No money down portfolio

Pincher

The Nirvana of Buy To Let was the no money down scenario.
Effectively the 100% mortgage.

So, you buy a house for £200k, putting down £50k cash, and borrow £150k. A few years later, the house is worth £300k, so you get a Buy To Let mortgage for £200k, releasing the £50k cash you put in in the beginning. This is now the no money down scenario, and the interest on £200k was fully deductible against rental income.

I achieved this about 15 years ago, and the whole thing became self sustaining, with the rent paying for all the expenses, and still produced rental income. The capital gains was building up nicely, but the money was inaccessible without selling the property.

I am toying with the idea of building a No Money Down Portfolio,
which is a standalone little vessel that containing no seed capital, but just carries on growing.

Ideally, I want to attract tax relief, to replicate the mortgage interest tax relief effect, but I can't take the seed money out from a pension pot, well, only the 25% lump sum.

Another aspect is the leverage through borrowing. Ideally, I would have liked to borrow £600k, from Atom, at 1.2%, then put it into say Vanguard Lifestyle 100, leave it for five years, then pay Atom back.

There's a rather useful variation, to reduce inheritance tax.

The parent gifts a £1million house, not main residence, to a child.
The parent then BUYS the house back with a £600k mortgage, 60% LTV 1.2% Atom deal (now withdrawn). The child buys £600k worth of Vanguard Lifestyle, which generates annual income. The child "lends" the parent the money to pay the monthly mortgage instalment. The parent builds up the debt, which further reduces the estate.

I expect no lender will go for it, despite the fact that the loan is only 60% LTV. Otherwise a pretty sweet tax saving scheme.

MisterMotivated

Pincher wrote: »

There's a rather useful variation, to reduce inheritance tax.

The parent gifts a £1million house, not main residence, to a child.

I'm not an expert on IHT but, if the parent dies within 7 years of gifting the house, surely it would still have an impact from a deprivation of assets perspective, even if the house was "sold" back to the parent.

The parent then BUYS the house back with a £600k mortgage, 60% LTV 1.2% Atom deal (now withdrawn). The child buys £600k worth of Vanguard Lifestyle, which generates annual income.

Presumably this £1 million house wouldn't be the child's main residence either, so wouldn't they be liable for CGT upon selling it back to the parent? Also, to buy the house back, the parents would need a spare £400k to give to the child, even if it was given back to them at a later date.

The child "lends" the parent the money to pay the monthly mortgage instalment. The parent builds up the debt, which further reduces the estate.

But at the same time, any money that would've been spent by the parents on the mortgage will be saved, thus increasing the estate by the same amount.

If purely to avoid IHT, why doesn't the parent just remortgage the house and gift the child £600k (or gift the house and let the child remortgage it) with the hope of living at least 7 more years?

Although you say it's a "no money down" scenario, it does require one to have of a spare, mortgage-free, £1 million house lying around.

jimjames

Pincher wrote: »

The Nirvana of Buy To Let was the no money down scenario..

Have you thought about offering training in your scheme? Some people seem to make a very good living selling such ideas over a 4 day course for thousands to each delegate for property investing.

grey_gym_sock

jimjames wrote: »

Have you thought about offering training in your scheme? Some people seem to make a very good living selling such ideas over a 4 day course for thousands to each delegate for property investing.

then, when you have £50k from course fees, you use it as a deposit on a house - effectively, it's no money down

the sky's the limit ... what about trump university ... think big, and in a few years, you could be starting a nuclear war

elephantrosie

can you explain more on the nirvana of BTL please

Thrugelmir

Pincher wrote: »

I achieved this about 15 years ago

I know a fair number of people. That during their lives have had a stellar piece of good fortune. Most fail to achieve that level of success ever again. Either by repeating the same idea or coming up with something new.

Pincher

Hence toying with the idea, as opposed to actively pursuing.
Who is going to lend me £600k for 1.2%, interest only?

As for the seven year exempt gifting, since the property now belongs to the parent, though purchase, maybe the gifting is null and void?

I was hoping a tax nerd would interpret the buy back scenario, after gifting.

In accounting, there is the leaseback arrangement, where you sell an asset, and then rent it back from the purchaser. I believe it's also called off balance sheet financing, which is a perfectly legal manoeuvre. I think it's supposed to allow you to claim the rent as deductible, which is more tax efficient than using stuff you own. Better use of the capital, which is released through the sale, so you get better ratios.

I just can't quite work out whether it's the parent that is doing the leaseback, or the child.

If this really works, the HMRC will probably lock me up for losing them millions in IHT. Fame at last.

Pincher

elephantrosie wrote: »

can you explain more on the nirvana of BTL please

Without putting in your own money, the house is making money for you, both in rent, and house value.

This is a sequence from Dune:

https://www.bing.com/videos/search?q=dune+moving+without+moving&view=detail&mid=EBBBA67F8293B4005FA3EBBBA67F8293B4005FA3&FORM=VIRE

which somehow captures the spirit of it all.

Pincher

Since we seem to be on a down trend for share prices, there is a rather neat trick to achieve the no money down portfolio, if you are brave, and lucky.

HSBC pays about 40p per share in dividend a year.

At £4.00, that is 10%.

So, you buy when it was £4.25, ( 9.4% ) on 14th June 2016.

On February 20th 2017, it was £7.11, which would be 5.6% if you bought at that price, but you are actually getting 9.4% because you bought at £4.25. Sell at £7.11 on 20th Feb, then buy back at £6.66 on 21st Feb. The 30 day matching rule matches the two trades, and you are deemed to have made a capital gain of 45p.
Well, stamp duty etc. means you probably made 44p. In fact, you might have to pay capital gains tax on the 45p gain as well, but let's just say that you made 45p by shorting HSBC.

So, you paid £4.25 for the share, and then you released 45p by this sleight of hand, so it's like you bought the share for £3.80.
40p dividend on £3.80 is 10.5%.

If I get lucky, and the share price keeps slipping, the sell/buys could release more and more money. With perfect play, using market corrections over time, it is possible to reduce the money invested down to zero. On paper, the shares are still recorded as having been bought at £4.25, but you are getting the dividend for no money down!

There is an added bonus, as you can use up the annual £11,300 CGT allowance as you go along, without reducing the shares you hold.

Even if it's only £3.00 instead of £4.00, you are getting 13.3% return.

For the people who can't resist fiddling with their bits, this is an alternative to going blind.

MisterMotivated

If we're going to be dabbling with shares now, I'd like to make another suggestion.

Sell the spare £1 million house your parents gifted you and buy 950,000 shares in Purple Bricks on 1 December 2016 for 104p per share at a total cost of around £993,000 (using X-O.co.uk or similar to keep fees down).

Sell 390,000 of them on 6 March for 355p per share for a total of around £1,000,000 after CGT. Spend the £7,000 on booze and women (or men). Now, with no money down, you have 560,000 Purple Bricks shares, currently worth over £1.6 million :T

greatkingrat

Yes, but you need to factor in the money it will cost you to build the time machine first!