# Tax exempt, am I making the most of it?



## marshmallow (20 Jun 2008)

Age: 35
Spouse’s/Partner's age: 33

Annual gross income from employment or profession: 100k (tax free due to artists exemption)
Annual gross income of spouse: 30k

Type of employment: Artist, wife is self-employed 

In general are you spending more than you earn or are you saving? Saving

Rough estimate of value of home 585k
Amount outstanding on your mortgage: 460k
*What interest rate are you paying? 4.59 NIB LTV*

Other borrowings – car loans/personal loans: Car 30k - 480pm 

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card? 

Savings and investments: 70k spread across various a/cs Rabo, Ulster etc

Do you have a pension scheme? No (no tax benefits for me as tax exempt)

Do you own any investment or other property? Yes 
Current value 600k
Outstanding mortgage 250k int only @ 4.8% = 1k pm
Rental income 1700pm

Ages of children: none

Life insurance: mortage protection


*What specific question do you have or what issues are of concern to you? *

My wife and I are considering selling the investment property and paying off the home mortage but as neither of us have a pension and aren't planning on getting one, I wonder if it is better to hold onto the investment property as a pension of sorts? As I'm paid in lump sums every now and again I plan to use these to pay chunks off the home mortgage which means we could realistically have it down to 350k by this time next year. We are thinking of starting a family soon so will need to upgrade to a bigger house at some stage as current house is only two bed so need to take this into account also. I'm really just looking for general opinions on whether we're doing the right things with the income we have at the moment. Thankfully my profession is now doing well (after years of very hard slog) so I'd like to make the best of it.


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## Brendan Burgess (20 Jun 2008)

This is a very interesting issue, when the bulk of a married person's income is tax free. I haven't come across it before. Here are my initial thoughts. 

Presumably,  you are jointly assessed so that your wife's income gets all the benefits of your tax credits and higher tax bands? 

The main financial planning issue is the uncertainty of your future income. €100k is a great income for an artist in Ireland today. How likely is it to continue at this level? I would think that it's difficult to predict. For that reason, I would agree with your strategy of getting down your home mortgage as quickly as possible. 

As you are paying tax at 20%, then there is no advantage in contributing to a pension scheme. Keep this under review though.

You have property worth €1.2m at the moment. That is a very high exposure to the property market. 

I think that the stockmarket is great value at the moment. I would tend to dispose of the property and invest the proceeds in shares rather than pay off your home mortgage. 

If you go down this route, you should buy shares directly as they are probably more tax efficient than buying through a unit-linked fund. 

Against that, you are getting tax relief on the interest you are paying on your mortgage. You have also paid the acquisition costs up-front. So if you decided in a few years to invest in property again, you would have to pay stamp duty and legal fees. But then, you could probably borrow the full amount of the investment and so get tax relief on the full mortgage. 

It's a very interesting Money Makeover issue and I would be interested to see other views on it.

Brendan


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## marshmallow (20 Jun 2008)

Thanks for the reply Brendan. Yes, we are jointly assessed so wife gets the tax credits etc. It looks as though my income will continue at least at that level in the future as my profile is increasing all the time (and workrate too!) but I too am aware that it is impossible to predict.
Re selling the investment property; the market is in turmoil at the moment so I'm not entirely sure how easy it would be to sell. The share solution is interesting although  I'd be very wary of investing 300k-odd in shares as to me it's rather akin to gambling! But I would certainly considering perhaps investing a smaller amount of the savings in shares.

Our main objective is to trade up in the next few years but again with the state of the property market we're unsure if trying to offload the investment property is a bit of knee jerk reaction, particularly when its easily covering itself and generating additional income which goes towards the home mortgage. So we're trying to decide if we should just leave it there 'in the background' almost like a pension and concentrate on reducing the home mortgage ourselves and trading up once it's reduced down to say 300k.


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## Jonathan.OB (20 Jun 2008)

Good Morning Marshmallow,   

Firstly, maximise your wife's pension contribution and tax relief, which will be at 20% of her contribution.   There seems to be a gross profit on your rental income of €700 p/m. What is the net rental profit per annum after all other costs (e.g management charges, let charge, f&f's, etc)?   What rate are you paying on your car loan? If the rate you're paying on this is greater than the interest being accrued by your €70k in savings, you would be better off to clear the car loan and use the €480 extra per month to put towards a structured savings plan and spread investment portfolio across more than just property, i.e shares, commodities/alternative assests - you will still have €40k in deposit accounts in your bank (deposit rates vary considerably so worth shopping around).

When do you plan on trading up? The decision on selling depends on this.  Bearing in mind if you decide to sell now, you wil have to pay Cap Gains Tax and then reinvest your money.

For your own pension plan, I would advise you have a structured retirement savings plan in place, and diversify your assest classes as you aren't heavily weighed in property and deposits.


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## marshmallow (20 Jun 2008)

Thanks Jonathan. 
To answer your questions: Net profit on rental is around 8k as I manage the letting myself and don't use agents etc. 
We plan to trade up in approx 2/3 years, mostly depending on when the home mortgage gets down to a lower level or when/if we have kids. 
To be honest, I'm not at all interested in a pension as I'm very much of the 'they are a gimmick' school and there are no tax benefits for me in this regard in any case. 

Yes, the car loan is at a rate of approx 7% whereas the savings are at approx 5% so a good idea to pay off this although I'd also prefer to keep a large rainy day fund (a hangover from my struggling artist days!)

I'm still very much in two minds about keeping/selling the investment property as if I do clear even a min of 300k in doing this, then we would be almost mortage free by this time next year, so what to do with our income?


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## Brendan Burgess (20 Jun 2008)

Hi Marshmallow

You are right not to invest in a pension while tax relief is limited to 20%. At some stage in the future,you are likely to be able to get tax relief at the top rate. So save your pension contribution elsewhere for the moment and put it in a pension when you can get 41% tax relief. 

Investing in shares is not gambling. I would suggest that you buy about 5 different blue chip shares. Some may fall, but overall the market will rise over time. It is very flexible. If you need cash, you can sell the shares almost instantly. It doesn't require the time which a property requires. 

Putting money on deposit long term is gambling. It will almost certainly fall in real value due to inflation. 

If you don't want to invest in shares, keep your investment property. It is not risk-free, but over the longer term, it should rise in value by more than general inflation. 

Brendan


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## Brendan Burgess (20 Jun 2008)

Another reason for having shares instead of property is that you will be able to trade up much more easily. When you see a property you like, you can sell shares to get the deposit. You don't have to do the balancing act between buying one house while selling another.


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## marshmallow (20 Jun 2008)

Brendan said:


> Investing in shares is not gambling. I would suggest that you buy about 5 different blue chip shares. Some may fall, but overall the market will rise over time. It is very flexible. If you need cash, you can sell the shares almost instantly. It doesn't require the time which a property requires.
> 
> Putting money on deposit long term is gambling. It will almost certainly fall in real value due to inflation.
> 
> ...


 
Good point about the money on deposit, very true. I will reduce our 'rainy day' fund then and consider looking at shares in more detail. Is it possible to administer the buying and selling of these shares oneself - like online? I notice my mortgage company NIB do some kind of share dealing service online so I might investigate this but would appreciate any recommendations you yourself might have for a hassle-free way of buying and selling shares (if there is such a thing!)


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## Jonathan.OB (20 Jun 2008)

Brendan,   Why would you not advise them to make use of the 20% pension bracket now? Wil they not miss out on the relief the could claim now?  J


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## Brendan Burgess (20 Jun 2008)

Hi Jonathan

this has been teased out elsewhere in some detail.  A pension fund is tax deferred not tax relieved. When the money comes out of the pension fund, it may be taxed at 41%. So that is very bad value.

But a more fundamental point is that the Mallows may be paying tax at 41% next year.  So if they put this year's contribution in a deposit account for a year, then they will get more tax relief next year. 

Even if the Mallows don't expect their income to rise, it is likely that the tax treatment of pensions will change to encourage low earners to contribute. It is likely to be much more attractive than 20% tax relief.

Brendan


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## Jonathan.OB (20 Jun 2008)

Thanks Brendan. Just wondering, is there some tax implication with artists that he will be taxed at 41% next year? Why "may" he be paying 41%?


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## marshmallow (20 Jun 2008)

I guess Brendan means if my wife's earnings rise, then we will be in the 41% tax bracket, however I'm still reluctant to even consider the pension option as I'm very much against them in theory, and I also don't want to lock funds away for so long. Hopefully in my business, I will still be able to work past 'retirement' age and all going well will also still have royalties so personally I believe there is no great argument for either of us to have a pension.


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## Brendan Burgess (20 Jun 2008)

Hi Marsh

Correct explanation. 

But don't let this timing issue reinforce your antipathy to pensions.

Pensions are quite simply the best approach to long term saving for higher rate tax payers.  If you find yourselves paying tax at 41% or if the pension rules change, then revisit the subject.

Brendan


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## marshmallow (20 Jun 2008)

Thanks again and I completely take this on board, but having read some of the other pension-related threads, I think I will take some convincing! 

I was mostly concerned that our level of debt was a bit too high in relation to our income which was why I was thinking of offloading the investment mortgage but I think we will hold onto it as our version of a 'pension' and just concentrate on reducing the home mortgage to a more sustainable level while also diversifying an savings out of deposits and into shares etc.
Advice much appreicated, thank you


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## eileen alana (20 Jun 2008)

Brendan said:


> it is likely that the tax treatment of pensions will change to encourage low earners to contribute. It is likely to be much more attractive than 20% tax relief.
> 
> Brendan


 

Brendan - Is this change expected anytime soon?


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## Brendan Burgess (20 Jun 2008)

No


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## yob (23 Jun 2008)

hi marshmellow heres my two pence worth,keep the investment property,you might be able to tie it into your pension in the future so you dont have to pay capital gains,these things are changing all the time,i dont see the point in selling it.
i understand how you feel about shares any body who never traded feels the same,so instead of selling the property to buy shares why dont you give yourself an allowance every month or period you monies come through and purchase some shares,and build a portfolio and you confidance.
as your planning to move in 2-3 years,get rid of the car loan,weather you use your savings now or increase the repayments,i dont think it will make a huge differance.
and i think you could increase your mortgage repayments,which will have a two fold affect,1)reducing the capital for when you go for your new mortgage
2)showing you can afford the higher payments on your new mortgage.
forget the pension it makes no sense at the moment,and is not your priority.
i would hang onto the savings for stamp duty,legal fees,engineer reports etc,for the new property.
best of luck
yob


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## marshmallow (23 Jun 2008)

yob said:


> hi marshmellow heres my two pence worth,keep the investment property,you might be able to tie it into your pension in the future so you dont have to pay capital gains,these things are changing all the time,i dont see the point in selling it.
> i understand how you feel about shares any body who never traded feels the same,so instead of selling the property to buy shares why dont you give yourself an allowance every month or period you monies come through and purchase some shares,and build a portfolio and you confidance.
> as your planning to move in 2-3 years,get rid of the car loan,weather you use your savings now or increase the repayments,i dont think it will make a huge differance.
> and i think you could increase your mortgage repayments,which will have a two fold affect,1)reducing the capital for when you go for your new mortgage
> ...


 
Thanks yob, makes sense to dip my toe into shares this way, hopefully I will learn as I go.  And my wife and I currently have no problem paying our fair share of taxation as I'm benefiting considerably from the exemption so even if she did reach the 41% I still doubt we'd be tempted by the pension! The post was more to do with how our borrowings look against our income


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## mell61 (25 Jun 2008)

Firstly Marshmallow congrats on making a living with something you love, the rest of us are probably very envious 
As you are already availing of the tax emption as an artist, would I be correct to assume you already have an accountant who has assisted you to get to this position?   Assuming so, and you are also gaining every tax benefit there (ie are you able to expense all your supplies, that weekend in Galway for inspiration , ) would it be worth using this person to investigate some of the options listed on this posting?
Secondly, I think you are getting a good return on the investment property, so in the current market i'd be a little hesitant to sell up, unless your renters are in a volitile role (ie builders) in an area you are unlikely to re-rent easily (middle of nowhere just new road being built, for miles around).
I would agree with the suggestion that ramping up the payments on your own home would be a good idea, indicating that you can afford more than your current payments when you next decide to move.   And of course pay off that car loan.

Well best of luck with the career continueing with as much success as you currently have.


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## acr2008 (25 Jun 2008)

I love the idea that the original posters name is Marshmallow and Brendan refers to he and his wife as "the Mallows". Nice touch Sir.


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## Brendan Burgess (25 Jun 2008)

In today's Indo it is reported that some Trinity think tank has called for the pensions relief for higher earners to be abolished altogether. 

I think it's more likely that pension relief for 20% payers will be increased, but I suppose the opposite is also possible. This does not affect the Mallows at this stage. 

Brendan


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