Reply to: buying investments via a limited company

[thompsonson]

I'm with you now - thanks

[minstrel]

I don't understand your math there - i've my mortgage is 6% i'm effectively investing at 6% but without the effect of compounding? I'd be really interested if you could expand on what you mean.

If you invested your money in a bank account that paid 6% and you are higher rate tax payer you get taxed 40% on the 6% interest. You effectively get an interest rate of 3.6% after tax.

You need to have a bank account paying 10% (6% post tax) before this gives you the same effective rate as paying off your 6% mortgage.

Actually, things have changed now that CGT will be 18%. If you are investing in shares/funds etc you only need to get a return of 7.3% (7.3% - 18% CGT = 6%) before this is better than paying off your 6% mortgage.

Another option is investing via spread betting as this avoids CGT completely.

[ASB]

Thanks for all the feedback guys, it has made me think about this from different angles.



ASB, are you multiplying the 6% by 1.25 and 1.66 for the hurdles? My rate is 3.99% at the mo, does that make them 4.99% and 6.6% ?



I'm hoping for 8% :-) may get a surprise but things are good at the moment....



this is my intention really, give me the option to travel some too i hope.

Yes (although that's not exact because basic rate is 21% - the point being of course that you pay your mortgage out of taxed income and in most cases the yield on the investment (or at least some of it) will be taxed).

The 5% was picked out of the air as an easily achieveable guranteed yield.

note that the figures I knocked out are not correct But they do show the principle.

You might also want to consider a pension for part of it. either making your own contributions or having the company do it. Which is best depends on circumstances and much has been written. [If you have an interest only mortgage then producing a pension to pay off the capital at age 50 can be attractive]

[thompsonson]

Thanks for all the feedback guys, it has made me think about this from different angles.

If you have debt you are normally better paying that off, otherwise you are effectively borrowing money at your net mortgage rate in order to invest it. If you are a basic rate taxpayer this gives you a hurdle rate of approx 7.5%. If you are a higher rate taxpayer this gives you a hurdle rate of approx 10%.

ASB, are you multiplying the 6% by 1.25 and 1.66 for the hurdles? My rate is 3.99% at the mo, does that make them 4.99% and 6.6% ?

Alternatively leave the 20k in the company (let's say same thing yielding 5%). In 5 years this is worth 25,525. But CT is payable on the gain, reduces it to 24,500. Pay this as a divi would yield £14,700.

I'm hoping for 8% :-) may get a surprise but things are good at the moment....

If you can stay a basic rate taxpayer and retain the funds in the company and pay them out in later years and remain as a basic rate taxpapyer then this can help things.

this is my intention really, give me the option to travel some too i hope.

[thompsonson]

Over 5-10 years you may find that it is better to pay the dividend and pay off mortgage capital.

I hear what you're saying and understand it's a risk i am taking. At the moment i'd rather try it and hope that my investments raise enough to make the risk worth while...

The 18% CGT means that you are only a few percent better off than the dividend route. If your mortgage is 6% and you pay off capital, you are effectively investing at a guaranteed rate of 10% (assuming higher rate tax payer).

I don't understand your math there - i've my mortgage is 6% i'm effectively investing at 6% but without the effect of compounding? I'd be really interested if you could expand on what you mean.

My plan though, by keeping it in the company, I'll pay CGT and CT but not Higher Income Tax.

Clearly it depends on your attitude to risk and investing skills, but are you confident your investments you make via company would make 10% pa?

At the moment yes, there's plenty of opportunity out there without too much risk.

[QUOTE}You've also got risk of being classed as an investment company (= higher CT) plus the possibility that they change the rules on capital distribution etc. What's the probablility of the tax rules being the same now as they will be in 10 years time? If they raise the CGT rate to 25% in a few years time that would have a big impact.[/QUOTE]

Yeah, the investment company thing is something i need to read up on - but if i'm making that much profit from it that its more profitable than working as a contractor i'll deal with it! ;-)

Things could go down as well as up... they may (i doubt it though) re-introduce tapering!

[thompsonson]

Interest free mortgage? That sounds awesome - where do I get one of those?

lol - if only

As i'm sure you figured interest only is what i meant.....

[ASB]

Thanks for the links.

At present i can happily live off basic wage and drawing down dividends within the basic rate tax bracket.

I already use my ISA as a repayment vehicle for my (interest free) mortgage so the allowance is pretty much used up on that. As such any profit made on personal investments would also be taxable.

So I'm thinking, have the company invest the money I would have personally. Keeping it in the company means i will pay CT on any profit (and write off any losses). Then drip feed it out (relatively tax free) as i do at the moment...

Obviously qualified advice is required but from reading the posts it appears they big thing to avoid is becoming an investment vehicle.

I doubt you will every become an investment company - but it is possible.

Assume you have a mortgage at 6% and you have used all the basic band and you have 20k left over.

Pay yourself 20k. Yields 12k. Reduce mortgage by 12k, saves 720 p.a. in interest. Save this 4 5 years @ 5% (3% after tax). This would yield as near as dammit £4000 in 5 years. [You could of course invest in a product where the return is capital, in this case the 720 PA would be worth about £4,200]

Alternatively leave the 20k in the company (let's say same thing yielding 5%). In 5 years this is worth 25,525. But CT is payable on the gain, reduces it to 24,500. Pay this as a divi would yield £14,700.

This puts you behind paying the capital sum off the mortgage and stashing the saving.

The point of this ??

If you have debt you are normally better paying that off, otherwise you are effectively borrowing money at your net mortgage rate in order to invest it. If you are a basic rate taxpayer this gives you a hurdle rate of approx 7.5%. If you are a higher rate taxpayer this gives you a hurdle rate of approx 10%.

If you can stay a basic rate taxpayer and retain the funds in the company and pay them out in later years and remain as a basic rate taxpapyer then this can help things.

There is no obvious answer. What is right for you will be different to what is right for somebody else of course.

[minstrel]

So that and I'd also be taxed on the other 75% of your pension...

Yes - but unless you build up a huge pension you'll only be paying basic rate tax and won't have paid CT on the contributions, so you save the 18% CGT.

[minstrel]

I may want it before then - my initial plan was a 5-10 year. one where i'd wind the company up with the taper relief... thanks to our very own Darling that's not going to happen now but i still think it's reasonably sound, as will be 18% CGT instead of 10%...

So that and I'd also be taxed on the other 75% of your pension...

Over 5-10 years you may find that it is better to pay the dividend and pay off mortgage capital.

The 18% CGT means that you are only a few percent better off than the dividend route. If your mortgage is 6% and you pay off capital, you are effectively investing at a guaranteed rate of 10% (assuming higher rate tax payer).

Clearly it depends on your attitude to risk and investing skills, but are you confident your investments you make via company would make 10% pa?

You've also got risk of being classed as an investment company (= higher CT) plus the possibility that they change the rules on capital distribution etc. What's the probablility of the tax rules being the same now as they will be in 10 years time? If they raise the CGT rate to 25% in a few years time that would have a big impact.

[minstrel]

I already use my ISA as a repayment vehicle for my (interest free) mortgage

Interest free mortgage? That sounds awesome - where do I get one of those?

[tim123]

So I'm thinking, have the company invest the money I would have personally. Keeping it in the company means i will pay CT on any profit (and write off any losses). Then drip feed it out (relatively tax free) as i do at the moment...

but you will pay tax on it: CGT inside the company.

tim

[thompsonson]

I may want it before then - my initial plan was a 5-10 year. one where i'd wind the company up with the taper relief... thanks to our very own Darling that's not going to happen now but i still think it's reasonably sound, as will be 18% CGT instead of 10%...

So that and I'd also be taxed on the other 75% of your pension...

[moorfield]

Why not just lump it all into a pension, and draw 25% tax free when you hit 55 ?

[thompsonson]

why...

Thanks for the links.

At present i can happily live off basic wage and drawing down dividends within the basic rate tax bracket.

I already use my ISA as a repayment vehicle for my (interest only) mortgage so the allowance is pretty much used up on that. As such any profit made on personal investments would also be taxable.

So I'm thinking, have the company invest the money I would have personally. Keeping it in the company means i will pay CT on any profit (and write off any losses). Then drip feed it out (relatively tax free) as i do at the moment...

Obviously qualified advice is required but from reading the posts it appears they big thing to avoid is becoming an investment vehicle.

[ASB]

Why? Is a question that springs to mind.

Remember any investment made will be out of post tax profits, so unless you have drawn salary.dividends up to the lower rate threshold then you personally can get the money out with no further tax to pay and can inverst it as you see fit.

Your company gets no CGT allowances and any profits or income arising are chargeable as profit.

Here are some links where it has been discussed which might answer your actual questions.

http://forums.contractoruk.com/accou...+company+funds
http://forums.contractoruk.com/accou...+company+funds
http://forums.contractoruk.com/accou...esting+company