While Special Purpose Vehicles (SPVs) offer various benefits and advantages, they are not without their disadvantages and limitations.
It is important to understand and consider these potential drawbacks before utilising SPVs for business purposes.
We explore the disadvantages and limitations of SPVs, including the complexity and administration burden, legal and regulatory risks, limited access to funding and capital markets, reputation and public perception, as well as the lack of flexibility and exit options.
Complexity and Administration Burden
Establishing and maintaining SPVs can be complex and administratively burdensome.
Setting up an SPV involves legal and accounting considerations, documentation, and ongoing compliance requirements. Maintaining separate financial records, conducting audits, and fulfilling reporting obligations add to the administrative burden. Businesses utilising SPVs should be prepared for the additional time, resources, and costs associated with SPV management.
Legal and Regulatory Risks
SPVs are subject to legal and regulatory risks that businesses must carefully navigate. Compliance with jurisdictional requirements, changing regulations, and reporting obligations can be challenging. Failure to meet these obligations may result in penalties, legal consequences, or regulatory scrutiny. The evolving legal and regulatory landscape increases the need for businesses to stay updated and ensure ongoing compliance.
Limited Access to Funding and Capital Markets
SPVs may face challenges in accessing funding or capital markets compared to traditional corporate entities. Some investors or lenders may perceive higher risks associated with SPVs due to their specific structure or purpose. Limited track record, market perception, or lack of transparency can impact the attractiveness of SPVs for funding or capital market transactions. Businesses utilising SPVs should consider alternative funding sources or explore strategies to address perceived risks.
Reputation and Public Perception
SPVs, especially when associated with complex business structures, can face negative perceptions and public scrutiny. The use of SPVs in certain industries or contexts has drawn attention and raised concerns about tax avoidance, financial secrecy, or unethical practices. Reputational risks may arise if the public perceives the use of SPVs as an attempt to evade obligations or exploit regulatory loopholes. Businesses should consider the potential impact on their reputation and take steps to mitigate any negative perception.
Lack of Flexibility and Exit Options
SPVs may have limitations in terms of flexibility and exit options. Once established, the structure and purpose of an SPV may be difficult to alter. Changing the ownership structure, transferring assets or liabilities, or unwinding an SPV can pose challenges. Exit options may be limited, and businesses should carefully consider the long-term implications and potential exit strategies before establishing an SPV.
In relation to property investing, SPV’s are incredibly popular and widely used.
Developers and builders have used them for years to ringfence each new project, protecting their other assets.
More recently individual buy to let investors have begun using Special Purpose Vehicle companies due to the personal restrictions in offsetting mortgage interest. SPV’s have no such restrictions, allowing them to offset 100% of the mortgage interest charged. This is a significant saving.
Nevertherless, it is wise to calculate how much an SPV arrangement might benefit you, before you jump on board.
Yes you can offset all of the loan interest. Yes the tax situation appears to be more favourable. But there are costs involved in running a limited company, along with a slightly higher mortgage cost. Ask your accountant to run some numbers and see how you fare.
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