. A solicitor may be asked to advise on acquiring an SPV. A family adviser may be helping shareholders separate their interests.

By the time a mortgage adviser becomes involved, the proposed transaction structure may already be well advanced.

That creates a strong reason for the debt conversation to start earlier. The finance adviser does not need to recommend the corporate structure. They need to establish whether the proposed structure can actually be funded.

What a Specialist SPV Share Purchase Finance Review Should Establish

For a landlord considering acquiring an existing property-owning company, the financing review should begin with the current corporate and debt position rather than a standard property-purchase fact-find.

Willow would need to understand the property schedule, current mortgages, rental position and proposed borrowing alongside the incoming ownership structure and corporate timetable. Where a share acquisition is already being considered, the client's tax adviser and corporate solicitor should be involved from the outset.

The lender universe can then be tested against the actual transaction rather than trying to force the case into ordinary limited-company purchase criteria.