Borrowing money to save tax

ProDave

Here is my situation. 7/10 of the way through building a new house and the money has run out.

Old house has not sold, currently being rented to a tenant who says they want to buy it, perhaps in another year, perhaps longer. Perhaps never then it has to go back on the market.

At the start of this year I ctystalised a defined contribution pension and took the 25% tax free lump sum. the rest, about £22K is now in a drawdown account. If I could draw that, it would just about finish the build. But to keep it to basic rate tax I would need to draw it over about 3 years and it would still cost me £4400 in tax.

IF I can wait another 5 years I have a window where I will retire, and only have a small pension so could then draw this DC pension pot over a few years all tax free, because then I would be under the threshold for paying tax.

So looking at borrowing money to finish the build, not through a mortgage. The way I see it if total interest over 5 years (will hopefully be a lot less) is less than £4400 it would be cheaper to borrow, than pay the tax.

Backstop: even if the old house does not sell, the PCLS from my main DB pension in 5 years would cover the debt in full and still leave me to then draw the DC pension over a few years tax free.

I suspect the difficulty would be finding someone to lend the money, esentially on an interest free basis with the capital to be repaid in a lump either when the old house sells, or when my larger pension pays out in no more than 5 years.

And preferably I would want to borrow the money in stages as we need ot for the build over the next year or 2.

Any ideas where I might find that sort of loan?

bowlhead99

ProDave wrote: »

So looking at borrowing money to finish the build, not through a mortgage. The way I see it if total interest over 5 years (will hopefully be a lot less) is less than £4400 it would be cheaper to borrow, than pay the tax.

Backstop: even if the old house does not sell, the PCLS from my main DB pension in 5 years would cover the debt in full and still leave me to then draw the DC pension over a few years tax free.

I suspect the difficulty would be finding someone to lend the money, esentially on an interest free basis with the capital to be repaid in a lump either when the old house sells, or when my larger pension pays out in no more than 5 years.

And preferably I would want to borrow the money in stages as we need ot for the build over the next year or 2.

Any ideas where I might find that sort of loan?

It depends on what your cashflow and credit rating is like, could you service a simple personal loan (on a repayment basis) out of your normal income?

For example:
£25k borrowed at Tesco repaid over 7 years at interest rate APR3.3% means repayments of £333 a month or £27985 over the course of the 7 years.
https://onlineapply.loans.tescobank.com/loans-ui

£333 might not be a lot of money to you if you have reasonable income, are still letting out your BTL etc. But the total repayments even if you took the whole seven years to pay it back are just under £28k so that's only £3k of interest cost and less than the £4400 tax you were talking about paying. Obviously if you sell to your tenant or someone else in a couple of years time, having made £8k of payments, and then pay off the remaining balance in one go with your property sales proceeds, you won't pay anything like as much as £3k of interest.

If your cashflow is such that you might not be able to find as much as £4k a year to make payments on the loan... that's why you would borrow £25k where you only needed £20k on the property, so you can effectively service the loan with the excess money borrowed on the loan, while waiting to sell your property.

If you don't actually need all the money up front and only in stages, you could obviously borrow rather less and then try to borrow more later. But that runs the risk of being denied the extra borrowing when you want it - so it could be more sensible to borrow it all right now if the lender will go for it. Not that taking on more debt than you strictly need is seen as a good thing on a money saving site but if it achieves the goal, you might not be so worried about extra interest being owed on your idle cash. After all, even with £25k and taking 7 years to pay it down, the interest is only £3k - that's the point of the illustration. Borrowing is cheap at the moment.

Getting a loan "essentially on an interest free basis" and repaid as a lump sum, is not possible as nobody lends for free - and if you don't want to make regular payments on the loan, but paying off in one bullet at the end instead, you'll be looking at bridging loans with even higher interest rates. But if by "essentially for free" you just mean at a lower cost than the tax on drawing your pension early, there should be ways and means if you have a decent credit rating and haven't maxed out at your credit cards on the work so far (if so, lenders will be reluctant).

ProDave

Those are the sort of figures I was working on.

Whatever I do, there needs to be provision for early repayment without penalty, i.e if I repay it in say 2 years in full,. I would genuinely save on interest payments.

I feel what I am really after is something more flexible than a personal loan. something that can let me borrow as I spend it over the next year or 2, and would let me pay interest only and redeem the loan in one lump up to a maximum agreed final date (5 years) i.e what I really want is an agreed overdraft, but at personal loan interest rates. I suspect a bank would not offer that. I am wondering if something like P2P lending might offer what I want?

pjcox2005

Depends on how spread the payments are but can you do it (or at least some) on interest free credit card (s)? Not sure what credit amount you'd get but if c.£10k then that's could either be used to make payments direct or put normal monthly spending on it to free up cash for the build. Potentially a second card may then allow you to double the amount borrowed..


Think you can now get three year interest free periods, and it means you can pay back early without any penalty. Just need to make sure it is all paid off at the end so you don't have high interest when the initial period runs out.