At just 24, Lawrence Ireton has his own property lettings business and big plans to expand.
Like many small-business owners, his personal and business finances are closely linked, and Lawrence hopes to increase his own existing property portfolio to let via the business. But he may have to do some clever asset juggling to be able to stump up the cash in a tough mortgage market.
"I'd like to know how I can leverage my assets more to be able to invest in other properties," Lawrence says. "I really need to know how my finances will be affected with the current deals on the market. But I'm also keen to find out how I can save for the future with my current income and expenditure levels." And with hopes to retire at 55 on £50,000 a year, he'll need to start soon.
The good news for Lawrence is that he has already done well, has many years to achieve more and has enough cash to be a little flexible. "Lawrence has made a significant amount of money through his property investments and has accumulated some additional savings," says Kevin Anderson, an independent financial adviser (IFA) for Budge and Company. "Now may be an appropriate time to diversify his savings into stocks and shares and pensions, and to allow his income stream to grow to facilitate additional borrowing for property investment."
Lawrence will have to be organised and make his money work hard to begin to achieve his goals – starting with his current accounts.
"Lawrence has a Barclays overdraft costing him 1.49 per cent every month," notes Robert Forbes, an IFA for Plutus Wealth Management. "He should try to clear this with his savings as the interest is taxed at 20 per cent.
"As Lawrence is running a business where void periods and emergency repairs are possible, he is right to have cash reserves of nearly £20,000. Unfortunately, the returns on his savings will be poor, but that's the price of having instantly accessible cash."
Lawrence has a collection of property lets in the UK, Italy and Spain, with small interest-only mortgages outstanding on the UK homes. But Dennis Hall of YellowTail Financial Planning suggests this loan arrangement should not be a long-term solution.
"An interest-only mortgage can seem attractive from a tax perspective, as all the interest can be offset against rental income, but at some point the capital will need to be repaid," he says. "Unless Lawrence has an alternative means of repaying the capital he will need to sell one or more properties to do this, which would seem to defeat the object of using these properties as part of his retirement planning."
If a repayment loan didn't appeal, he could build up an investment fund to cover the cost of the whole loan. But he'll need to save hard. "With 21 years to go, he will need to save about £524 per month, assuming a net return of 6 per cent from investments to achieve the £260,000 mortgage liability," Mr Hall says. "At this level, his ISA allowances would be sufficient to grow this fund in a tax-efficient way."
But Lawrence wants to raise capital from his existing property in order to buy more property, which could be difficult on his £25,000 income. "While buy-to-let deals are available, they are nowhere near as attractive as they used to be and the lending criteria is much stricter," says Mr Anderson. "Some lenders require a minimum earned income over any rental income, others take into account the rental income. Existing properties may be remortgaged to raise the 30 per cent deposit required, but his current income could make saving enough very difficult."
"It's important that Lawrence gets advice about tax," Mr Forbes says. "He says all his income from his lettings firm is taxed as earned income and he could take a proportion of this in the form of dividends which offer a saving on his National Insurance contributions. If he decides to make pension contributions then he should do so as an employee contribution. It will be viewed as a business expense and could reduce his corporation tax liability."
Lawrence does not have any pension provision as yet, but wants to retire at 55 with a pension of £50,000 a year. "This might be a little ambitious," Mr Anderson suggests. "He would need to build up a fund of around £850,000 in today's money. This will mean Lawrence making substantial pension contributions almost immediately, or perhaps scaling back his expectations."
But Mr Hall goes one step further. "If Lawrence wants to draw, say, 4 per cent of his pension pot in retirement income every year, he'll need assets of around £1.25m. In 21 years, this figure will be closer to £2.33m assuming annual inflation of 3 per cent. That should be Lawrence's target."
Lawrence's properties will go some way towards achieving this and if house prices increased by 6 per cent a year, two of his flats alone – with a current combined value of £495,000 – might grow to around £1.68m by the time he comes to retire at 55. "But there will no doubt be some capital expenditure along the way, as well as the need to service the mortgage costs and repay the capital," Mr Hall adds.
However, Mr Forbes disagrees that property is the answer to Lawrence's pension aims. "There is nothing better for long-term savings than a pension plan. However, I would suggest that in the short term Lawrence use his equities ISA allowance of £10,200 this year," he says. "This way he'll be able to invest in the market in the same way as he would do in the pension and then in later years when he feels more settled he could put the money into a pension plan and receive tax relief at his highest rate."
Wills & Insurance
Not only has Lawrence invested in life insurance but, unusually, he already has a valid will. Because he has built up significant assets, Lawrence should ensure that he keeps both up to date and should consider writing the insurance policy into trust for his heirs. Doing so will mean the payout is no longer part of his estate and will go straight to his beneficiaries without being subject to inheritance tax.
"He should also consider a critical-illness policy that will provide a lump sum if he contracts a critical illness – a powerful protection policy," says Mr Forbes. "It's good to see that Lawrence has written a will, and he should also consider a Lasting Power of Attorney. This is a living will and gives someone the ability to make financial decisions on his behalf if he were incapacitated."
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Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF email@example.com