I have just inherited £175,000 and don’t know where to put it. I own several properties worth about £630,000 in total with mortgages on them of £282,000. I have £30,000 in Isas. I am currently getting about 5 per cent in a building society account for the inheritance. What should I do with the money? Should I clear most of the mortgages or invest elsewhere? I have little in the way of a pension fund, am married and I am in my mid-30s. I am not afraid of taking a risk.
Your attitude to risk and your views on tax-efficient investments are all important considerations when reviewing your options, says Simon Pym Williamson, certified financial planner with Broadway Financial Planning. This aside, your instinct to pay down your mortgages as a priority is a sound one, he says. This is because if you are a higher rate taxpayer, then to repay mortgage interest of, say, 6 per cent per annum you need to be convinced that you can obtain returns of at least 10 per cent gross before you break even. However, if any of your properties are let, then you could be getting tax relief on your mortgage interest and this, together with the tax allowances and reliefs available through Isas, pensions and venture capital trusts would make the investment decision tax neutral. If repaying your mortgages, Williamson says you should check that there are no early repayment penalties.
Also, to leave for the flexibility of having capital available, consider rearranging your borrowing to an “offset” type mortgage where any capital you have on deposit is used to reduce your mortgage interest. This is usually both tax and interest-rate efficient, Williamson says. Another point is that for personal reasons sSome people like to keep inheritances intact and separated from their other assets. “If you have, or are likely to have, children there could be good tax-efficient reasons for completing a Deed of Variation to your recent inheritance and having it placed in a Discretionary Trust of which you, your spouse and any children could be potential beneficiaries,” he advises. “This route could potentially have good long-term tax benefits.” But the downside of this option is that it would preclude you from investing into Isas, VCTs and other tax-efficient vehicles as your money would be locked away. If you aren’t wary of the stock market, then Williamson says Isas and pensions should be seriously considered. “The 40 per cent relief currently available on VCTs might also be attractive.”
Williamson advises that you should remember that anyone who has a mortgage and investments at the same time is essentially borrowing money to invest. “Given your young age this is certainly not an unacceptable philosophy, but you do need to ensure that it sits comfortably with your risk tolerance.”
Putting cash into Child Trust Funds
What are the best deals for Child Trust Funds? I prefer not to put the money into stocks and shares?
There are eight providers offering cash deposit accounts, all with competitive rates compared with standard children’s savings accounts. Of the accounts currently on the market, Ipswich Building Society is offering a market-topping 6 per cent per annum. However, the account won’t be available to you if you don’t live in the East Anglia area or aren’t willing to become a member of the society. Britannia building society is also offering 6 per cent per annum. That rate includes an introductory 1.25 per cent bonus for two years, but thatit only applies if the account is opened before April 6. Of the bigger high street institutions, Nationwide is offering an introductory rate of 5 per cent, with an additional bonus of 1 per cent per annum for accounts topped up by £240 per year. Abbey , the only bank to offer a cash account, has tiered its incentives, paying 5.25 per cent for the minimum £250, but this raterises to 5.75 per cent if your balance rises to passes £750 or above. For a full list of cash account providers and the rates and incentives they are offering see www.moneyfacts.co.uk, an independent provider of financial information. The website also has details about the products offered by stakeholder and and equity-based providers. You should remember, also, that you can switch providers, usually without penalty, if you do spot a better deal.
Losses can offset deferred profits
I am a small investor, but in 2000 I got lucky and made good profits in the tech share boom. I paid capital gains tax in 2001. However, to reduce the amount of tax, I invested £20,000 in a venture capital trust, which allowed me to defer £8,000. In the following years, I showed losses of £7,879, £3,597 and £8,563. This year, I have losses so far of £8,771 on my tax return. The VCT shares were redeemed on December 1, 2004, which I assume triggers the £8,000 deferral on my 2001 tax returns. Can the £8,000 I deferred be offset against the losses I have sustained since when I make my return for tax in April?
Patricia Mock, tax director at Deloitte, says the gain of £8,000 which was deferred when you invested in the VCT shares is treated as being made when the VCT shares are disposed, which was December 1, 2004. As far as setting losses against it, it is treated like any other gain, she adds, so it will firstly be relieved by losses made in 2004/05. As you have made losses of £8,771 so far in 2004/05 these will be sufficient to cover the gain. “If you make further gains in 2004/05, so that you have net gains, after setting off the losses of the year, these may be covered by the annual exemption of £8,200.” To the extent the net gains exceed the annual exemption, the losses which have accumulated from prior years of £20,039 can be set against them to reduce them to the annual exemption. for the year. You should note, she adds, that if taper relief is available (which it will be on assets owned for more than three years, or one year for business assets, as defined) losses are set against gains before taper relief is applied.
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