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I have been running an idea around my head for a couple of days and would like your views
Generating deposits can be quite Taxing
to save 25% deposit for each purchase can be a bit of a struggle
So I have come up with this strategy
You will need a certain amount of cashflow to do this and you would need to be over 55 and a company director and a higher rate tax payer and most likely a Northern Landlord
The first goal is to create a bundle of Tax Free Cash and I will use 20K as that goal
Your Company would fund your directors pension with all its advantages Nil Corp Tax using the Pension rules to help with IHT Tax Planning
Your Company would fund you Directors pension to the Max of 40k per year
After two years of making contributions you than take you Tax Free Lump sum 25% of the 80k Fund and you leave the 75% of the fund alone to avoid IHT
You then buy a three bed house with a 75% mortgage via the company with the 20k
In the NE you can purchase an 80K property with a income of £600 which is a yield of over 8%
The company would then have a positive cash flow of around £250 to £350 a month
so that's the strategy it helps with IHT and gives you an extra pension if you want one
There is no tax to pay and you have generated £3600 a year for the company
I fully understand 40k a year is for a wealthy Landlord but I think this strategy would help a 40% or 45% Tax payer - and they have to be over 55.
Learn Change and Adapt ?????
And how will this work if you are below 55?
I know it will not work, however if you finds a smart way, please let me know
sorry I cant help you there Graa
But I have just thought of another plus on this
The director will have loaned the company the deposit via a directors loan
The company could than pay back the Loan and the director has no tax to pay
the company would have a tax liability of 19% on the money it pays back
But that is better than 40% or 45%
The other issue with your suggestion is that it is a one hit plan. The reason being that once you have taken your tax free 25% you are then limited to being able to only pay £3,600 gross (£2,880 net of basic rate tax) into your pension scheme. Whilst this will have saved you corporation tax in the short-run it will have damaged your future use of pensions for tax and investment planning. A better solution would be to accept paying corporation tax on the money you need as a deposit ( and if need be setup a group company to hold the property through) and then pay money into a pension fund as a separate tax free investment to produce income in the future and possibly also as tax free IHT planning.
It is important - even at over 55 - to keep your tax and investment options open.
You not quite right
With a Pension as long as you don't touch the Taxable element of the fund ie only take 25% tax free You can still invest another 40k a year up to age 75
so this can be done over and over again
If you do touch the Taxable Part of the Pension you are then restricted to 4k a year
I have just had a chat with my IFA and he confirms what I thought
Tax Free deposits and ring-fenced funds from IHT if you pass before 75
and even after 75 If the fund was passed to grandchildren they can take an income and only pay there own rate of income tax at the time on the income
My IFA told me the same thing last month.
Interesting what your IFA says because on HMRC's site they have the following:
You can take up to 25% of the money built up in your pension as a tax-free lump sum. You’ll then have 6 months to start taking the remaining 75%, which you’ll usually pay tax on.
On the basis of the above you would only have 6 months rather than until your 75 for the remainder of your fund to grow.
No you don't have to take a pension its up to the investor
under pension freedom
Oops looks like HMRC have a mistake on their web site.
lol am I surprised Not
The more I roll with this the better it looks to be honest
Its quite tax efficient for a Higher Rate Tax Payer
the only tax I could see being due would be the Corp tax when the directors loan is repaid
I could live with 19%
Its not the only one. It looks like they often forget to keep sites up to date.