Buy a London Flat or an EIS/other investment?

mither_2

Hello All,

I would really appreciate some input on this. I have spent alot of time on this but it still seems like I'm missing something.



My situation
1. Own a house in Manchester and moved to north London for work purposes. Currently renting this out and renting a flat in NLondon. The Manchester house is tenanted until September 2016. The fixed rate mortgage expires in June 2016. As i see it this makes it more difficult to sell without incurring costs (braking the fix early and possibly getting a lower price when selling as the property is tenanted and so i'm a less flexible seller and BTL landlords may now be put off). Does it make sense to sell when the house is very easy to rent out and the sales market seems to be pretty flat? i.e. minimal gains in Manchester compared to London. The house is worth about £30k above the price I paid based on other proprty in the area. I have £110k left on the mortgage.
I rent the property out for £13k a year which is roughly a 7% yield before paying all of the various costs and then paying tax on the income.
Capital gains is possible but has been low compared to elswhere. 15% in 5 years vs 100% in London in 5 years?

2. If I buy a flat in London I will be hit with the additional 3% charge on second homeowners from April 2016. I have a budget of £300k for a flat which if i buy after this time will cost me an extra £9k in SDLT.

3. Looking around at what I could get for £300k and it seems that the London market must be overpriced? My view is that it is and could easily drop as BTL landlords sell up following the budget. Also if there is a Euro exit in 2017 demand will be reduced and overseas investors will be put off.

4. I have £70k for a deposit and if I sold my property this would be £170k. I have been offered a large mortgage on a flat here in London based on a £70k deposit.

5. I have the £70k deposited in various bank accounts and ISAs and earn almost nothing on it and so need to do something with it.

6. Since moving to London job last year I have paid a large amount in higher rate tax at 40% (the extra London salary mostly lost in tax and high rent costs so benefit minimal but thats another discussion)

I'm considering 3 options
1. Buying a cheapish property (£200k - £250k) in an an area not yet boomed (not easy to find North London) in value so much (usually a bit rough) in the hope that it will hold its value in the event of a property crash or if it does lose 10%-20% then the £ value of this will be lower than on an inflated property. If the market drops in 2017/18 then I can move on to another property.

2. Using the cash to substantiually pay down my Manchester mortgage. I'm paying 3.29% interest. If/when I go to remortageg the LTV will be down so i should be able to get a cheaper mortgage.
I'd have to continue paying £950 a month in rent in London.
I could then sell the Mancheter proerty in 1 or 2 years and buy a London property without paying


3. Investing the £70k in an EIS or other tax efficient investment so i can try and get back some of the 40% tax that I have been paying. I am prepared to take some risk. Based on the classifications I've seen I'd be a medimum risk investor.
I understand to get any tax benefits I'd need to leave the cash in there for 3 years. This is fine.

My job is fairly secure and I will retain some savings to carry me through any rough patches. I'm 34 with no kids at the moment so fairly flexible.


Leaving the £70k in cash at current interest rates is not a good option but what to do?

If anyone has any other suggestions then these would be appreciated.

Thanks

Mither

TheTracker

Sell the Manchester flat when you have enough funds, including the proceeds, to buy a London property? Avoids the extra duty.

EIS is high risk. That's why it holds the tax relief incentive. Typically one would first attack the 40% tax with pension contributions. If you need the money in a few years though EIS/VCT is a possibility but do recognise it is high not medium risk. It usually also comes with liquidity constraints that may matter to you.

Pincher

The second home stamp duty is a bit hazy right now.

Moneybox today on Radio 4 suggests you can probably sell the first property up to 18 months after you buy a second, London property, and get the extra stamp duty back. But nobody can guarantee this.

There might be a beat the stamp duty rush, so you end up paying more any way. Assuming this, it would tend to make sense to sell the Manchester flat before April, then buy in London when the stamp duty dampens the market.

It is rude to throw tenants out to sell.
It is really bad form to throw them out over Christmas.

chucknorris

I don't think that VCT's, EIS's and SEIS's are for me, despite the tax benefits, my first impression is that I'd rather invest in something far less risky and with much lower fees. But I am still looking at them, but I wouldn't want to invest in something purely for the tax incentive.

mither_2

Hi all,

Thanks for the input. Much appreciated. Think I need to do some more research.

The new stamp duty rules do seem a little hazy. I can imagine there would be some flexibility. The moneybox point raised above makes sense. I think my situation is an unintended consequence of the government's plan to cut down down on the people who own multiple properties.

There needs to be some flexibility to avoid a boom followed by a slump right?

No intention of asking tenants to leave before xmas and can likely wait until next Spetmber when the tenancy expires or possibly sell with tenants in place. The tenants are 3 working young professionals in their mid 20s. I would assume a potential buyer would be OK with such tenants? Any BTL landlord may be put off by the higher stamp duty though. Even if I wanted to sell this is manchester, not London and so could take 6 months to sell.

Understood regarding EIS etc. I know some people who have done well from it but they knew the investment that they were putting cash into well. I think I need to research more before considering anything. There are a few renewables energy projects that are advertising that they will receive EIS relief but I have little confidence in them to deliver the projects in time to receive the subsidies that make them viable.

Perhaps one for another thread but do people expect the BTL introduction to dampen demand. I will be following the market very close in the next few weeks. There may be an opportunity to play on the sellers fears of a slump and actually suppress prices before April if buyer is able to move quickly?

Thanks again