£100,000 Mortgage overpayment or invest

ExpedLdr

Rafter wrote: »

Unless there is some compelling tax reason to do something else (pensions spring to mind) I'd repay the mortgage.

I'm guessing you are in a long term fix so an offset is not an option? At least that way you can still access your money if your income circumstances change or you do spot an investment opportunity - Aston Martin or otherwise!

R.

Thanks R,

Just realised that i had mis-typed the rate on my mortgage which is 5.99% over 10 years. I had been offsetting some money but used it recently. I will look at the Pension side of things as well as i am not making direct provision for that at the minute; I have an Armed Forces Pension which pays me a few hundred pounds a month currently and will go up to something more usable in 13 years time when i reach 55.

Appreciate you taking the time to reply

Mike

Jonbvn

ExpedLdr wrote: »

Thanks Jon, I know what 1 is can work out what 2 is but never heard of 3.

Looks like there is a lot more reading to do!

But this is really good advice thanks as it gives me something to look into.

Mike

Good article in the Times on VCT's.
http://business.timesonline.co.uk/tol/business/money/tax/article3055930.ece

I do like the fact that you can reclaim the tax through the PAYE system and/or if you are self employed.:beer:

Sapphire

ExpedLdr wrote: »

Thanks Footsie, i know that i while i am not earning interest on any money that i overpay i am reducing both interest that i would have to pay and reducing my monthly outgoings but my question is what would you guys do?

If I owed the moneylenders nearly half a million pounds, I think I would use the money to pay off some of the mortgage – especially given that the economy looks shaky at the moment and this situation could well continue for quite a few years.

I'd also try to pay of the rest of the mortgage asap to achieve peace of mind. I would find owing such a huge amount of money a huge burden.

jamesd

ExpedLdr, there's currently a sale on for stocks and shares and it may continue at varying prices for a few years. It's an excellent time to be doing regular investing. Low prices and market crashes = sale for those who don't currently have lots of investments.

So perhaps take the dividend and put it into lower risk corporate bonds initially and switch to equities or equity funds (unit trusts, OEICs, SICAVs) over two years, switching a bit each month. Or plan to put in 100k a year if the business can sustain that and do this batch over just this year, when the sale looks likely to be at its best (and market doom and gloom saying at its worst).

You can't predict when the prices will be at their lowest but regular investing will cover the whole period that spans the lowest even if the initial investments drop in value for a while as the bottom is reached and passed.

If you're not comfortable doing this it's just the sort of thing that IFAs like dunstonh do for a living. With what may be 100k+ of investable money each year you're the sort of prospect that would make an IFA really pleased to have you as a customer.

If you don't yet have a target for when you want to retire with a few million in capital you could set one and use that to decide how much of the money should go into pension investing.

Footsie_2

Personally I'd pay the mortgage. You never know when life will change and you could find yourself out of work with your investments down. I'd rather find myself out of work with a lower monthly repayment on my mortgage.

meester

You haven't mentioned the 25% tax liability on the dividend, versus the 10% liability if you wound the company up, and also the possibility of investing the money inside the company.

ExpedLdr

meester wrote: »

You haven't mentioned the 25% tax liability on the dividend, versus the 10% liability if you wound the company up, and also the possibility of investing the money inside the company.

Meester,

This is news to me, ell the 10% bit, as i knew about the dividend tax but figured that i would ensure that i kept enough in the company to cover future tax bills. But i would really welcome your thoughts on both the 10% approach and investing within the company as i am at a complete loss there.

Hoping to hear from you!

MIke

meester

ExpedLdr wrote: »

Meester,

This is news to me, ell the 10% bit, as i knew about the dividend tax but figured that i would ensure that i kept enough in the company to cover future tax bills. But i would really welcome your thoughts on both the 10% approach and investing within the company as i am at a complete loss there.

Hoping to hear from you!

MIke

Hi, on selling or winding up a company, the personal tax liability from the capital gain realised is only 10%. This is subject to a lifetime limit of £1m of gains.

This is personal tax, not company tax (which is 20% on your company's profits, and can be paid out as a dividend, net of Corporation Tax, with BASIC RATE income tax liability imputed (hence the extra 25% payable when you go into higher rate bracket)). As a company you are probably also collecting VAT for HMRC.


As a broad guide:

Do £250k of business per year, with £100k of expenses. Profit = £150k. Corporation tax = £150k * 0.2 = £30k. This leaves £120k of shareholder's equity (i.e. yours). Assuming you pay out (as a completely arbitrary) a £30k dividend, that leaves £90k in the company.

After five years, there would be £450k in the company.

If you decided at this point to pay out all the retained capital (which, don't forget is the result of £562,500 of pre-tax profit), you would need to pay income tax of 25% on the dividend. This would be £112,500 in income tax, leaving you with £337,500.

On the other hand, if you decided to retire, or to move into a different business, you could wind up the company (which would incur a nominal cost). At this point all the money left in the company is a CAPITAL GAIN, not income, and would be introduced as capital. As you are an entrepeneur, you are subject to the preferential CGT rate of 10%. The tax payable would only be £45k.

Of course the other option, which is what you are proposing, is to pay out all £120k each year, and paying £30k/year in tax, but then investing that personally. Personal investment is generally cheaper and easier to manage than company taxation, and the tax treatment is slightly more favourable, BUT the question is whether it is worth paying an extra £105k of tax (over 5 years) to invest the money yourself.

The advice is in 'Rich Dad, Poor Dad' is very trite, it sounds to me like you are doing the Rich Dad bit pretty well, as evinced from the income you are earning, which is obviously very high. Mortgage repayment is a safe thing to do with capital, the issues with it are the other opportunities for the money, and also the personal tax bill, which would more than wipe out any interest saving. Don't forget that although mortgage interest compounding looks scary, 5% interest is VERY low, in fact IMO it's costing you nothing, and you have a five year fix - real inflation is about 5%, so the inflation-adjusted cost of borrowing the money is close to zero. If the interest rate were not so good, I would worry more about it.

BTW, it seems wrong that you have NO employees, as a director of a limited company, there should, for tax avoidance reasons, be at least ONE employee - you. This is because you can pay £5k/year salary (the personal allowance), which is an expense for your company, reducing its profits that suffer tax, so no tax to the company, and no personal tax either.

You are NOT self-employed, you are employed, your company is a distinct legal entity from yourself. Self-employed people do not have companies, and do not pay dividends, everything is INCOME to them, and subject to income tax.

Your accountant should be able to explain all of this to you.

Out of interest, what business are you in?

amcluesent

So, could you use the £100,000 to expand the business?

If you're a one band consultant you can't really scale the income stream beyond 50 billable hours a week. You could take on a salaried employee and shake the money tree for their hours or commission a (software?) product for clients which you earn license fees while you sleep.

That said, I was mortgage free in my late thirties due to capital overpayments, hurrah for the Y2K bug!