Pay off mortgage with dividends???

[roadsmash]

I would pay it off.

Or at the very least remortgage to a better rate. I presume based on that 4+% rate it’s not fixed?

But if the money isn’t doing anything else then paying it off is fine.

[JapanRed]

LivingTheDream said:

JapanRed said:

Thanks. I’m already maxed out on pension contributions for the time being. And have diverse investments elsewhere.

Literally just need to know if what I’m planning makes sense and that I’m not missing something obvious.

Dropped the calculations into Money Saving expert overpayment calculator and a £40k overpayment would save me £68k in interest over the term. I’d have a £13k tax bill next year but would still be £55k “up” (£68-13k). Unless I’m talking rubbish which won’t be the first time haha.

Fundamentally yes - you would be much better off in the long run.

However, I would do the calculation slightly differently as you need to pay the £13k tax bill from somewhere. So unless you’re paying that from another pot you should take £40k divi, stash the £13k tax in somewhere with decent returns until you need to pay it and pay off £27k.

I would pay the tax bill from future dividends.

[JapanRed]

roadsmash said:

I would pay it off.

Or at the very least remortgage to a better rate. I presume based on that 4+% rate it’s not fixed?

But if the money isn’t doing anything else then paying it off is fine.

Thanks mate. Yeah it’s 4% as it’s not fixed. I could probably remortgage to under 3% if financially viable, however I think you are right in that paying it off makes better financial sense.

[roadsmash]

JapanRed said:

roadsmash said:

I would pay it off.

Or at the very least remortgage to a better rate. I presume based on that 4+% rate it’s not fixed?

But if the money isn’t doing anything else then paying it off is fine.

Thanks mate. Yeah it’s 4% as it’s not fixed. I could probably remortgage to under 3% if financially viable, however I think you are right in that paying it off makes better financial sense.

Cool.

Perhaps start by paying off a good chunk and leave a bit of the cash in the company and see how you feel before committing to the full mortgage.

Best of luck.

[Alpinestars]

LivingTheDream said:

JapanRed said:

Thanks. I’m already maxed out on pension contributions for the time being. And have diverse investments elsewhere.

Literally just need to know if what I’m planning makes sense and that I’m not missing something obvious.

Dropped the calculations into Money Saving expert overpayment calculator and a £40k overpayment would save me £68k in interest over the term. I’d have a £13k tax bill next year but would still be £55k “up” (£68-13k). Unless I’m talking rubbish which won’t be the first time haha.

Fundamentally yes - you would be much better off in the long run.

However, I would do the calculation slightly differently as you need to pay the £13k tax bill from somewhere. So unless you’re paying that from another pot you should take £40k divi, stash the £13k tax in somewhere with decent returns until you need to pay it and pay off £27k.

And the tax relief lost on the interest on the principal repayed.

OP, going forward a couple of years, you may get less tax relief for interest.

I think your options for working out whether repaying is cost effective or not are based around 2 variables. Pay or don’t pay the mortgage, and take a dividend or not. I’ll assume you won’t/can’t pay the mortgage without a dividend, so that leave 3 options:


1. Don’t take divi and don’t pay mortgage
2. Take divi and pay mortgage
3 Take divi and don’t pay mortgage

I’ve tried to explain each option below, can’t guarantee any mistakes in calcs or logic, and hopefully it’s not too painful to follow.

Option 1

The cost is c £160k (£120k * c4.5% * 30 years). I’ve not factored in time value of money, the small tax relief you’d get, periodic repayments etc. To get an accurate cost you’d need to take account of time value of money and the small tax relief.

Option 2

You save the £160k in option 1, and replace it with the tax cost of taking a dividend now. If you assume you take all the dividend out in one year, I think the incremental tax is c £44k. You’d now have to compare this £44k tax cost now (no discount required), against the discounted cost of paying the mortgage off over 30 years, ie £160k in total. That’ll give you whether it’s worth paying off or not.

Option 3

You still incur the £160k interest cost on the mortgage. But you now have money (the net dividend) which you could invest into other things. If that investment makes you more than £160k in 30 years, you should discount option 1.
Back of a fag packet, says that c3% gross, compounding income on your net dividend (which I think is c£76k), should get you around £160k in 30 years.

Edited by Alpinestars on Saturday 19th January 11:34

[JapanRed]

Thanks everyone. Really great replies as always. Think I’ll pay off the mortgage. I could take the dividend and invest elsewhere but it would be riskier than I’d like and not guaranteed. Whereas the savings on both mortgages interest is guaranteed.

[JulianPH]

JapanRed said:

Thanks everyone. Really great replies as always. Think I’ll pay off the mortgage. I could take the dividend and invest elsewhere but it would be riskier than I’d like and not guaranteed. Whereas the savings on both mortgages interest is guaranteed.

I think that makes a great deal of sense.

[Tumbler]

Have you checked with the bank how much you can overpay without incurring a interest penalty, often it is only 10% of the outstanding balance in any year.

[williaa68]

Is the business ongoing? If not, you could (potentially) liquidate it and take the cash out and pay 10% CGT via entrepreneur's relief, rather than 32.5% tax on the dividend. Even if it is ongoing now, if you are planning on stopping in the near future, this is worth bearing in mind. This is, broadly, my strategy - I have a similar amount tied up in my company but plan on accruing cash for approx another 3 years and then retiring. The only potential spanner in the works is a corbyn government in which case I will be liquidating and retiring very quickly!

[JapanRed]

Tumbler said:

Have you checked with the bank how much you can overpay without incurring a interest penalty, often it is only 10% of the outstanding balance in any year.

We aren’t tied in. No early repayment charges as I’m on base rate.

[JapanRed]

williaa68 said:

Is the business ongoing? If not, you could (potentially) liquidate it and take the cash out and pay 10% CGT via entrepreneur's relief, rather than 32.5% tax on the dividend. Even if it is ongoing now, if you are planning on stopping in the near future, this is worth bearing in mind. This is, broadly, my strategy - I have a similar amount tied up in my company but plan on accruing cash for approx another 3 years and then retiring. The only potential spanner in the works is a corbyn government in which case I will be liquidating and retiring very quickly!

Hi mate. I started the business 5 years ago. The reason I’ve got £250k in there is because I planned to do 5-10 years and then liquidate via entrepreneurs relief. It was almost set in stone and I had it all planned out with the accountant too.

Through sheer luck and not judgement, the business has gone from £30-50k a year profit to £120k last year and potentially £180-220k next year. Hence me now not wanting to close it for the foreseeable future. Maybe if it gets to a million I might close it but can’t see me wanting to shut it down while ever it’s going from strength to strength. It’s increased its profits year on year from inception so seems daft to think about closing. Hence the change of heart regarding entrepreneurs relief.

[Foundthecure]

JulianPH said:

To answer your specific question OP, yes.

The savings over the term of the mortgage would massively outweigh the tax on the dividend withdrawal.

Using the rental yield to overpay your residential mortgage will result in further interest savings.

Do this.

[JulianPH]

Foundthecure said:

JulianPH said:

To answer your specific question OP, yes.

The savings over the term of the mortgage would massively outweigh the tax on the dividend withdrawal.

Using the rental yield to overpay your residential mortgage will result in further interest savings.

Do this.

Thank you!

One other thought OP. It may be possible to reduce the tax bill by transferring part of your shareholding to your wife (or vice versa) in return for the capital payment.

This would then be subject to CGT rather than Income Tax which would give rise to a tax liability of 20% or even 10% if you could use your entrepreneur relief.

It is certainly worth speaking to your accountant about (or asking Eric very nicely! )

This is simply tax saving however, the principle still remains the same on the dividend income tax payment, just even more attractive on the CGT/ER basis if that can work.

Cheers

[selmahoose]

@JR:

Hate to tell you, but the fact that someone else is buying that btl in Barnsley for you is just about the only thing it's got going for it.

It grosses £9k, £6.6k of which is going to the lender. Then there's the factoring, the insuring, the gas, elec, pat, legionella and other testings to pay for. Then there's the calc. for the self-management (inc.time cost at whatever your PAYE rate is). Then there's reps & maint which no property ever escapes from for long including the ones we live in. There's even landlord registration, accountancy, and probably a factor/buildings manager to pay for too. And those are my top of head calcs so there'll be other costs on top.

So there's not much to worry about taxwise because it's making jack anyway.

The ONE thing it does have is that you're NOT paying for it. The tenant is. So, so far your ROI (calculated on the 'hurt' money you paid to get it - deposit, conveyancing etc) may well be pretty decent.

Often enough that thought is the only thing that keeps a landlord sane!

And you want to spoil that. By dumping another £120k from a different company on it. Massively reducing your ROI.

And it's to be paid from dividends. Which are not 'business costs' like fee/salary income from companies is. So the dividends are from residual profits taxed at the corp tax rate (19%, 20%??). In other words, the dividend has already BEEN taxed before you get it.

Then you get it. And I'm surprised that the daft folk who encourage you to do this haven't told you to limit that dividend to £34.5k instead of £40k for reasons that I can't be bothered explaining.

Next you've to take the now mortgage free rent money (which once again has a tax implication) and use that towards your resi mortgage which is most definitely not a deductible business cost and may be "investing" in a depreciating asset!

Well you're a Yorkshireman so you'll appreciate some blunt speaking rather than ego-puff. I'd say give your head a wobble, join those Barnsley landlords who're getting their nice 10% from those decent little £50k terraces Rightmove is full of, and just further that plan you were talking about a few weeks ago of building up a nice portfolio of btls.

ETA: Deleveraging a btl business at age 33??? Seriously? lol!

With the greatest respect to St Eric, I'd look to PH counselling from say Dazwalsh or Cerbperv if he's still around re btl affairs. IME - albeit fundamentally flawed - in the property business you need an accountant prepared to have a laff with HMRC rather than someone keener to take the cautious (aka paranoid) approach so often to be seen on this font of wisdom.

PS: I know what I'd have done with your 1/4 bar of company moolah when I was 33. But then, I was never certain I was going to be 34

Edited by selmahoose on Saturday 19th January 15:13

[JulianPH]

selmahoose said:

Far to much as usual and yet again confused his own opinions with facts...

I preferred you when you were Joyless Lobotomised Parrot (and even when you were Groak, for that matter).

Lighten up man and do everyone a favour!

[selmahoose]

JulianPH said:

selmahoose said:

Far too much as usual and, yet again, confused his own opinions with facts...

I preferred you when you were Joyless Lobotomised Parrot (and even when you were Groak, for that matter).

Lighten up man and do everyone a favour!

/quote]

So you didn't enjoy the original 'selmahoos' (no 'e') then? Back in the pre-groak days? When Real Men discussed property matters on the "How Far Will House Prices Fall"? thread? Oh dear!

Lighten up? tee-hee! If I was any lighter I'd be floatin'! You don't HAVE to be greasily effusive to exchange Sat PM banter on a chat site y'know. And the atmosphere of a raving is often revealed by that emoji thing we stick on at the end!

[JulianPH]

selmahoose said:

JulianPH said:

selmahoose said:

Far too much as usual and, yet again, confused his own opinions with facts...

I preferred you when you were Joyless Lobotomised Parrot (and even when you were Groak, for that matter).

Lighten up man and do everyone a favour!

So you didn't enjoy the original 'selmahoos' (no 'e') then? Back in the pre-groak days? When Real Men discussed property matters on the "How Far Will House Prices Fall"? thread? Oh dear!

Lighten up? tee-hee! If I was any lighter I'd be floatin'! You don't HAVE to be greasily effusive to exchange Sat PM banter on a chat site y'know. And the atmosphere of a raving is often revealed by that emoji thing we stick on at the end!

I've tidied up your quoting for you, happy to help!

I don't think I was an active member prior to you being Groat, or maybe I just managed to forget...

Emojis are quite helpful as sarcasm and persiflage can often (on online forums) be mistaken for insults that were not intended.

I'm not sure how I was "greasily effusive" but I have experienced enough to know that you will tell me!

Enjoy your day!

Julian

[JapanRed]

JulianPH said:

Foundthecure said:

JulianPH said:

To answer your specific question OP, yes.

The savings over the term of the mortgage would massively outweigh the tax on the dividend withdrawal.

Using the rental yield to overpay your residential mortgage will result in further interest savings.

Do this.

Thank you!

One other thought OP. It may be possible to reduce the tax bill by transferring part of your shareholding to your wife (or vice versa) in return for the capital payment.

This would then be subject to CGT rather than Income Tax which would give rise to a tax liability of 20% or even 10% if you could use your entrepreneur relief.

It is certainly worth speaking to your accountant about (or asking Eric very nicely! )

This is simply tax saving however, the principle still remains the same on the dividend income tax payment, just even more attractive on the CGT/ER basis if that can work.

Cheers

Hi Julian.

Could you expand on this? My wife is already a shareholder and I already give her dividends. I plan to give her about £50k and myself £20k before April 5th. And can then fo the same after April. Is this what you mean?

[JapanRed]

selmahoose said:

@JR:

Hate to tell you, but the fact that someone else is buying that btl in Barnsley for you is just about the only thing it's got going for it.

It grosses £9k, £6.6k of which is going to the lender. Then there's the factoring, the insuring, the gas, elec, pat, legionella and other testings to pay for. Then there's the calc. for the self-management (inc.time cost at whatever your PAYE rate is). Then there's reps & maint which no property ever escapes from for long including the ones we live in. There's even landlord registration, accountancy, and probably a factor/buildings manager to pay for too. And those are my top of head calcs so there'll be other costs on top.

So there's not much to worry about taxwise because it's making jack anyway.

The ONE thing it does have is that you're NOT paying for it. The tenant is. So, so far your ROI (calculated on the 'hurt' money you paid to get it - deposit, conveyancing etc) may well be pretty decent.

Often enough that thought is the only thing that keeps a landlord sane!

And you want to spoil that. By dumping another £120k from a different company on it. Massively reducing your ROI.

And it's to be paid from dividends. Which are not 'business costs' like fee/salary income from companies is. So the dividends are from residual profits taxed at the corp tax rate (19%, 20%??). In other words, the dividend has already BEEN taxed before you get it.

Then you get it. And I'm surprised that the daft folk who encourage you to do this haven't told you to limit that dividend to £34.5k instead of £40k for reasons that I can't be bothered explaining.

Next you've to take the now mortgage free rent money (which once again has a tax implication) and use that towards your resi mortgage which is most definitely not a deductible business cost and may be "investing" in a depreciating asset!

Well you're a Yorkshireman so you'll appreciate some blunt speaking rather than ego-puff. I'd say give your head a wobble, join those Barnsley landlords who're getting their nice 10% from those decent little £50k terraces Rightmove is full of, and just further that plan you were talking about a few weeks ago of building up a nice portfolio of btls.

ETA: Deleveraging a btl business at age 33??? Seriously? lol!

With the greatest respect to St Eric, I'd look to PH counselling from say Dazwalsh or Cerbperv if he's still around re btl affairs. IME - albeit fundamentally flawed - in the property business you need an accountant prepared to have a laff with HMRC rather than someone keener to take the cautious (aka paranoid) approach so often to be seen on this font of wisdom.

PS: I know what I'd have done with your 1/4 bar of company moolah when I was 33. But then, I was never certain I was going to be 34

Edited by selmahoose on Saturday 19th January 15:13

Hi selma,

Thanks for the comments. To answer a few of them:

Yes I know it’s a poor example of a BTL. If I was a professional landlord I would’ve bought 4 terraced houses for the price I paid for this house (£185k I think).

I’ve considered buying a few properties as you have noted, but have yet to pull the trigger as I’ve had a bit of hassle with tenants and being a landlord, whilst not terrible, has occasionally been a bit of a ball ache.

I do indeed appreciate the straight talking ;-)
I’m 34 not 33 :-)

(Sorry I’ve not mentioned all this before. Didn’t want this to become my life story).

On a side note, you say you know what you would do with the money at my age. What would you have me do with the money at 34?

EDITED AS I FELT THERE WAS TOO MUCH PERSONAL INFO IN HERE

Edited by JapanRed on Saturday 19th January 16:11

Edited by JapanRed on Monday 21st January 10:01

[anonymous-user]

JapanRed said:

Toyed with getting a McLaren but honestly can’t bring myself to spend that much of my daughters inheritance on a car,

Just remember you get a 40% discount if you buy the McLaren yourself compared with your daughter buying one later...