BTL v Savings looking long term for child

Pipjo

What type of return would I then get on I.e. £15K?

I thought having the max amount Santander was the best rate?

"Now or never" applies yes to both tax and after this year I will not be able to get standard 25 years mortgage as too old next year.

bowlhead99

Pipjo wrote: »

What type of return would I then get on I.e. £15K?

I thought having the max amount Santander was the best rate?

It is the best rate for putting £20k in a single bank account and taking zero investment risk.

If you are willing to take investment risk over the next decade, as you would be doing by creating and running a single-asset property business, you should make more than 3% (at least going off historic averages). With a ten year timeline you would hopefully get 5-10% compound growth - inflation plus a few percent a year.

But it is not a fixed guaranteed return. Like investing in a property rental business, the returns of investment funds could be volatile and sometimes negative instead of positive, because they are driven by world stockmarkets as well as property markets and whatever else you chose to invest in...

As you mention, you have never heard of investment trusts, investment managers like F&C, investment blog sites like monevator etc. So you are a way away from being ready to dive in and pick a random set of funds to invest into for your child's future. But it strikes me that you are a way away from being a professional landlord as well, which is a riskier type of investment, so not something to jump into quickly as if it were truly 'now or never'. Your child is not going to be old enough for uni or whatever for another decade. Instead of investing tomorrow you could invest next month, next year, or the year after instead, once you've evaluated all the options.

The options are not just "stick it in one buy-to-let property and cross my fingers" or "leave it in the best paying bank account I can find and hope that I can always keep finding a bank account that pays a lot more than inflation"

It is not a coin toss between two options. Surely it is worth finding out what is out there, as it is your child's future you are considering.

"Now or never" applies yes to both tax and after this year I will not be able to get standard 25 years mortgage as too old next year.

So next year you could just do it with a 24 years mortgage instead, or am I missing something? Presumably if you can afford to pay off a repayment mortgage out of the rental income your ability to still have a job in 25 years is not the sole deciding factor on whether you would be able to get a BTL mortgage.

atush

Investment trusts are collective funds, in that they hold the shares of many other companies, sometimes hundreds of them. This mean if one company has a problem (such as BP after the oil spill) your investment doesn't fall 50%, because you have all those other companies in there that are unaffected.

They are companies, they just dont make/do anything. Their purpose is to buy shares in other companies and make a good return overall. They are bought and sold like shares, and can be held in ISAs, Jisas, pensions etc.

I too like the above poster invested in them for my 3 children, and they/we have used the funds to help pay for university expenses, and to set them up after they leave.

jimjames

Pipjo wrote: »

What is F&C? Never heard of these investment trusts? Do they carry risks being stocks and shares? How much interest do a 10 year plan pay? would 3% Child ISA be better?

F&C is a company that manage investment trusts and an investment trust is a just company that invests in other shares - very similar to a unit trust that you may have heard of.

There is risk involved - but then there is risk involved in BTL which you're considering too and seem happy with that. There is no guaranteed amount after 10 years and they pay dividends not interest. As they're investments you can't compare to a cash ISA which is guaranteed capital.

You can read more on www.monevator.com but you may also want to use Google on some of the terms mentioned so you can research and learn more about them.


You may also want to research more on BTL. There are some calcs they do for affordability that give the rent needed for mortgage and it's generally 125% of the mortgage amount per month but on higher interest rates. So your numbers may not even work out, worth checking that first.

MoneyEM

bowlhead99 wrote: »

If you buy a house for £100k after 6 April you will pay £3k of stamp duty taking the total cost to £103k.

If you then sell the house for £120k in ten years time, you can include the stamp duty in your costs when calculating your gain on disposal, so you would say £120k - £103k is £17k profit (instead of £120k - £100k is £20k profit), and have less tax to pay on the gain because the gain is smaller.

So in that sense, part of the stamp duty 'comes off tax' because if you had not paid stamp duty you would have made a bigger profit on disposal and therefore paid more tax.

But paying stamp duty does not affect the annual income tax you owe on the profits of your new property rental business. It is not an operating expense, just a one off capital cost which gets considered when you sell. The profits of that business that you have to pay tax on annually are your rental income less your expenses like agents fees and insurance and mortgage interest and wear and tear. If you are a high rate taxpayer there is a bit of a quirk that you can't claim the full amount of mortgage interest in calculating your profit, but assuming that with this new load of business profits you'll still be a basic rate taxpayer, it is relatively straightforward.

Of course, as others suggested, if you spend the money on investment funds or investment trusts inside S&S ISAs (you can put £15k in this tax year and the other £10k next tax year), you will be able to make income and gains completely tax free and have the investment portfolio grow over time. That way you would not have the risk that your eggs are all in one basket in a single residential property which could fall in value to wipe out your equity, or could be trashed by tenants, or could be empty for months at a time, etc etc.

If you have never been a professional landlord before it seems quite bizarre to say "it's now or never" when the only thing that changes in April is a new stamp duty of a few thousand pounds on the £100k or less that you're talking about and is tax deductible in a decade's time. Think carefully and do your research on how it will all work. I assume you're only going to buy a house worth about £100k at the very most, because you only have £25k which has to cover all your purchase fees and deposit and presumably leave a repairs and maintenance fund, and you won't be able to borrow more than about 75% of the house's value on a buy-to-let basis.

If BTL investors are scrambling now to put their offers in on houses before April to avoid the new stamp duty, you might find that actually the headline price of the houses comes down a bit in April because there is no longer so much demand, because of the additional closing costs that group of buyers would face after April.

I was also under the impression that the way BTL investors pay tax will also change from April? for example, currently (as to my understanding) the tax is paid on the profit after mortgage payments... so if you had taken £15k in rent, but had paid 5k in mortgage payments, you would be taxed on the remaining 10k. However, with the new law, i understand that this tax will be taken on the full £15k regardless of how much your mortgage payments may be.

jimjames

I think you're misunderstanding the change and when it happens. Probably a good idea to clarify before you base any decision on it.

bowlhead99

MoneyEM wrote: »

I was also under the impression that the way BTL investors pay tax will also change from April? for example, currently (as to my understanding) the tax is paid on the profit after mortgage payments... so if you had taken £15k in rent, but had paid 5k in mortgage payments, you would be taxed on the remaining 10k. However, with the new law, i understand that this tax will be taken on the full £15k regardless of how much your mortgage payments may be.

At the moment, BTL investors pay tax at their personal marginal rate of tax on the income from their business less the allowable expenses of their business.

'Mortgage payments' are not an allowable expense. Mortgage interest costs are an allowable expense.

So if you had taken £15k in rent, on which you owe tax at your 40% marginal rate, but had paid £5k in mortgage payments of which £3k was interest, and the £3k is fully allowable at your 40% marginal rate, you will end up with £4800 tax to pay out of your £10000 free cashflow

Going forward, the mortgage interest cost will not be an allowable expense that attracts tax relief at your marginal rate of 40% or 45% or 60% or whatever. You can just claim a flat 20% relief against it, equivalent to what a basic rate taxpayer would get, even though you are paying your high marginal rate on the income. So in the above example you would end up paying £5400 tax out of your £10,000 free cashflow. because you don't get a full credit against all your costs.

If you are just a basic rate taxpayer or are not paying much mortgage interest you won't see much change.

As jimjames says, if you have a BTL or are planning to get one, probably best to research how it works. If you're not, then I don't suppose it matters.

KNJ_2

Also consider interest rates are now low. Who knows where they will go in the future, but I remember paying 18% p.a. ( ouch...) If they start to move upwards the rent may not cover the costs of additional payments, and are you prepared to then pay that cost on top of your current expenditure?

atush

given the tax changes re BTL, I would be investing for children.