Reply to: Investing in property, but not going to SPV route

[sludgesurfer]

As you say, there's no right or wrong. I do however see some property zealots blinkered by home bias. i.e. they dismiss the stock market solely based on FTSE 100 performance (excluding dividends) and extol the virtues of property based on solely on UK property prices often with a strong regional bias.

I see several of my fellow contractors ignore some of the (admittedly few) remaining tax benefits sitting under their noses in pursuit of some passive property income dream. They'll dick around with legally and ethical questionable practices like trying to convince their accountant to put their caravan through the company or take a £50k BBL to "invest" in premium bonds and such like without even considering the use of simple tax avoidance steps like a personal pension or using their ISA allowance.

[Paralytic]

The risk is far too great ...and the loan can't be paid off by tenants!

You need a bigger baseball bat.

I'd not be buying property just now either, unless it was for a home I planned to stay in for a good number of years, not as an investment.

[ChimpMaster]

Continued asset price inflation from today's prices?

See post above: Also agree that it isn't a great time to be buying property.

But still, if you are have cash in the bank then you have to put it to work somewhere at some time. Right now, I have no idea, but I will bide my time to see how the economic crisis unfolds next year. It's really interesting watching inner London prices coming down, and I reckon they have another 20% to fall yet, unless rents go back up.

I really need to get out there more, network, share ideas, go into partnerships etc.

[eek]

£1m of property can be bought with just £250k of outlay. Personally I don't go beyond 60% LTV, but that's just my risk profile. And the loans would be paid off over time by rental income, and of course you would expect (hope for) asset price inflation.

I have leveraged to buy shares before (well, derivatives) but I have always lost money, hugely. The risk is far too great ...and the loan can't be paid off by tenants!

Continued asset price inflation from today's prices?

[ChimpMaster]

You've identified what it is about property that works. Easy access to credit so you can leverage your investment. Anybody can do it.

You say £1M in stocks and shares get's you £50k. Fine.
£1M in property (4 houses at £250k each) get's you £50k in rental income. Also fine.

Property is more effort. Shares are more risk.
The main difference though is that banks will lend you money for the property.
It is possible to borrow money to invest elsewhere but unless you work in finance (EDIT: I don't mean as an IT contractor) good luck getting that.

£1m of property can be bought with just £250k of outlay. Personally I don't go beyond 60% LTV, but that's just my risk profile. And the loans would be paid off over time by rental income, and of course you would expect (hope for) asset price inflation.

I have leveraged to buy shares before (well, derivatives) but I have always lost money, hugely. The risk is far too great ...and the loan can't be paid off by tenants!

[Lance]

Horses for courses. I don't disagree with investing in shares or funds but the UK stock market is probably the worst of the first-world markets, it really is the sick market of the world in my view. I lost money that never came back (for example, banking shares in the 2008 crash), so I stay clear of it. You have to buy in 100% cash, and dividends run at around 4% to 5% on average. You need £1m+ to generate an income of £50k, with significant risk to your initial investment. But some can make it work.

Property takes a lot more effort, for sure, but has significant advantages too. You can leverage a big part of the investment with a very cheap loan, and have that loan repaid over time by income from rentals. In the long term, you gain an asset that has not only been largely paid for by the rental income, but has very likely appreciated in price too. In many cases you can release equity to get your initial investment back out, in effect making your returns infinite. You'd have to hit some seriously home-runs on the stock market to achieve the % gains anywhere close.

Even if you consider just one or 2 properties, rented out long term to (say) a housing association or to the local council (almost like a FIR lease, so minimal management needed), it'll be a nice nest-egg for your later years.

I do agree that property investment is better on a medium/large scale (meaning within the confines of our ability i.e. like 5 to 10 properties etc). You can then build up a business model around it and generate sufficient income to not have to worry about working/contracting in IT any more.

Also agree that it isn't a great time to be buying property. The problem is that yields are so long everywhere else, unless you are willing to significant risks. Even today a very simple BTL can give you 5% without much effort, and that's if you buy a property cash, for example £1000 rent on a £240k flat. If you leverage via a mortgage then your ROCE will be even greater: for example, put down £60k and mortgage the £180k on a £240k flat, meaning profit of (£12000 rent - £5400 loan interest) = £6,600 each year i.e. an 11% return on your £60 deposit. Simplistic numbers but you get the idea.

You've identified what it is about property that works. Easy access to credit so you can leverage your investment. Anybody can do it.

You say £1M in stocks and shares get's you £50k. Fine.
£1M in property (4 houses at £250k each) get's you £50k in rental income. Also fine.

Property is more effort. Shares are more risk.
The main difference though is that banks will lend you money for the property.
It is possible to borrow money to invest elsewhere but unless you work in finance (EDIT: I don't mean as an IT contractor) good luck getting that.

[ChimpMaster]

This ^^^.....all day long....

I must work with 25 Ltd contractors. Property investing seems to be a religion for a lot of them. I see them bending over backwards to make it work, mortgaged to the hilt. Some have. Normally those that can cashflow their next purchase outright from accumulated rental income.

Investing in any cyclical asset class works at the right point in the cycle. In my opinion, with property, that point is not now.

I don't like it as an investment on a small scale and certainly don't like it as a business on a small scale with a narrow geographic focus. It's illiquid, with high transaction fees and it involves a host of variables between your tenant's wallet you and your own. Putting the properties inside a company adds a couple more. I appreciate that I'm talking of a rental business and not a buy and flip one. Perhaps with a specific practical skillset at your disposal and a bunch of sweat equity, buying and flipping is a more workable model.

My preference is to hold property investment trusts with long track records of healthy yields (some of which are presently trading at significant discounts to NAV) bought with my own money as part of a diversified portfolio inside a SIPP or ISA that you don't even have to declare to the tax man and avoid the gymnastics described above. Is it boring? Perhaps. Will it make you rich overnight? No. But it has a proven track record of doing so over any appreciable timeframe.

Horses for courses. I don't disagree with investing in shares or funds but the UK stock market is probably the worst of the first-world markets, it really is the sick market of the world in my view. I lost money that never came back (for example, banking shares in the 2008 crash), so I stay clear of it. You have to buy in 100% cash, and dividends run at around 4% to 5% on average. You need £1m+ to generate an income of £50k, with significant risk to your initial investment. But some can make it work.

Property takes a lot more effort, for sure, but has significant advantages too. You can leverage a big part of the investment with a very cheap loan, and have that loan repaid over time by income from rentals. In the long term, you gain an asset that has not only been largely paid for by the rental income, but has very likely appreciated in price too. In many cases you can release equity to get your initial investment back out, in effect making your returns infinite. You'd have to hit some seriously home-runs on the stock market to achieve the % gains anywhere close.

Even if you consider just one or 2 properties, rented out long term to (say) a housing association or to the local council (almost like a FIR lease, so minimal management needed), it'll be a nice nest-egg for your later years.

I do agree that property investment is better on a medium/large scale (meaning within the confines of our ability i.e. like 5 to 10 properties etc). You can then build up a business model around it and generate sufficient income to not have to worry about working/contracting in IT any more.

Also agree that it isn't a great time to be buying property. The problem is that yields are so long everywhere else, unless you are willing to significant risks. Even today a very simple BTL can give you 5% without much effort, and that's if you buy a property cash, for example £1000 rent on a £240k flat. If you leverage via a mortgage then your ROCE will be even greater: for example, put down £60k and mortgage the £180k on a £240k flat, meaning profit of (£12000 rent - £5400 loan interest) = £6,600 each year i.e. an 11% return on your £60 deposit. Simplistic numbers but you get the idea.

[sludgesurfer]

This ^^^.....all day long....

I must work with 25 Ltd contractors. Property investing seems to be a religion for a lot of them. I see them bending over backwards to make it work, mortgaged to the hilt. Some have. Normally those that can cashflow their next purchase outright from accumulated rental income.

Investing in any cyclical asset class works at the right point in the cycle. In my opinion, with property, that point is not now.

I don't like it as an investment on a small scale and certainly don't like it as a business on a small scale with a narrow geographic focus. It's illiquid, with high transaction fees and it involves a host of variables between your tenant's wallet you and your own. Putting the properties inside a company adds a couple more. I appreciate that I'm talking of a rental business and not a buy and flip one. Perhaps with a specific practical skillset at your disposal and a bunch of sweat equity, buying and flipping is a more workable model.

My preference is to hold property investment trusts with long track records of healthy yields (some of which are presently trading at significant discounts to NAV) bought with my own money as part of a diversified portfolio inside a SIPP or ISA that you don't even have to declare to the tax man and avoid the gymnastics described above. Is it boring? Perhaps. Will it make you rich overnight? No. But it has a proven track record of doing so over any appreciable timeframe.

[Lance]

Chipmaster has posted about this so do a search

FWIW I did not do the MVL route and instead changed the SIC code and I really regret it - I could have paid 10% tax at the time and taken the money out cleanly. Instead I chose to change the SIC code and buy a property thinking I had saved 10% ER tax

But now I am stuck with a company which is generating an income true but I will have to pay 20% tax if I sell the company shares to someone and thats if I am lucky (still researching what happens on share disposal if outside UK and CGT but thats different).

So this is the only chance you get to pay 10% and reinvest the money in a new company or personally. Like I said if I knew then what I know now I would definitely have MVLd

This ^^^^^^^

sometimes that amazing wheeze that sounds great on paper is just overly-complex and unforseen consequences come along.
At least when it's your money, it is actually your money.

I'd take this one stage further for simplicity. Instead of buying a property to rent and have all the issues that come with that (and the future issues as society starts to frown more on greedy landlords), why not invest it in the property you live in? That way you enjoy it, no hassle.

I don't really see why ex-contractors see a monthly income that rarely exceeds what you'd take in 2 days, to be worthwhile for the hassle.
Maybe if you have no high value skills, and can maintain the properties yourself, and are able to run a highly leveraged portfolio it maybe makes sense. But outside that I just don't get it.

[NowPermOutsideUK]

Chipmaster has posted about this so do a search

FWIW I did not do the MVL route and instead changed the SIC code and I really regret it - I could have paid 10% tax at the time and taken the money out cleanly. Instead I chose to change the SIC code and buy a property thinking I had saved 10% ER tax

But now I am stuck with a company which is generating an income true but I will have to pay 20% tax if I sell the company shares to someone and thats if I am lucky (still researching what happens on share disposal if outside UK and CGT but thats different).

So this is the only chance you get to pay 10% and reinvest the money in a new company or personally. Like I said if I knew then what I know now I would definitely have MVLd

[Anagram]

Thanks to everyone who's written back - food for thought.

With respect to this post though just wanted to confirm something... when you speak about "killing it's history" are you suggesting that if I close down my company it would prevent a retrospective investigation by HMRC for my previous contracts' IR35 status?

I think I've seen this mentioned in passing in other threads I've read now that you bring it up... given the high frequency of client changes I've had over the last few years and various other things I've done I think such risks are low... but perhaps worth factoring into my thinking.

Thanks!

Hi LifeExplorer,


If you have taken action on your plans, could you let me know what option you choose and why? I am in a similar situation and try to gather as much info as possible.

[lifexplorer]

I can’t see anything wrong with the company car. In fact, given the tax advantages of electric, I think it’s a great idea.

IMHO anyone would be crazy though to keep a PSC past contracting. I think it’s best to kill it and it’s history as soon as possible. Transfer funds to a newly set up company and then wind up current PSC.

Thanks to everyone who's written back - food for thought.

With respect to this post though just wanted to confirm something... when you speak about "killing it's history" are you suggesting that if I close down my company it would prevent a retrospective investigation by HMRC for my previous contracts' IR35 status?

I think I've seen this mentioned in passing in other threads I've read now that you bring it up... given the high frequency of client changes I've had over the last few years and various other things I've done I think such risks are low... but perhaps worth factoring into my thinking.

Thanks!

[ChimpMaster]

Nothing wrong with your thinking, but there are many variables and many options, and you need to start on the correct footing.

First, get a new accountant. I'm happy to recommend mine, who is well versed in IT and property accounting.

Second, yes you can change the SIC and the purpose of the company, if you won't be contracting anymore. This is an option I have considered and it's still one of my options, but not the preferred one.

Third, think this one through: it might be better for you to MVL and claim ER, if you are eligible. The proceeds will then be yours personally, to do so as you wish. You could then open a new SPV and loan those proceeds to that SPV, to buy property within the SPV. The funds you have lent the company will be repayable to you, tax-free, but of course not eligible as an expense against the SPV's corporation tax.
The SPV can pay you back the loan over a number of years, thereby creating a tax-free income for your family for many years, until the loans are re-paid. Note, the funds were already yours (personally) anyway, and you lent them into the SPV after having paid tax on them already. So you're not avoiding tax, you've just created another way to generate income with funds on which tax is already paid.

I have a busy day today so can't write much more, but you look like you have done some research and hopefully I have given you some more to do. Best of luck.

[Finance Contractor]

I can’t see anything wrong with the company car. In fact, given the tax advantages of electric, I think it’s a great idea.

IMHO anyone would be crazy though to keep a PSC past contracting. I think it’s best to kill it and it’s history as soon as possible. Transfer funds to a newly set up company and then wind up current PSC.

[lifexplorer]

Yes, the plan is utterly insane on so many levels that I can't be bothered to deal with it.

Just close your company down and open another one for this business.

Also running a company car while not using or working for the company WTF...

Can you give me a one reason why it's insane (humour me...)?

The company car would still be used in my plan for company business... said business being a BTL business, though my next company year end would include a mix of business activities.

Business mileage is one of the various expenses involved with running a BTL business as well...remember, keeping the same company. As far as I can tell, tax treatment of a company car is pretty much identical whether it's used 1% of the time for personal use, or 99% of the time... and on a pure electric car that's a 19% corporation tax saving on the car costs in exchange for a 0% Class 1a NI/personal BIK tax hit on the P11D value of the car in the 2020-2021 tax year, followed by 1% hit in the 2021/2022 tax year.

Again, happy to for someone to tell me why this doesn't work... like saying "section xyz of rule q of HMRC says you need to do a minimum of 10000 miles on a company car..." or there's a rule that says corporation tax is doubled if your company changes SIC code during your year end or something...

Seriously, if there's something like that that's missing that everyone knows about and I've someone never stumbled across in my research let me know...