Dead capital

Property investment and dead capital


I was recently introduced to a relatively simple idea. The idea was nothing new, it was just something I hadn't thought about before.


Safe property investment Stategy


I have mentioned in previous articles that I eventually want to invest in property. My strategy was a very safe one. I was going to buy my first property and push my finances to pay the mortgage off as quickly as possible. Once paid off I could start to look at an investment property. The only problem with this strategy is that it would take years, decades even, to pay off the first property and then build up a deposit to buy my investment property. The other issue with this investment strategy is the fact that I have "dead capital".

Dead Capital


Dead capital (in this scenario) is equity that I have built up in my property that doesn't generate and marginal (or additional) income.

Let's say that I buy a house with a £40,000 deposit. I take out a mortgage for £160,000 and through tough financial decisions I manage to pay off the whole mortgage in about 15 years. I will then take another couple of years to build up a deposit to put into my investment property. Once again, this will be tough (but not as tough, as I no longer have a mortgage to pay). Then I purchase my investment property, get in a tenant as have them pay off the mortgage over the next 20 years. In the meantime in saving for another deposit for another investment property....and so on and so forth.

If you think about it the above scenario is very inefficient. Once I've paid off my own home I have a lot of equity locked up in my property (£200,000 to be precise, assuming zero house price inflation). Why am I saving up for the next few years for another deposit? Why don't I withdraw some of the equity that I already have in my house ad purchase the investment property today, rather than in 3 years time. The obvious answer seems to be that it means I will continue to pay a mortgage on my own property. 

However, there are many scenarios whereby releasing some of the equity to purchase an investment property would be advantageous. Let's say that after paying for your mortgage for 5 years you manage to build up £30,000 in equity, additionally you manage to build up £20,000 in savings. Between the two vehicles you can put a deposit down on an investment property. Let's say you put 25% down on a £200,000 property (once again assuming no inflation). Now, you still have a mortgage for £120,000 on your home as now have £150,000 mortgage on your investment property. Because I own a decent chunk of both properties, I can get a good mortgage interest rate. Let's say I can achieve 2.5% and 3% respectively. This equates to an annual payment on mortgages of £7,500. However, I now have a tenant paying a yield of 5% on a £200,000 investment property earning a cool £10,000. I'm £2,500 a year better off!

Of course, the above example has lots of assumptions. But it also teaches us a valuable lesson: if you do the maths correctly and choose the right properties then you can benefit from using up existing equity to purchase investment properties. It's a far more effective use of capital, rather than leaving it tied up in your property.

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Avoid inheritance tax - for rich people only!

Inheritance tax advance strategy


The following article does not constitute financial advice. Please seek financial advice from a qualified professional only. The purpose of this article is simply to state potential options to help reduce your tax bill. It is not stated with the intention for anyone to follow as a guidebook for tax planning. I will repeat: always seek advice from a suitably qualified professional.

This article follows on from my previous article on inheritance tax planning. However, the difference is that this article is specifically for wealthy individuals only. Furthermore, this type of tax planning involves some risks.

One of the funny things about life is that when you're young and can best use the money you have none, and when you're old you will probably be at your wealthiest but with less need to use the money. Given this fact, it may be the case that you want to give your children some money. What follows is an explanation on how to transfer income to your loved ones and to reduce the inheritance tax charge paid by your children.

One of the biggest assets that most people pass on once they've "finished retirement" is their house. Given recent house price increases, many families may find themselves with a hefty tax bill given the threshold for inheritance tax currently at £325,000. 


Inheritance tax - the solution


One option could be to transfer your house to your loved ones. in decent time before you pass away. Obviously you can't predict when you'll die but you can make a decent guess as to when might be best (I.e. 65 is probably better than 85). The house may still be liable to inheritance tax, especially if you're still living there, as the taxman would deem that you are still benefiting from the asset and haven't really passed it on.

One way around this problem is to pay your loved ones a rent equivalent to the market determined rate for other houses in your area. This will mean that your children/ loved ones are your landlord. It will demonstrate that you have truly passed on your house. It's also a very good way to pass on an asset to your children/ loved ones, and to help them financially over the remainder of your life.


The risks with reducing inheritance tax


Of course there are risks with this scheme. The first being that you may run out of money. You need to make sure that you have plenty of cash each month to be able to pay the market rent until you die. Secondly, and more importantly, make sure you have a good relationship with your loved ones. Being a tenant means that your loved ones could potentially kick you out of their house if they wanted. Furthermore, let's say you give the house to a child who is married and they get divorced. Your child's ex may be entitled to half the house. In which case it will need to be sold. Be warned.

Finally, make sure you seek proper legal and financial advice before taking any financial or legal decisions, especially with regard to your inheritance.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter@millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Premium bonds rule changes

New Premium Bond rules


Following the chancellor's budget on 19th March 2014 Premium Bond rules have changed. Previously, savers were limited to investing a maximum of £30,000 in premium bonds. In an effort to encourage greater savings the Chancellor has introduced a number of measures such as the New ISA, as I wrote about in my previous article. Furthermore, the Chancellor has been bold enough to introduce revolutionary rules on pension annuities to be discussed in an upcoming article. Added to these measures to encourage savings are changes to the much loved Premium Bond.

Premium Bond Changes


The intention is that by the end of June 2014 savers will be able to buy up to £40,000 of premium bonds, a 33% increase on the current maximum. Following on from this, by 2015 this maximum will be raised again up to £60,000.  Whilst I don't believe these changes will have a radical effect on savers, I believe it sets a tone for this Government to try to aid savers who have been crippled over the past few years by low interest rates.


Are Premium Bonds a good investment?


Premium Bonds are essentially a lottery. You could win anywhere between £25-£1million, with the higher prizes being less probable. The average return based on probability of winning the various prizes is about 1.8%. This amount is still well above most current savings rates. Coupled wih the fact that any winnings are tax free, makes premium bonds a very attractive savings vehicle.


 Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter@millionairer0ad or comment. Whether good or bad, I want to hear from you all.

New Tax ISA

New Individual Savings Account


For those who have been keeping an eye on the news, you will have noticed that yesterday (19/03/14) was George Osbone's budget speech. One of the key aspects to the budget was the revaluation of a new tax free ISA.

I have written about ISAs in the past. ISAs are individual savings allowances, essentially a wrapper for your savings to shield them from taxation. Previously, you could put up to £5,760 in cash into one of these tax free wrappers each year. Alternatively, you could put up to £11,520 of investments (non-cash savings) such as stocks and shares into and investment ISA and shield it from tax. Or else, you could put a combination of tax and cash into ISAs assuming the cash part is no more than £5,760 and the total does not exceed £11,520.


Drawback of ISAs


One of the criticisms of the ISA was that the cash part was too low and did not allow people the ability to save enough money each year to build up savings eg for a deposit. In answer to the critics from the 1 July 2014 savers can put up to £15,000 in to either a cash ISA, an investment ISA or a combination of both, with no maximum limit below £15,000 on either category. This change should allow savers to make a real difference to any pot they at trying to build.

Many savers will take the opportunity and place more of their money into a cash ISA. However, I would note that with Bank of England base rates still at 0.5%, an all time low, the best cash ISA rates are 1.65%. As such, I would suggest that some of your money, regardless of who you are, should be in investments. Why not start off putting 5% of your monthly income into a cheap FTSE100 tracker? And you can shield it from tax in your new investment ISA!


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter@millionairer0ad or comment. Whether good or bad, I want to hear from you all.

What is Bitcoin?

What is Bitcoin?


Bitcoin is commonly known as the currency of the internet. A more technical definition would describe Bitcoin as a network whereby everyone involved shares a list of Bitcoin owners. When Bitcoins are traded (eg for cash) then both trading parties have to agree on the transfer, after which the list is updated.

Still unsure of what Bitcoin is?


Bitcoin is open source software. This means that anyone can update the software, but all users must agree any changes. Bitcoin is really an innovative means of data storing and data sharing. The fact that it has become a currency rests on the fact that people attribute a value to it. There is no central bank controlling the money supply and there is no underlying reserve value such as gold reserves backing a portion of the dollar.


I'm still not getting it? Simply. What is Bitcoin?


To you and me Bitcoin is a currency. I have my store of Bitcoins and as long as everyone accepts that Bitcoins have a value then I can exchange my Bitcoins for goods or cash.

Why has the Bitcoin price been so volatile? 


Bitcoin's price is volatile due to the hype and speculation surrounding the web-based currency. Since the supply is relatively "fixed", price fluctuations are mainly determined by the demand for Bitcoin. As more people became aware of Bitcoin, and there hype built up, more people bought bit coins, pushing the price up well in excess of $1,000. Recently, the price crashed following controversy involving the potential theft of  a quarter of a million dollars worth of Bitcoins.


Is Bitcoin a good investment?


Absolutely and emphatically not. I'm so sure of this that I'm tempted to argue the point as objective fact rather than my subjective opinion. The problem with Bitcoin is that it's valuation is not based on any fundamentals. In contrast, when looking at a share price you can look at the underlying business and make an educated guess at its valuation by looking at its Assets and ability to make a profit. In the case of Bitcoin there is nothing upon which to base your valuations. Bitcoin price movements are totally determined by speculation.


But I really want to invest in Bitcoins!


If you just can't help yourself then please be careful. I would suggest only buying a few Bitcoins to speculate on the price for a bit of fun. I certainly wouldn't put any serious amount of my savings into Bitcoin. Rather, treat investing in Bitcoins like going to the casino - the minute you walk into a casino write off the money that you are going to inevitably lose. That way, if you manage to make a profit then that's a bonus!

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Avoid inheritance tax

Reducing inheritance tax bill


The following article does not constitute financial advice. Please seek financial advice from a qualified professional only. The purpose of this article is simply to state potential options to help reduce your tax bill. It is not stated with the intention for anyone to follow as a guidebook for tax planning. I will repeat: always seek advice from a suitably qualified professional.


Inheritance tax - the situation so far


Currently, when a person dies their estate is valued. The deceased can pass on up to £325,000 of their estate onto loved ones. Any inheritance in excess of this amount will be taxed at a whopping 40%!
There are all sorts of caveats to this, with certain types of businesses having different exemptions. Apparently, passing on a sheep farm in inheritance is exempt!

"7 years A'tapering"


There are many inheritance tax rules, however, I will cover just one - Tapering. 

If you have an elderly relative who gives you £100,000 and then 6 months later they sadly pass away the Tax Man determines that the full £100,000 should be treated as part of the deceased's estate. That means that if they have a house worth £325,000 then the full £325,000 Inheritance Tax free allowance will be used on the house. Hence, you will pay inheritance tax at 40% on the £100,000 that your loved gifted to you, costing you a hefty £40,000! They don't call it the death tax for nothing!

However, should your loved one give you the £100,000 over three years ago, then the tapering effect comes into play. As such, if your loved one died over three years ago then you only owe HMRC 80% of the inheritance tax owed on the gift. In this case, it would be 80% of £40,000, which would be £32,000. 

The longer the length of time between the transfer of money from your loved one and they sadly passing away, the less tax you pay. Between four and five years, you only pay 60% of the inheritance tax owed. That's 60% of the £40,000 in this case only £24,000 between five and six years, only 40% of the 40% tax owed, £16,000. Between six and seven years 20%, £8,000. Finally, if your loved one transfers gifts in the form of inheritance seven years or more before their death, then you will pay no inheritance tax at all!


Inheritance Tax Planning


So it's pretty clear. If you want to reduce the inheritance tax bill to your children or loved ones, you got to start transferring your assets to them as quickly as possible (assuming you don't need them anymore).


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Disclaimer

Information on this site is not appropriate for the purposes of making a decision for carrying out a transaction or trade nor does it provide any form of advice (investment, tax or legal) amounting to investment advice, or make any recommendations regarding particular financial instruments, investments, or products.
Always seek advice of a competent financial advisor with any questions you may have regarding a financial matter