The Daily Telegraph - Saturday - Money
‘Can I turn my inheritance into a travel fund?’
Should Tanya Dempsey invest in buy-to-lets or stocks and shares to get £10,000 a year, she asks Melissa Lawford
When Tanya Dempsey received an unexpected inheritance after the death of her uncle, she was astonished. His £1.1m estate included a threebedroom house on Hayling Island, Hampshire, which Ms Dempsey chose to keep. In July last year she and her husband moved back from Zambia into the house to be closer to her mother, who lives nearby. The house was valued last year at £260,000 and she also inherited £118,000 in cash. She is using £76,000 of this to renovate the property, leaving £42,000.
She wants to know how she can manage her new assets so that she can have an extra £10,000 to £15,000 to go travelling every year, while potentially working part-time. “I’ve never been to South America. I’d love to go to the Yucatán in Mexico and see the sinkholes and the Mayan ruins, such as Chichén Itzá,” Ms Dempsey, 50, said.
She said she planned to sell the house after a few years as she is adding value and prices are rising. “A similar property around the corner just sold for £380,000,” she said.
She has discussed teaming up with her mother to buy somewhere else to live locally, mortgage free. If she were to set aside £200,000 from a future sale, she would potentially have an extra £180,000 to invest in a few years’ time.
But where should she start? “I am a complete novice with investments, but I’m keen on the idea of buy-to-lets or holiday lets,” said Ms Dempsey.
Her annual pre- tax salary as a teacher is £33,000 and her husband does not work. They have no other assets except for a collection of vintage cars, which includes a 1973 fire engine. “I’d like to convert it into an overland expedition vehicle, ship it to Namibia and tour Africa,” she said.
Anna Clare Harper
Chief executive of SPI Capital, a property consultancy Ms Dempsey’s goal of making £ 10,000 to £ 15,000 a year is achievable from property investments with the amounts of money she has inherited.
Buy- to-lets offer consistent income and are one of the least risky property investments in terms of cash flow. Demand from tenants for good, affordable rentals is strong and growing.
Holiday lets are attractive on paper thanks to their gross yields. But owing to higher management costs, longer void periods and inconsistent and seasonal bookings, a question mark over future demand and anticipated future regulations, they are not the best fit.
Ms Dempsey should choose buyto- let properties worth £ 70,000 to £150,000 that have a 6pc gross yield.
If she buys mortgage-free using the sums from her inheritance, her portfolio will start with a value of about £210,000 after transaction costs. If house price growth were 5pc, the annual capital appreciation would be £10,000 and she could achieve rental income of £9,198.
If she uses mortgages to buy, however, her portfolio could be worth £740,000 with the help of 75pc mortgages. With the same 5pc growth rate, capital appreciation would be £37,500 a year. Using a 75pc five-year fixed-rate mortgage at 1.75pc, Ms Dempsey could use her initial £42,000 to buy a property worth £136,000 in the short term, generating £8,160 gross income.
Assuming typical management costs of 10pc plus VAT and setting aside 15pc each year for voids, maintenance and contingencies, she would have a pretax income of £4,172.
The additional £ 180,000 investment in a few years could be used to buy a property worth £581,000, generating a £17,822 pre-tax income with the same assumptions. She would then have a portfolio worth £717,000 generating £43,020 in rent, with a £21,994 income before tax. Buying via a limited company allows investors to make mortgage interest tax deductible. If Ms Dempsey chooses to borrow, she could establish an investment company to take advantage of this. But the finance costs are higher at more than 3.5pc. For a modest portfolio and a lower-rate taxpayer, it can be cheaper not to bother with the limited company.
Victoria Ross of tax- efficient wrappers. Ms Dempsey and her husband can each invest £20,000 a year in Isas and benefit from tax-free growth and flexible access. Gifts between spouses are free of any tax and so Ms Dempsey can transfer cash to her husband so they can both make use of their allowances.
She can also potentially contribute to a personal pension up to 100pc of her salary every year, receiving basicrate tax relief, immediately boosting her investment by 25pc. She can take money out of a personal pension from age 55, which should be appropriate for her travel plans.
I’d suggest using both their Isas for the initial cash and putting any remaining money into Ms Dempsey’s pension. Once the house has been sold, they can continue to pay £20,000 each into Isas every year and up to 100pc of Ms Dempsey’s salary into a pension if she is still working (or £2,880 per year net if not).
Anything left over can be put into a general investment account and used to top up the Isa and pension each year until the general investment account is used up. Any income should be taken from the general account first, leaving more assets in the tax-efficient wrappers.
Ms Dempsey should consider a ready- made diversified fund portfolio. In the long term, such a portfolio with a medium risk level should sustain annual withdrawals of 3pc without significant erosion of the capital. There could be medium-term volatility, so she could benefit from maintaining a cash buffer of a couple of years’ income needs (say £25,000). This could be used for income instead of the investments if markets fall.
A 3pc withdrawal from a £222,000 portfolio is £ 6,660. If Ms Dempsey wants £10,000 from her portfolio, this will erode the capital, so an income of £10,000 to £15,000 is unlikely to be feasible from the inheritance for life. Simple modelling suggests that taking £10,000 of income for 10 years should reduce the portfolio to £190,000.
This should still be able to generate income in perpetuity of 3pc to 4pc, or £5,700 to £7,600 a year.
Tanya Dempsey wants income to pay for travel to Chichén Itzá in Mexico, right