1 million to invest

atush

I would strongly suggest you take it easy on the BTL thing. As you appear to be novices and not in the bulding trade (although you may have frends and family in it). The best profits from this route tend to be cheaper properties, sometimes bought at auction which are then improved before being let. This provides the best yield, and the most capital profits. But can be a minefield for the unwary who don't research the area, the rents, have good links to professionals to do the work, and for those who don't read all the legal packs/get in a surveyor.

But it could be worthwhile to do if you start small ie with one property. Only looking at buying others once the previous one is let sucessfully. And only if your wife (like me) would be interested in doing this. Can be easier to do once you have for instance, built and renovated your own property as we did.

It seems you will be continuing to work, so proportionally more of the investments should be in your wife's name to reduce tax, all of you should have pensions, cahs and S&S Isas too (ncl the kids). And if you find your income is getting close to or above HRTax, then increase pension contribs.

jamesd

jamesd wrote: »

If you do go for a new property to live in, do consider using investments that will produce an income that pays the mortgage and more instead of buying with cash. That should leave you with a profit compared to buying outright.

MarcoM wrote: »

Am I right in saying that this is a good thing to do now because of the low interest rates or is this tactic good regardless of the interest rates?

It depends on the difference between mortgage interest rates and investment returns. In practice investment returns are almost always sufficiently above mortgage rates over the long term that it will pay off.

MarcoM wrote: »

Also am i right in saying that the OP would be better with an interest only mortgage on his own house rather than a repayment one? I was always told to have repayment on your own home and interest on BTL but maybe this has changed.

Interest only is always better in pure financial terms because of that higher investment than mortgage interest rate difference.

However, people have different risk tolerances, so some people won't be comfortable doing that. There are a couple of cases:

1. Mortgage on repayment basis and paid by investment income: something of a middle ground, you start off with roughly enough capital that you could clear the mortgage from day one if you wanted to, you just recognise the better return from investments and use the income to pay it and take a profit instead of paying cash.

2. Mortgage on interest only basis and some repayment vehicle for your own property. Here you can do things like also exploiting pension tax relief to effectively get tax relief on your equity purchase. The pension tax relief can be particularly efficient for a 40% tax payer. Here's an example ignoring any investment growth.

Pay in £10,000 in a year.
Get £2,500 in tax relief added.
HMRC refunds £2,500 via income tax claim.
Pension pot now has £12,500 in it that cost only net £7,500 to put in there.
Take a 25% lump sum from age 55, that's £3,125 off the property capital.
Leaves £9,375 in the pension to produce ongoing income.

The main limitation is the need to pay in a bit over twice as much as the capital you want repaid, if ignoring investment growth. There's also the absolute maximum of capital that can be paid off this way because of the £1.5 million pension lifetime allowance, which caps you at no more than £375,000 or lump sum to clear a mortgage, if you accumulated the 1.5 million.

Then you add investment returns and the numbers start to look even more attractive. It's why I have an interest only mortgage even though I have ample money in savings and investments to clear it whenever I like. It's just more efficient for me to use the pension since I also want to be increasing the money in my pension pot.

gadgetmind wrote: »

I'm sure that's a perfectly good fund, but anything that generates income would need to be held in pension or ISA and the OP will have to drip-feed into these vehicles. (Well, he might be able to slam some into pension(s) but I guess he's looking at that.)

Not necessarily. Two reasons:

1. You're forgetting the investment bond tax wrapper that allows 5% of the capital to be withdrawn free of income tax each year, with any unused allowance able to be used in later years. The values here are easily sufficient to make considering this worthwhile and income-producing investments are where investment bonds are most likely to be a good solution.

2. Unwrapped 6-8% isn't too bad, though definitely not ideal.

It is definitely preferable to have the investment income produced from say an ISA but that will take a while to arrange even with two allowances per year allowing say £100k per five years to be moved into it. It's OK to take a while to make the income tax free since this is long term planning and there's ample capital available.

Property income can be paid via dividends and that may be sufficiently efficient already.

gadgetmind wrote: »

We then sell enough per annum to use our capital gains allowances, move as much as we can into ISAs, and re-invest the rest. Meanwhile, we also have dividend income, which is currently being re-invested, but we will enjoy as a tax-free income stream in retirement.

That's a good plan IMO, just takes a while to arrange starting from zero with a million Pounds.

gadgetmind wrote: »

I keep looking at BTL, and have read several books on the subject, but it all looks too much like hard work given the likely return, and I hate the idea of holding such large and illiquid assets that will cause future capital gains headaches.

BTL really depends a lot on the tenants. My landlord is clearly happy since I've had the same one for some six years and no rent increases. I introduced myself to him by explaining my tenant philosophy: "keep the money coming and don't bug the landlord" and that's exactly what most landlords want. But some tenants can certainly be a lot of trouble. Here it may serve a useful additional purpose for the wife.

A single BTL property has quite a lot of overhead but when you get say ten or twenty there's a fair bit of economy of scale and perhaps £5,000 to £10,000 of rental per month, ignoring voids. Mortgages will initially use up around 80% of that. Capital gains tax is payable but with a fair number of properties and properties of modest per-property value it's not too bad. Say if outside a company and the properties were jointly owned that's over £20,000 in gain tax free if you do one sale per year. And since transfers between spouses are tax free the proportion owned by each could be adjusted to keep things at the lower CGT rate. Also needs to be considered how this works if the properties are held within a company, which is likely to be the best route for scale. Really something that takes a discussion in advance with an accountant familiar with BTL and BTL companies so things can be set up correctly from the start. The ages here also make CGT less important since there are many, many decades of income to take.

Fella

10 or 20 properties with a 25% deposit on each is a very highly geared position. If house prices drop 25% you lose everything.

gadgetmind

jamesd wrote: »

1. You're forgetting the investment bond tax wrapper that allows 5% of the capital to be withdrawn free of income tax each year, with any unused allowance able to be used in later years. The values here are easily sufficient to make considering this worthwhile and income-producing investments are where investment bonds are most likely to be a good solution.

I probably need to start a new thread regards investment bonds as I've read a few pages from providers of them and they seem somewhat complex and it looks like the tax catches up with you in the end.

MarcoM

Jamesd,

Your numbers make a lot of sense. I wonder if I am doing wrong by having my house already paid for and not raising a mortgage on it and invest the proceeds into these products you mention.

From what you are telling us it would appear that a low risk approach (ie. paying your property off) is a losers one.

jamesd

Fella wrote: »

10 or 20 properties with a 25% deposit on each is a very highly geared position. If house prices drop 25% you lose everything.

Only if you choose or are forced to sell and these are typically long term investments for many decades, with long run average increases of 8% or so a year.

25% deposit is only 4:1 gearing, not particularly high. Compare to say 10% deposits and 10:1 gearing. Also note the total amount of capital available in this case and its possible liquidity should there be some requirement for capital, so there's relatively little prospect of forced sales.

There's also the very common BTL practice of buying properties that need refurbishment to get a quick increase in value and reduce the potential for negative equity significantly.

gadgetmind wrote: »

I probably need to start a new thread regards investment bonds as I've read a few pages from providers of them and they seem somewhat complex and it looks like the tax catches up with you in the end.

Not that complex, just something else to learn about. Eventually there will be tax to pay but that's arranged to happen at time when the tax rates are reduced. The typical 20 plus year term for planning makes that fairly straightforward in many cases.

It's still possible that an insurance bond wrapper won't be appropriate, just an option that needs to be considered.

For others, insurance bonds are just like ISAs and pensions, something in which you hold investments and which have rules on how much can be taken out and when tax gets paid. They are usually less good than S&S ISAs but can be of use for inheritance tax, means testing, people who may move abroad, those who are higher rate tax payers who will later be basic rate or where moving the money into other things would take too long to be practical.

MarcoM wrote: »

Your numbers make a lot of sense. I wonder if I am doing wrong by having my house already paid for and not raising a mortgage on it and invest the proceeds into these products you mention.

Maybe. If you do that, do consider an offset mortgage so that if you do find a period of higher mortgage rates than investment returns you can eliminate the mortgage interest.

MarcoM wrote: »

From what you are telling us it would appear that a low risk approach (ie. paying your property off) is a losers one.

It is if you look at pure cost. But it's a safe one and that's preferable for many people. Or even for some of the money of people with higher risk tolerances. There aren't that many people who, after paying off a mortgage, would then go and take one out again, even though all that does is put them into the position of any person with an interest only mortgage. If you are tempted, you might consider no more than 50% of equity until the value of investments has accumulated a generous safety margin. Unless you already have a very generous safety margin. My non-pension savings and investments are currently something like 1.5 times the outstanding mortgage value so the chances of me having to make a forced sale in a depressed market aren't high. But not zero.

You do need to consider what Fella hinted at, what happens if things go wrong and you need the money at a time when prices for property are low? Being a forced seller is bad and if you have to sell your own home you'd be suffering already but you might suffer also because of loss of property value.

Where it can really pay off quickly and extremely well is with a higher rate tax payer who is 55. Or basic rate using salary sacrifice to get 32%+ tax relief. Such people can take out the mortgage, pay lots of money into a pension quickly (subject to the pension limits) and also rapidly clear the mortgage. How rapidly depends on how big it is. And of course you can plan a few years in advance to set things up to clear at 55.

If you are around this sort of age there's not even a need to take any investment risk, you can just use the tax relief and savings accounts within the pension for the 25%.

You do still then need to take some sort of investment risk within the pension for the retirement part, but the house buying part can be about as safe as you can get.

longleggedhair

If you believe he has a million you will believe anything!

gadgetmind

longleggedhair wrote: »

If you believe he has a million you will believe anything!

A million used to be a real fortune, but the printing presses have been running pretty quickly over recent decades/years and it's now a fairly modest retirement pot.

Deru

longleggedhair wrote: »

If you believe he has a million you will believe anything!

Why can't someone have a million? It's not exactly far fetched. Now if he said a billion, that's a bit different.

longleggedhair

gadgetmind wrote: »

A million used to be a real fortune, but the printing presses have been running pretty quickly over recent decades/years and it's now a fairly modest retirement pot.

Yes quite true, although its becoming a more frequent occurance people on the forum claiming to have untold fortunes, although perhaps im getting cynical in my old age!