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Early Mortgage Repayment - Extra Dividends vs Entrepreneurs Relief

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    Early Mortgage Repayment - Extra Dividends vs Entrepreneurs Relief

    First post - go gentle!

    I'm struggling with a fairly basic investment conundrum, to draw extra dividends from my ltd company in order to overpay my mortgage vs sitting tight for X years and then potentially ceasing trading.


    So assuming I remain in constant work over the next few years (big assumption), clearing approx 70k profit per annum....

    Current financial picture, draw £40k from company each year (10k salary, 30k div) half of this goes on mortgage repayments the other half on living costs. Just taken out a 360k mortgage on a 5 year fix at 2.5%, I can overpay 10% per year.

    Business bank balance £100k retained profit earning 0% interest

    Option 1
    Draw an additional £50k dividend each year (using my current retained profit starting balance of 100k to fund the shortfall). This would incur additional income tax circa £16k per annum. From the £50k dividend I'd have £34k / annum to overpay my mortgage. Plugging this into my mortgage calculator assuming a 4.25% variable rate after the initial 5 year fixed term and with my monthly repayments fixed (overpayment reducing term not monthly) indicates that my mortgage would be paid off in 8.5 years, the overpayments saving me £144k of interest. However I would have paid an additional £16k x 8.5 years of income tax (£136k).

    Option 2
    Continue as I am currently effectively retaining 30k profit in my limited company each year. After 8 years I should have banked an additional £240k, this with my starting balance of £100k gives a total of £340k. If I cease trading I would hopefully gain entrepreneurs relief so would pay 10% capital gains so my net would be £306k, the outstanding balance on my mortgage at year 8 would be £291k so I could pay my mortgage off with a little to spare.


    Spending an hour figuring this out might have answered my own question, obviously lots of assumptions and best case planning, from the above option 2 seems to be optimum as I retain a war chest however I would not be able to earn a living as a contractor for 2 years after claiming the entrepreneurs relief (assuming the rules don't change in the next 10 years).

    Have I missed anything? Any other considerations? If I could figure a way to get a relatively risk free return on my business bank balance option 2 becomes even more attractive....

    #2
    IMO leaving 50k in your company isn't enough of a warchest. I'd be quite happy leaving up to 100k in and then wondering what to do with the extra above that. Thinking about it from a warchest perspective would give you your answer IMHO.
    'CUK forum personality of 2011 - Winner - Yes really!!!!

    Comment


      #3
      Originally posted by northernladuk View Post
      IMO leaving 50k in your company isn't enough of a warchest. I'd be quite happy leaving up to 100k in and then wondering what to do with the extra above that. Thinking about it from a warchest perspective would give you your answer IMHO.
      You want to leave less than that in one bank to ensure you are covered by the financial service compensation scheme.
      "You’re just a bad memory who doesn’t know when to go away" JR

      Comment


        #4
        Originally posted by SueEllen View Post
        You want to leave less than that in one bank to ensure you are covered by the financial service compensation scheme.
        Good point well made. I'd made the assumption that people open separate accounts with higher interest rates like Aldermore to stick excess in etc.
        'CUK forum personality of 2011 - Winner - Yes really!!!!

        Comment


          #5
          Thanks SueEllen northernladuk, good points, I hadn't considered spreading company funds across multiple banks, slightly surprised my accountant hadn't mentioned this.

          Comment


            #6
            Originally posted by danny1313 View Post
            Thanks SueEllen northernladuk, good points, I hadn't considered spreading company funds across multiple banks, slightly surprised my accountant hadn't mentioned this.
            Also consider what you will do for money in 8 years if you close your company down and take the cash at 10%. You can't start a new LTD company, you could I guess work through an umbrella, or go perm. But take this into consideration too.
            I am what I drink, and I'm a bitter man

            Comment


              #7
              And will that even be available in that time frame?
              'CUK forum personality of 2011 - Winner - Yes really!!!!

              Comment


                #8
                You should be able to get around 1% on business savings without too much trouble, especially if you are willing to lock up some of it for a while. You could keep £20K in easy access, tie up £20K for six months, put £40K into one year fixed rate, and £20K into two years fixed rate. That way, even if your entire income dried up, you'd have money coming in to keep you going for 2 1/2 years and you could probably get well over 1% on your savings. That's before tax, of course. But it does offset a significant chunk of the mortgage interest you save by paying the mortgage early, and given the tax cost, probably makes it not worth it in strict financial terms.

                I hate debt, though. Sounds like you can probably easily live on £30K a year, if you needed to. I'd keep two years (£60K) in business savings, and out of the rest pay larger dividends and burn through that mortgage faster, even if it cost me some extra tax. That's just me, though, and I'm not saying it would be better financially.

                Or you could get married, give her shares, and double the basic rate dividends you are paying. This has the added benefit that you'll soon have a mortgage-free house to give her when she divorces you.

                Comment


                  #9
                  You're letting the tail wag the dog.

                  Relax.

                  Be tax efficient and pay off lumps off your mortgage as and when you can.

                  Hopefully you won't have to go onto the lender's SVR of 4.25%. If rates stay low then you can remortgage.

                  I paid off my residential mortgage some time ago. Then I got bored and took 40% equity back out so that I could invest and spend it.

                  On top of that I have a warchest but I plan to MVL and retire from contracting within the next year or so. I might then pay off some of the mortgage or I might invest it further. Who knows. I'll worry about it when I get there.

                  Comment


                    #10
                    Personally, I would get the money out of the company and into something you control sooner rather than later. I certainly wouldn't rely on tax relief that's available today being available in 8 years time.
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