Pay off mortgage with dividends???

[JulianPH]

Alpinestars said:

JulianPH said:

I can understand if they are deemed to be connected parties this might not work, but my point is that the sale of the shares is contractually structured so that (to use round numbers) Person A (the seller) agrees to £100k total consideration of which £10k is paid upfront by Person B (the purchaser) and the balance is paid in 3 equal six-monthly instalments from the company being sold.

I am assuming that Person A retains a minimum 5% shareholding and continues to work for the company for this period as a minimum.

As I say, I am not an accountant and that is why I am asking the question.

It doesn’t work.

What you’re describing is a mechanism for paying the consideration.

Person B owes person A for the acquisition. The sale by A, if ER applies is subject to the lower rate (but being a transaction between spouses, is at no gain/no loss). But there’s no money. If B pays the consideration directly, the company is still stuck with the money - you’re kicking the can down the road. I think you’re suggesting the company pay the consideration, ie, the money has to come out of the company? As soon as that happens, it’s taxable income for the recipient. There’s also the small matter of the company not having a liability to pay any money. It’s not party to the transaction. It’s the subject of the transaction.

Edited by Alpinestars on Sunday 20th January 12:18

Thanks, that was the answer I was looking for. A friend sold his business on a deferred consideration basis and told my otherwise (i.e. that the company he had sold was paying him the deferred consideration directly), hence me asking the question. He must have been confused.

My guess is that the buyer used his holding company to make the purchase and passed up retained cash profits from my mates business (and many other similar purchased ones) to the holding company to pay the deferred, but who knows?!

Cheers

[red_slr]

(dont take this the wrong way) All this d*cking about for £750 a month when your "side business" is (by the sounds of it) making at least £10k a month profit. Loans, mortgages, bla. Honestly you are just wasting your time. And if your side business really is making that kind of money (you say the business will account will grow by another £150k this year) then seriously jack in your £60k PAYE and focus on the business that probably has the potential to make a heck of a lot more.

Personally your best solution here, IMHO, is to sell the damn BTL and forget about it. There will be very little tax to pay that way (if that's whats bothering you) then focus on how to best financially manage your business.

[Alpinestars]

JulianPH said:

Thanks, that was the answer I was looking for. A friend sold his business on a deferred consideration basis and told my otherwise (i.e. that the company he had sold was paying him the deferred consideration directly), hence me asking the question. He must have been confused.

My guess is that the buyer used his holding company to make the purchase and passed up retained cash profits from my mates business (and many other similar purchased ones) to the holding company to pay the deferred, but who knows?!

Cheers

That makes more sense. He sold and got his ER, and the purchaser (which was a company), used money in the target to pay him the (deferred) consideration. The difference here is that the money can be extracted tax free from the target (a dividend from the target company to its parent purchaser is tax free). Parent then uses the money to pay for the shares).

[JapanRed]

WonkeyDonkey said:

I'm sorry if this sounds crass but if you are earning so much from your day job and side job why not just get proper financial advise from an accountant or something similar?

Surely they'll be able to advise you properly and the cost will be pennies compared to whatever interest you're paying at the moment on the btl

I get regular advice from 2 accountants but I like to bounce ideas off this forum before going to them. Wouldn’t make any decision purely based on an Internet forum but these forums have given me ideas in the past thaty accountants haven’t thought of.

[JapanRed]

red_slr said:

(dont take this the wrong way) All this d*cking about for £750 a month when your "side business" is (by the sounds of it) making at least £10k a month profit. Loans, mortgages, bla. Honestly you are just wasting your time. And if your side business really is making that kind of money (you say the business will account will grow by another £150k this year) then seriously jack in your £60k PAYE and focus on the business that probably has the potential to make a heck of a lot more.

Personally your best solution here, IMHO, is to sell the damn BTL and forget about it. There will be very little tax to pay that way (if that's whats bothering you) then focus on how to best financially manage your business.

It’s not wasting my time. My side business can’t expand exponentially. I’ve calculated a maximum it could earn per year as approx £350k pre tax. It’s also very volatile and could end with less than a years notice due to political situations.

I also don’t want to quit my day job, yeah it earns much less but is about a thousand times more rewarding - job satisfaction and all that. I’d rather be happy earning £60k than unhappy earning millions. I’ve considered selling the BTL multiple times (usually when it causes me hassle) but always come round to the thought that it’s not actually costing me anything so what’s point in getting rid...

I don’t have aspirations to become a millionaire. We aren’t ever likely to want to live in a house worth over £600-750k. I’m quite into cars so could see myself in a £100k motor one day but ultimately aren’t flash with money. That doesn’t mean I don’t want our money to work hard for us. We have a 1yr old child so everything is now done with her in the back of my mind. Just because someone can earn £10k a month doesn’t mean they should be daft with money. I’ve always been cautious with money and probably always will be.

I don’t really want to go into any more than that. I’ve already posted more about my life story than I ever wanted.

Edited by JapanRed on Sunday 20th January 15:41

[selmahoose]

red_slr said:

(dont take this the wrong way) All this d*cking about for £750 a month when your "side business" is (by the sounds of it) making at least £10k a month profit. Loans, mortgages, bla. Honestly you are just wasting your time. And if your side business really is making that kind of money (you say the business will account will grow by another £150k this year) then seriously jack in your £60k PAYE and focus on the business that probably has the potential to make a heck of a lot more.

Personally your best solution here, IMHO, is to sell the damn BTL and forget about it. There will be very little tax to pay that way (if that's whats bothering you) then focus on how to best financially manage your business.

Well yeah he COULD kill the poor wee btl dream rather than just leave the tenancy to pay off the mortgage to one day allow the burden free rent to pay his monthly wine bill in retirement.......

...but the op's actual op involves dealing with surplus profits, which your post doesn't fully address.

...so I decided to phone my associate at Stupid Money (specialism - Making a Small Fortune from a Large One) Ltd. And he immediately came up with a fiendishly cunning yet somehow stunningly simple plan:

Seems this dude has about £150k pa surplus.

Why doesn't he find a real, proper, highly capable professional kickass letting agent/property manager.

And every year spend the £150k buying 3 of these natty little £50k terraces so beloved by landlords in his area.

For the next 20 years

Then suddenly he will be 55, when he wants to retire.

And then his 60 happy dungeons can change from supplying him with lease payments on a Ferrari Unnecessario and many happy training trackday trips to Maramallow and turn instead to providing £30k a month gross (probably £50k in 20 years) to supplement his pension and investment incomes and the income from the sale of his nicely profitable business?

Of course, while this is Stupid Money's Balsawood Package, there is the slightly more complicated Special Stupid Money Brainless Chicken Scheme aka Limited Leverage for Dummies.

This requires a calculator, a sharpened pencil, an old envelope, and primary 5 level arithmetic skills, plus between 5 and 15 minutes of focussed thought depending on the ability level of the participant.

It involves using the combined LTV of the existing unburdened portfolio and a similar number of proposed purchases backed up by the current and projected rents of the whole kit and caboodle.

Then a whopping sum is obtained and suddenly instead of reaching retirement age with 60 dungeons, the op would have 120. Currently grossing £60kpm and in 20 years time, who knows? £100k?

£100k a month is enough even for most though not all PHers to struggle by on as old duffers.

And then there's whatever relatively piffling sums his other investments (pensions etc) have managed to produce as a backup in case he decides to not insure his properties and burn them all down.

Caveat: The Stupid Money Specialist who provided this harebrained and clearly worthless opinion is currently sitting with his personal assistant (with whom he has 2 charming kids) in a quiet little bistro in Athens. They are mildly inebriated.

He is there to sign off on the purchase of the final tiny <€20k Athenian dungeon of the portfolio of 20 he spent most of last year buying. His accountant, Barlinnie Bert, has told him there is no reason why the cost of this essential business trip should not be considered as a deductible expenditure. Nor is there any reason not to include hotels, meals and other expenditures normally associated with tourism as further expenses. Nor is it unreasonable that this trip should be of a week's duration.

He recommends Athens as the venue to replace Marbella for the AGM of the company we jointly own this year and advises all of you to do the same.

So just remember folks......this has been brought to you FREE OF CHARGE, pro bono, and no bill to follow...and you heard it first at.....

!!!!!STUPID MONEY!!!!! (how to make a small fortune from a large one) Ltd

Edited by selmahoose on Sunday 20th January 15:52

[JulianPH]

JapanRed said:

WonkeyDonkey said:

I'm sorry if this sounds crass but if you are earning so much from your day job and side job why not just get proper financial advise from an accountant or something similar?

Surely they'll be able to advise you properly and the cost will be pennies compared to whatever interest you're paying at the moment on the btl

I get regular advice from 2 accountants but I like to bounce ideas off this forum before going to them. Wouldn’t make any decision purely based on an Internet forum but these forums have given me ideas in the past thaty accountants haven’t thought of.

You are right. Asking for the thoughts of others is not always an alternative to seeking profession advice, it can be complementary.

You correctly considered that if having cash earning next to nothing in your business - whilst having borrowing for the same amount on a personal level costs you loads - then why not take a comparatively small tax hit to stop this.

You were always going to put this to your accountant, but simply sought opinion first.

This is the beauty of the finance thread, you can test ideas without spending money or committing.

[JulianPH]

selmahoose said:

Blah...

You are still entertaining, just no quite as coherently as you once were (and that is seriously stretching things!).

You do understand (and I know you do) that BTL income is only yours when you actually own the property. The OP is seeking to achieve just this.

You are suggesting continued leverage (borrowing) on the basis of continued house price and rental income growth.

That may indeed work, but it is not certain and the OP is looking to reduce the costs of the very same thing you basically propose.

He is perfectly free to re-mortgage at a better rate to fund another BTL purchase (or take further income from his business to do this). I'm not sure why you appear think otherwise.

It's a thumbs up for me, someone in their 30s doing well financially and aware of taxation issues is certainly on the right path.

[selmahoose]

I really don't know whether to laugh or cry.

Could someone...preferably a landlord...explain to Julian what the op's btl is COSTING HIM to buy from the lender?

Actually, I DO know...



Ps: Does anyone know how much of the mortgage the tenant's paying is capital?

Edited by selmahoose on Sunday 20th January 16:22

[Alpinestars]

selmahoose said:

I really don't know whether to laugh or cry.

Could someone...preferably a landlord...explain to Julian what the op's btl is COSTING HIM to buy from the lender?

Actually, I DO know...

It’s costing him the opportunity cost of his deposit plus interest on the loan, less, capital growth plus income. Less tax on any of that.

Presumably only he knows the position.

[selmahoose]

Alpinestars said:

It’s costing him the opportunity cost of his deposit plus interest on the loan, less, capital growth plus income. Less tax on any of that.

isn't the rent covering the interest? THAT kind of 'costing him' (tho I knopw what you mean).

How much (cashflow if you like) is op having to pay from the pocket to own this btl? Answer. Nothing. In fact I'd guesstimate he probably adds a grand a year to his net rellys.

Once upon a time when bankers were businessmen they'd all happily advance 100% of the purchase price of a unit against the value of a portfolio. No deposit necessary. Rent repaid the lender. Everyone happy. Rinse and repeat 100 times over. RICHES!!! (including, of course, the bankers cut)

Now only some do.

Dafties!

Edited by selmahoose on Sunday 20th January 16:35

[Alpinestars]

selmahoose said:

Alpinestars said:

It’s costing him the opportunity cost of his deposit plus interest on the loan, less, capital growth plus income. Less tax on any of that.

isn't the rent covering the interest? THAT kind of 'costing him' (tho I knopw what you mean).

How much (cashflow if you like) is op having to pay from the pocket to own this btl? Answer. Nothing

Once upon a time when bankers were businessmen they'd all happily advance 100% of the purchase price of a unit against the value of a portfolio. No deposit necessary. Rent repaid the lender. Everyone happy. Rinse and repeat 100 times over. RICHES!!!

Now only some do.

Whether or not the rent is covering the interest, the calculation is as set out.

Re the rental income and interest alone, If you take a simplistic view that the rent is covering the interest, you might still have the small matter of tax since the changes in interest deductions.

[JulianPH]

selmahoose said:

I really don't know whether to laugh or cry.

Could someone...preferably a landlord...explain to Julian what the op's btl is COSTING HIM to buy from the lender?

Actually, I DO know...



Ps: Does anyone know how much of the mortgage the tenant's paying is capital?

Edited by selmahoose on Sunday 20th January 16:22

Hi Groat

As a landlord I can explain it myself (not that I have to as Alpinestars already has).

The OP is paying 4% a year to borrow money he already has.

He will therefore save 4% a year (after the dividend tax cost) if he pays off the mortgage.

The rental income will remain the same, but the OP will save tens of thousands in interest charges.

If you can't understand this then all credit to you for doing so well despite this knowledge.

My Grandfather was a Yorkshireman (so like a Scotsman, just without the generous streak) and he taught me that if you look after the pennies the pounds would look after themselves. Apart from added complexity the same is true today.

The OP is simply doing this on a larger scale.

[selmahoose]

Alpinestars said:

selmahoose said:

Alpinestars said:

It’s costing him the opportunity cost of his deposit plus interest on the loan, less, capital growth plus income. Less tax on any of that.

isn't the rent covering the interest? THAT kind of 'costing him' (tho I knopw what you mean).

How much (cashflow if you like) is op having to pay from the pocket to own this btl? Answer. Nothing

Once upon a time when bankers were businessmen they'd all happily advance 100% of the purchase price of a unit against the value of a portfolio. No deposit necessary. Rent repaid the lender. Everyone happy. Rinse and repeat 100 times over. RICHES!!!

Now only some do.

Whether or not the rent is covering the interest, the calculation is as set out.

Re the rental income and interest alone, If you take a simplistic view that the rent is covering the interest, you might still have the small matter of tax since the changes in interest deductions.

Total and accurate accountant style thinking.

But in the Real World both this guy's interest payments and profits are pretty small. And he's self-managing with all the potential deductible expenditures that entails.

No tax to pay here, guv, with or without the dreaded interest deduction scandal.

I used to wonder why people did this type of (profitless) btl'ing. But I HAVE had it explained/rationalised to me by someone who does it. It's a bit of pretzelly logicality, but seen a certain way it does have sense.

Bit like the ole pension scam. Depends bigtime on you surviving until the fruity bit.

[Alpinestars]

selmahoose said:

Alpinestars said:

selmahoose said:

Alpinestars said:

It’s costing him the opportunity cost of his deposit plus interest on the loan, less, capital growth plus income. Less tax on any of that.

isn't the rent covering the interest? THAT kind of 'costing him' (tho I knopw what you mean).

How much (cashflow if you like) is op having to pay from the pocket to own this btl? Answer. Nothing

Once upon a time when bankers were businessmen they'd all happily advance 100% of the purchase price of a unit against the value of a portfolio. No deposit necessary. Rent repaid the lender. Everyone happy. Rinse and repeat 100 times over. RICHES!!!

Now only some do.

Whether or not the rent is covering the interest, the calculation is as set out.

Re the rental income and interest alone, If you take a simplistic view that the rent is covering the interest, you might still have the small matter of tax since the changes in interest deductions.

Total and accurate accountant style thinking.

But in the Real World both this guy's interest payments and profits are pretty small. And he's self-managing with all the potential deductible expenditures that entails.

No tax to pay here, guv, with or without the dreaded interest deduction scandal.

I used to wonder why people did this type of (profitless) btl'ing. But I HAVE had it explained/rationalised to me by someone who does it. It's a bit of pretzelly logicality, but seen a certain way it does have sense.

Bit like the ole pension scam. Depends bigtime on you surviving until the fruity bit.

Sounds like you know the OP’s tax position and alternative use of money better than we do.

[selmahoose]

Alpinestars said:

Sounds like you know the OP’s tax position and alternative use of money better than we do.

Relating specifically to the btl, from the information he's provided most of it isn't hard to guesstimate.

And as to alternative use of money, if you're talking about playing at property with it I'd be pretty certain I'd know how to use it better than "we" - depending of course on who 'we' is.

In fact it'd be pretty embarrassing if I didn't given a lot of the nonsense I read.

Actually, relating to the btl property stuff, imo it's getting worse.

Edited by selmahoose on Sunday 20th January 17:37

[JapanRed]

Hi guys. Thanks again for excellent advice. It’s great to get opinions from different corners and it’s all certainly given me food for thought.

No need to continue arguing amongst ourselves now I suspect I’ve received all the answers that I needed.

Top Pistonheading everyone. Have a great week. Cheers. Rob

[Deesee]

Just flicked through the thread...

Ltd co..

Cash on deposit in the business... what's your working capital cycle and cash requirement, say its 20/30k, then you have a surplus, withdraw it, the business does not need it.

Do you take advantage of making pension contributions from the company and reducing your corp tax bill? Could this be paid into a personal pension or a sipp/sass?

Do you take advantage of employee/shareholder benefits, ie life insurances, private medical, dental care as a business expense, rather than paying them after you've paid corp tax/PAYE/DIV tax?

Personal

Are you (and your partner) utilising the ISA allowances (you would have 40k between you) and potentially the lifetime isa allowance of 4k each? You could grow a sizeable investment portfolio CGT and income/Div tax free here.

Personal pensions see above are you BOTH getting up to the annual allowance limit?

Have you set up a Junior ISA for the new arrival?

PAYE

Does the company/s you both work offer a salary sacrifice, or a matched pension contribution scheme, potentially could you lower your PAYE tax payable and also your NI, and get more cash into the wrapper.

Is it worth looking at taking a sabbatical to concentrate on the side business, to see what could be achieved with 6 months of total commitment in terms of time?

BTL

From your numbers provided, you have an (hopefully) appreciating asset, with debt being repaid, assuming the property in a decent state of repair and you have a reliable tenant why worry?

Good luck OP!

Edited by Deesee on Sunday 20th January 23:49

[xeny]

JapanRed said:

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.

Remember that the £13K bill is now, some of the extra interest will be later, when inflation will have reduced the value of those £s, so it's not _quite_ that good a deal.

[red_slr]

JapanRed said:

It’s not wasting my time. My side business can’t expand exponentially. I’ve calculated a maximum it could earn per year as approx £350k pre tax. It’s also very volatile and could end with less than a years notice due to political situations.

I also don’t want to quit my day job, yeah it earns much less but is about a thousand times more rewarding - job satisfaction and all that. I’d rather be happy earning £60k than unhappy earning millions. I’ve considered selling the BTL multiple times (usually when it causes me hassle) but always come round to the thought that it’s not actually costing me anything so what’s point in getting rid...

I don’t have aspirations to become a millionaire. We aren’t ever likely to want to live in a house worth over £600-750k. I’m quite into cars so could see myself in a £100k motor one day but ultimately aren’t flash with money. That doesn’t mean I don’t want our money to work hard for us. We have a 1yr old child so everything is now done with her in the back of my mind. Just because someone can earn £10k a month doesn’t mean they should be daft with money. I’ve always been cautious with money and probably always will be.

I don’t really want to go into any more than that. I’ve already posted more about my life story than I ever wanted.

Edited by JapanRed on Sunday 20th January 15:41

IMHO, you need a reality check.

You need to sit down with someone who can provide this.

Otherwise you are going to end up in a world of hurt in a few years if you are currently trying to figure out how to pay off a £120k mortgage and pay a few tens of k tax bla. Seriously you need to do this asap.

Businesses grow, businesses fail, there is a life cycle. You are refusing to accept this or plan for it. You need a 5 year plan, and I am talking tax here.

You say you don’t have aspirations to become a millionaire, well you best accept it because most likely you will become one in the next few years. Just because of poor planning accessing the cash may become problematic if you are tax averse. I am not saying you will be daft with money in terms of spending it, but you are being very silly refusing to accept where you are now and need to look at what presents good value and what is best use of your time for the future.

Plodding along in a 60k PAYE job with a business in the background which has potential profits of £350k PA is just madness. All because you want to appear to be "not bothered and we don't need the money" etc etc. But in the meantime you are worried about £20,30k tax bill.

Reality check time....