Interest rates

[2into1]

And yes, if you have rental properties you can mortgage them even if you have little other income than your rent.

I'm not sure that is still true. MAYBE I could use the rental income from other BTLs to shore up the risk on the one I sought to mortgage, but I still think lenders are insisting there is enough regular, salaried income to cover mortgage costs. My non property income is neither regular, salaried (or significant!) so I think I'd be paying higher rates if I did decide to leverage my rentals.

 

[Amarillo]

Alternatively of course you could set up a limited company with assets from alll four of you, a dividend structure that makes use of their tax free status, and invest in properties.

On the day you and dad expire, the company is untroubled by IHT.

Definitely tax efficient but a whole new level of complex.

We discussed exactly that with a financial advisor about seven years ago. We decided then the benefits would be marginal. Today there would be a lot of CGT to pay if we were to go that route.

 

[willwander]

I tend to side with Amarillo on this. Not withstanding the risks that you pose, it can easily go wrong if you take your eye off the ball.

For me, I do the 100% thing, I’m lazy. But I’m acutely aware that the majority of successful wealthy companies leverage debt in order maximise their capital assets. If it works for them it certainly works for landlords.

But “property is theft” right?

 

[Amarillo]

I'm not sure that is still true. MAYBE I could use the rental income from other BTLs to shore up the risk on the one I sought to mortgage, but I still think lenders are insisting there is enough regular, salaried income to cover mortgage costs. My non property income is neither regular, salaried (or significant!) so I think I'd be paying higher rates if I did decide to leverage my rentals.

I spoke to a broker about this back in August, and he was confident that I'd be able to remortgage on the strength of my rental income alone. Of course much has changed since the Black Swan event of Truss's short tenure as Prime Minister.

How sweet it would have been if I had secured five 60% mortgages, fixed for five years, at 0.5% back then... We can dream. But five mortgages was not my intention back then. It was ramping up with one new five year 60% mortgage every year for five years. And that is more or less what I am considering again now.

Just for completeness, we are not completely mortgage free now. We have five BTL flats each worth about £300,000, with mortgages of £zero, £zero, £60,000, £70,000 and £80,000.

 

[The Tall Luthier]

We discussed exactly that with a financial advisor about seven years ago. We decided then the benefits would be marginal. Today there would be a lot of CGT to pay if we were to go that route.

wouldn’t that be offset by all the tax savings you make from repaying the directors loan account every year?
Especially in a market where cG will be low

 

[Amarillo]

wouldn’t that be offset by all the tax savings you make from repaying the directors loan account every year?
Especially in a market where cG will be low

I don’t know. I will investigate again but the CGT bill would be considerable if we sold the five flats to a limited company now.

 

[Amarillo]

I'm not sure that is still true. MAYBE I could use the rental income from other BTLs to shore up the risk on the one I sought to mortgage, but I still think lenders are insisting there is enough regular, salaried income to cover mortgage costs. My non property income is neither regular, salaried (or significant!) so I think I'd be paying higher rates if I did decide to leverage my rentals.

There's a brief guide on how to release equity from a BTL here.

Buy to Let Equity Release - Expert Mortgage Advisor

If you own a buy to let, equity release can allow you to access capital in the property. Using assets for financial leverage is a common strategy to expand property portfolios. Furthermore, you may choose to release equity for a number of other reasons. There are many strategies that landlords...

www.expertmortgageadvisor.co.uk

 

[The Tall Luthier]

I don’t know. I will investigate again but the CGT bill would be considerable if we sold the five flats to a limited company now.

Agreed. Plus the stamp duty makes it an expensive venture. Once done though you’ve dodged a bigger bullet.

Obviously you can control the sale price, to a point.

From an IHT point of view it will be near impossible to avoid the CGT as it only takes effect on sale of assets.

 

[The Tall Luthier]

I don’t know. I will investigate again but the CGT bill would be considerable if we sold the five flats to a limited company now.

I don’t know whether this would apply to an individual, perhaps if you were offloading your whole portfolio and you could make a strong case that it was your business.

It’s like capital gains tax relief but for Tories. Hence tax rates are pathetically low.

Capital Gains Tax Entrepreneurs’ Relief - reduction in the lifetime limit

www.gov.uk

 

[CLTB]

Not quite. But so long as a BTL property keeps rising in value, it is possible for the owner to repeatedly take equity out of the property tax free.

It is something I am contemplating doing, but it is not without risk.

But I would not spend the money as you suggest I would, but invest the money and spend the dividends of those secondary investments.

In essence, I’d keep 40% equity in my BTL portfolio and 60% of the portfolio’s value in shares.

That would give me four passive income sources.
1. Rent - taxed normally
2. Share dividends - 8.75% tax
3. Property price inflation - tax free
4. Share price inflation - CGT

I’d have to pay hefty mortgage interest - this is a known cost over a five year period, so the greatest risk to me would be share yield being lower than 80% of the mortgage interest rate.

As I understand it you have to be careful with this approach as one you have returned your original capital the tax relief on mortgage interest is restricted. Been a very long time since I looked at this but when you have an ‘overdrawn capital account’ in a property business and the funds were used for private purposes the mortgage interest relief is restricted

 

[Mansfieldman750]

So your exit strategy for getting rid of your heavily mortgaged rentals is to drop dead to save a bit of tax.

Extreme exiting

 

[Mansfieldman750]

No one suggests that the strategy is risk free. But I suggest now that the strategy of splitting your money 40% property 60% stock market is lower risk than 100% property. This is because a drop in the value of stocks and property is less likely than a drop in the value of stocks or property.

So what we’re talking about here is a rebalancing of assets. Move some money out of property and into equities.
I agree with that strategy. But you would be doing it on margin ie you would be borrowing more at 4.79 % ( less tax relief ) to invest in shares. That’s a powerful headwind. The dividend yield on a FTSE 100 tracker is under 4%.
I think ( warning I am not an IFA ) you are overexposed to the property market and you need to extricate yourself from the buy to lets as best you can.
You are in your fifties, 30 years or more to go. Time is on your side. The house you will be retiring to is enough exposure to property. Stick your money in Vanguard 100% equities trackers, after 10 years move to a 80/20 Life Strategy tracker, and after another 10 years 60/40.
Obviously max out your Stocks and Shares ISA‘s every year and you’ll never pay a penny in tax.
Take advice from a proper IFA but if he tells you not to use trackers but go with the latest star fund manager instead, run a mile.
Good luck, whatever you decide.

 

[Velma's Dad]

Take advice from a proper IFA but if he tells you not to use trackers but go with the latest star fund manager instead, run a mile.

But “it is difficult to get a man to understand something, when his salary depends on his not understanding it.”

 

[Mansfieldman750]

But “it is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Very true. Remember Woodford, Anthony Bolton, Scottish Mortgage Investment Trust.
Reversion to the mean. It’s a very powerful magnet that draws them all back in. Oh and Terry Smith, forgot him.

 

[Amarillo]

So what we’re talking about here is a rebalancing of assets. Move some money out of property and into equities.
I agree with that strategy. But you would be doing it on margin ie you would be borrowing more at 4.79 % ( less tax relief ) to invest in shares. That’s a powerful headwind. The dividend yield on a FTSE 100 tracker is under 4%.
I think ( warning I am not an IFA ) you are overexposed to the property market and you need to extricate yourself from the buy to lets as best you can.
You are in your fifties, 30 years or more to go. Time is on your side. The house you will be retiring to is enough exposure to property. Stick your money in Vanguard 100% equities trackers, after 10 years move to a 80/20 Life Strategy tracker, and after another 10 years 60/40.
Obviously max out your Stocks and Shares ISA‘s every year and you’ll never pay a penny in tax.
Take advice from a proper IFA but if he tells you not to use trackers but go with the latest star fund manager instead, run a mile.
Good luck, whatever you decide.

Lots of good advice there.

FTSE long term dividend yield is 3.55%.

What has impressed me is that my boys’ JISAs which are invested in:
UK tracker
US tracker
Japan tracker
Europe (ex UK) tracker
Pacific (ex Japan) tracker
Emerging markets tracker
All accumulation funds, have achieved to date 7.88% annualised return (24.82% total return).

It is an idea I have to diversify relatively rapidly (at the moment I hold no shares in my name other than 600 P&O B shares).

At the end of October this year we need to remortgage from a 2.19% fixed rate. We can repay much of that debt, but we could invest in trackers like we do with our sons or we could increase the mortgages and invest more in trackers.

No decision has been taken. But I am impressed with the growth I have achieved for my boys.

 

[Mansfieldman750]

People can argue all day long about which is best, property or equities.
The big advantage equities have is liquidity.
If you need to raise money in a hurry for whatever reason, selling shares takes a fraction of a second. Selling a house takes a bit longer and a lot of expense.

 

[yossarian]

People can argue all day long about which is best, property or equities.
The big advantage equities have is liquidity.
If you need to raise money in a hurry for whatever reason, selling shares takes a fraction of a second. Selling a house takes a bit longer and a lot of expense.

And you can sell the exact amount of equities you need to achieve your goal.

 

[Amarillo]

People can argue all day long about which is best, property or equities.
The big advantage equities have is liquidity.
If you need to raise money in a hurry for whatever reason, selling shares takes a fraction of a second. Selling a house takes a bit longer and a lot of expense.

It is easier and cheaper to borrow money to buy property.

It is easier and cheaper to borrow money using property as collateral.

 

[Mansfieldman750]

And you can sell the exact amount of equities you need to achieve your goal.

Exactly. We have a California on PCP At 2.8% interest.
When the CFP ( crippling final payment ) comes due then we’ll sell some shares.
Can get a settlement figure and do it anytime but as the yield on trackers is greater than 2.8% it would be a bit daft.

 

[Mansfieldman750]

It is easier and cheaper to borrow money to buy property.

It is easier and cheaper to borrow money using property as collateral.

It was cheap for the last decade. It’s not cheap and easy now

 

[Amarillo]

It was cheap for the last decade. It’s not cheap and easy now

I expect it will still be cheaper to borrow say £100,000 against property than against shares.

 

[NessL]

Lots of good advice there.

FTSE long term dividend yield is 3.55%.

What has impressed me is that my boys’ JISAs which are invested in:
UK tracker
US tracker
Japan tracker
Europe (ex UK) tracker
Pacific (ex Japan) tracker
Emerging markets tracker
All accumulation funds, have achieved to date 7.88% annualised return (24.82% total return).

It is an idea I have to diversify relatively rapidly (at the moment I hold no shares in my name other than 600 P&O B shares).

At the end of October this year we need to remortgage from a 2.19% fixed rate. We can repay much of that debt, but we could invest in trackers like we do with our sons or we could increase the mortgages and invest more in trackers.

No decision has been taken. But I am impressed with the growth I have achieved for my boys.

Perhaps, given that you’ve made so much money from these properties over the last few years, you could wait for one of your tenants to move out if you want to sell. After all, it’s your investment, but it’s their home.

 

[Amarillo]

Perhaps, given that you’ve made so much money from these properties over the last few years, you could wait for one of your tenants to move out if you want to sell. After all, it’s your investment, but it’s their home.

Purchase £132,500
Sale £295,000 (estimate)
Fees etc £10,000 (estimate)
Profit £152,500 (estimate)
Tax £42,700 (estimate)

The fees and tax would sting too much.

I think we will hang onto the five flats until the day I die (and probably both).

When I come to remortgage in October, I will take out a bigger loan on the most expensive of our three mortgaged flats, and use the excess to repay the mortgages on the other two mortgaged flats. (I already have verbal confirmation from my current lender that they will allow this.)

We will then put any excess money we have each year into ISAs, up to £40,000 per year, instead of repaying mortgage capital, and keep paying the interest on the one BTL mortgage we will still have, probably around £840 per month for the 5 years after remortgaging in October.

 

[Mansfieldman750]

But “it is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Sorry folks, I’m just going off topic for a few seconds then we can get back to that concept of how borrowing large sums of money at high interest rates will result in great riches.

That quotation. I almost never bothered to check who said it as I thought it was bound to be Dr Johnson. Upton Sinclair. An American to boot.
You are clearly a literary man with a gift for a well placed quote.
How about starting a new thread called “ Good Reads “ or something like that with your recommendations. I’m often stuck for a good book when I’m away in the van.

 

[The Tall Luthier]

Purchase £132,500
Sale £295,000 (estimate)
Fees etc £10,000 (estimate)
Profit £152,500 (estimate)
Tax £42,700 (estimate)

The fees and tax would sting too much.

I think we will hang onto the five flats until the day I die (and probably both).

When I come to remortgage in October, I will take out a bigger loan on the most expensive of our three mortgaged flats, and use the excess to repay the mortgages on the other two mortgaged flats. (I already have verbal confirmation from my current lender that they will allow this.)

We will then put any excess money we have each year into ISAs, up to £40,000 per year, instead of repaying mortgage capital, and keep paying the interest on the one BTL mortgage we will still have, probably around £840 per month for the 5 years after remortgaging in October.

If you are keeping them till the day you die then:

Sale £295,000 (estimate)
Inheritance Tax £120,000 (estimate)
But no capital gains I think.

and of course, the kids get nothing until they pay the tax. So they have to pay the tax, then sell the flats, then repay the massive bridging loan they took out to pay the tax.

Personally, I'd look at protecting all of those clever investment decisions you are making for the long term.