Buying a Limited Company with a Special Purpose Vehicle (SPV) is a must. There are three key reasons:
- You can lend your initial consideration to the SPV without incurring tax
- Not using an SPV could put your other assets at risk
- You can pass any finance to the SPV, again without paying tax
Lending to Purchase the Business
Firstly, let’s delve deeper into the tax benefits of using an SPV for business acquisitions. While taxes may not be the most exciting topic, they can significantly impact your bottom line. Consider this scenario: you’re ready to invest £500k in acquiring a business. If you proceed directly, that’s a straightforward £500k expense, with potential tax implications down the line.
However, by leveraging an SPV, you can adopt a more tax-efficient approach. Instead of deploying your funds directly, you extend a loan to the SPV. This establishes a debtor-creditor relationship, offering several tax advantages. Firstly, you become eligible to claim relief on the interest charged, allowing you to accrue interest income without incurring dividend tax or national insurance contributions.
Furthermore, as the acquired business begins to generate profits or release cash from its assets, these funds can be passed on to the SPV tax-free. Ultimately, this tax-efficient structure enables you to maximise your returns while minimising your tax liabilities.
Reducing Risk on other Assets you own
Beyond tax considerations, utilising an SPV for business acquisitions also offers significant advantages in terms of risk management. Acquiring a business involves inherent risks, including undisclosed liabilities or discrepancies in financial performance.
Without the protection of an SPV, your personal assets could be exposed to these risks. However, by structuring the acquisition through an SPV, your liability is limited to the assets held within the entity. T
his creates a vital layer of protection, shielding your personal assets from potential adverse contingencies. Additionally, incorporating appropriate indemnities or guarantees within the acquisition agreement further mitigates risk, ensuring a more secure transaction.
Passing Finance through the SPV
The strategic use of an SPV facilitates enhances financial flexibility and structuring options. In acquisitions involving deferred consideration, vendor finance, or funds released from the target company’s balance sheet, channelling these financial instruments through an SPV offers several advantages.
By directing these funds to the SPV, either as dividends or a loan, you can avoid triggering tax liabilities that would arise if the funds were received by you directly. This not only optimises the overall tax position but also enables more efficient cash flow management and transaction structuring.
Summary
Employing an SPV for business acquisitions offers a multifaceted array of benefits. From tax optimisation and risk mitigation to enhanced financial flexibility. The strategic use of an SPV provides a robust framework for executing successful acquisitions. By leveraging the tax advantages, mitigating risks, and maximising financial flexibility offered by an SPV, you can enhance the overall success and profitability of your business acquisitions..
