A plan for windfall.

ikorodu

Hello all,

The wife and I are likely to see a large cash windfall (400k) shortly and we've had various ideas as to what to do with it.

I'm a 40% tax payer, my wife pays no tax. No debt other than mortgage.

Here's the current plan

1. Pay off mortgage (£90k approx)
2. Purchase a couple properties to rent out (£150k)
3. Put £30k in a high interest current a/c (123?) as emergency fund.
4. Some investments?

Any advice on the plan would be great, as would advice on suitable investments. Got no real idea on investments, I know we'd want to look a low to medium risk where you could get the money out relatively quickly if needed.

TIA

ikorodu

traineepensioner

"
1. Pay off mortgage (£90k approx)
2. Purchase a couple properties to rent out (£150k)
3. Put £30k in a high interest current a/c (123?) as emergency fund.
4. Some investments?
I know we'd want to look a low to medium risk where you could get the money out relatively quickly if needed."
...I think that would rule out option 2 and investments in equities.

You could open 3 Santander accounts between you & your wife (one each & one joint). That would give you 3% on £60,000.:)

Paying off the mortgage would save you the mortgage interest and leave you more cash each month...to invest or spend as you wish.

As a high taxpayer, are you making the most of your ISA allowance each year?
Are you both making the most of the tax relief & employer contributions to your pensions?

Archi_Bald

What are your pension arrangements?

ikorodu

traineepensioner wrote: »

"
1. Pay off mortgage (£90k approx)
2. Purchase a couple properties to rent out (£150k)
3. Put £30k in a high interest current a/c (123?) as emergency fund.
4. Some investments?
I know we'd want to look a low to medium risk where you could get the money out relatively quickly if needed."
...I think that would rule out option 2 and investments in equities.

You could open 3 Santander accounts between you & your wife (one each & one joint). That would give you 3% on £60,000.:)

Paying off the mortgage would save you the mortgage interest and leave you more cash each month...to invest or spend as you wish.

As a high taxpayer, are you making the most of your ISA allowance each year?
Are you both making the most of the tax relief & employer contributions to your pensions?

I've not really made myself clear. My reference to low/medium risk and getting money out quick was in reference to number 4, as number 2 is the higher risk longer term lock in.

The 3 off 123 accounts is a good idea.

I pay a small amount into a company scheme where the company put in 7%. Mrs is not employed and has no current pension.

I have £5k in an isa (nsi) but most isa seem to have very low rates at the mo.

Thanks for all the advice so far. More would be gratefully received.

PeacefulWaters

Stakeholder pension for the non-earner as an absolute starter.

ikorodu

PeacefulWaters wrote: »

Stakeholder pension for the non-earner as an absolute starter.

Thats not something we've considered . What's the benefit of saving in a pension for a non taxpayer? Would the recent rule changes mean that Mrs could get all the money out at 54 ?

jamesd

Any person who is not working can pay money into a pension and get basic rate tax relief on up to £3600 gross of pension contributions a year. If you are not using pension contributions for your one higher rate income it is better to do that instead of having the money go into a pension for the spouse. That's because there is likely to be a better gain from use of your pension than theirs and the lump sum from your pension can be transferred to them later, exploiting the higher tax relief you had. The rules changes have not reduced the minimum pension access age from 55 to 54. the proposed rules will allow withdrawing all of the pension capital at 55. the first 25% will be tax free. The remainder is added to normal taxable income in the years in which it is taken. This can mean tax rates for nothing to 45% depending on how much it is.

Your buy to let planning seems poor, particularly the financing side. Interest on a mortgage taken out for a business use is deductible from income. The property that the mortgage is secured on is irrelevant to getting this tax relief. Interest rates and fees on residential mortgages are lower than on BTL mortgages. What this means is that for the same amount of money being borrowed it is cheaper to use a mortgage on your own home than on the property that is being let.

However, you cannot just say that the existing £90,000 balance on your mortgage is now for the BTL business. You must arrange some drawing of capital that can be seen to be for that purpose. If your mortgage is a flexible one that allows it one way to do so would be to pay down much of the mortgage than later withdraw the money and perhaps more again to fund the BTL property purchases as you make them. You should discuss this with an accountant who is familiar with BTL financing to ensure that they agree that the particular combination of events will meet HMRC's requirements, since it is possible to get it wrong.

Your plan to use only two properties that you own outright is poor. It has little diversification. You really should have more properties and borrowing via mortgages is the way to achieve that.

Your spouse can be the owner of the properties or at least some of them to exploit their lower income tax bracket. The net of rental income minus permitted mortgage interest deduction minus costs is taxable as income.

So far as other investments go it's really hard to beat pension contributions, particularly for a 40% income tax payer who pays in their 40% taxed income. This is even more true for a person who is 55 or will be in a few years, since it eliminates the lack of access disadvantage of a pension, particularly once 100% access to the pension pot at 55 is permitted with no minimum guaranteed income requirement.

You also have the income and capital to possibly consider some limited VCT use but your limited experience with investments suggests that you should probably not do this until you have more experience. VCTs offer 30% income tax relief that has to be repaid if they are sold within five years and income is tax free for as long as they are held. The initial relief is capped at the actual income tax paid in the year. It can be interesting for those who have capital to eliminate their income tax bill by using a combination of pension contributions for higher rate income and VCT purchases for basic rate income. A bit over £20,000 of VCT purchase would eliminate all of the basic rate income tax liability. VCT tax relief can be delivered via a tax code adjustment for those in PAYE employment if a request is made to HMRC, else it's done via the tax return and refund process.

ikorodu

54 came from fat fingers and posting on an iPhone!

VCTs; you are right that it is a step too far for us at the moment. The tax implications are interesting but I feel that we need a bit more experience first.

I agree about the number of BTL properties and that using mortgages would be a better approach. I need to convince my better half that this is the lower risk option as one is spreading the risk, but currently she sees it as taking on more debt.

The use of our existing mortgate for funding BTL is a new idea to me. I'll look into it further. We are currently on a fixed 2.44% for the next 4.5 years but I don't think it's very flexible but as I say I'll look in to it.

The idea of being mortgage free is a seductive one but I suppose that an investment that gives more than 2.44% net would be a better option than paying off the mortgage?

I'll certainly be increasing my pension payments to take advantage of the tax relief

Finally thanks for the comprehensive reply. I found it most useful.

jamesd

The mortgaging would be taking on more debt, with the purpose of reducing risk and increasing income. So she's right about the debt part.

You probably can't change the existing 2.44% without paying an early repayment fee but depending on LTV you might be able to add more on a tracker deal if the lender agrees. Otherwise you can use BTL mortgages instead. You'll need 60% or lower LTV for most BTL mortgages, though there are a small number available above that at significantly higher cost.

Yes, either a conventional investment or BTL can be expected to beat a 2.44% mortgage cost.