The House Crowd – tax efficient investing
This is the second post in a series about The House Crowd, who are one of the pioneers of property crowdfunding in the UK. If you want to find out more general information about the company and what investing with them entails be sure to check out my first post: an introduction to The House Crowd which I’ve written in FAQ form to hopefully answer any questions you may have had about them (and feel free to ask any others in the comments section!)
This time round I’d like to talk about how investing in crowdfunding can be very tax efficient, even if you can’t at the time of writing wrap these investments into an ISA or SIPP (more on this later though!).
There are essentially two types of investment you can take up with The House Crowd, one which pays dividends and one which pays interest. The structure of each investment is clearly explained when you receive the lender fact sheet.
As a quick aside, I’d also recommend signing up to their email list as you’ll get new investment opportunities emailed through as they come up, with all the basic info you need to know plus links to the more detailed lender fact sheet. I’ve found you don’t necessarily have to act that quickly to get on board with any given investment, but I guess if a sterling one came up then being on the email list would be of benefit here, and more to the point it saves you having to go and check their website every week or so. The frequency of emails is not annoying as they don’t just pick any old property to invest in so you will likely only get one email per week. It’s also worth pointing out you can obviously sign up to the email list without actually putting any money up, that’s what I did for about a year to keep an eye on what type of properties came up before finally diving in so it’s a good way of weighing up what it’s all about.
Back to the tax stuff! Let’s look at how these two type of investment payout structures can work out with your tax, with some examples.
dividend paying investments
I’m going to take the liberty that most people reading this blog have not already breached the £5,000 tax free allowance on dividends 1. For this example I’m also going to assume for my example that our hypothetical investor is in fact not getting any dividends that aren’t already shielded in an ISA or SIPP tax wrapper. I think that covers most investors on their way to Financial Independence, because most of us are not earning enough 2 to fill up both the ISA and SIPP allowance in any given year so why would you be purchasing any shares outside of those wrappers.
OK so with that caveat how much could you theoretically invest and earn with The House Crowd whilst not paying any tax on earnings?
My first dividend payment came through with a rate of 6.5% ROI for the year. So let’s use that as an average rate of net yield, which seems more than fair from what I’ve seen properties offering so far. So with the full £5,000 at your disposal you could invest:
Not too shabby. Of course I wouldn’t suggest anyone actually do that, as that would likely be a very non-diversified portfolio, but what it goes to illustrate is that there is plenty of headroom there and most frugal spending aspiring FI’ers are not going to hit that ceiling for quite a while. Obviously if you are a couple, then the amount you can invest doubles!!!
interest paying investments
The other type of payout you will get from The House Crowd is in the form of interest. As you probably know already there is now up to a £1,000 interest free allowance on interest earnings, for those whose annual earnings fall in the basic tax rate band. For those in the higher rate band the limit is only £500 and £0 for those in the additional rate band.
Taking the most basic scenario in which you are not earning any interest at all from other sources 3 and you are earning in the lower rate tax band, and using The House Crowds range of 9-12% returns for these investments, you’re range of investment capital needed would be:
£11,111 – To hit the max of £1,000 with a rate of 9%
£8,333 – To hit the max of £1,000 with a rate of 12%
the innovative finance ISA
The above is all well and good and should cover most individual investors needs quite easily without paying a penny of tax, but how about forgetting all of that and just wrapping all of your money up into an ISA? Wouldn’t that be much easier?
Well The House Crowd are on track to getting full FCA permission to offer their product wrapped up in the new Innovative Finance ISA (IFISA) around October time 4. Keep an eye on their blog for more information as it comes out (or I might even give them a shout out on here if you’re lucky 😉 )
To learn more on the IFISA see the FAQ page here but here a few bullet points for you:
- It looks like it will work in exactly the same way as a cash ISA, but you can use P2P platforms instead to get a better rate. I first thought there was a clause where you couldn’t touch your money for 5 years when reading around, but it looks like that isn’t the case and this is only determined by the length of any given investment you take up on your platform of choice (so for The House Crowd though, you are looking at longer term investments)
- Your ISA limit of £15,240 for this tax year and £20,000 for 2017/18 covers all types of ISA, so you could say have £5,000 in a cash ISA, £5,000 in a stocks and shares ISA and £5,000 in a P2P crowdfunding ISA, but the key is that the sum of your deposits in any given tax year must not breach the total limit.
- Obviously there is slightly more risk in P2P lending, which you would expect with a much greater return rate on cash.
- Remember P2P lending is not covered by the Financial Services Compensation Scheme if it all goes down in flames (unlikely, but something worth remembering before you plow 100% of your Net Worth into it, which you shouldn’t of course!)
I’m really excited by the IFISA in general and will definitely be using it once a few more P2P lenders have managed to get full FCA permission to offer a product!
- If you have, get in touch and lend me a tenner will ya? ↩
- if we were we’d already likely be FI I imagine and sunning ourselves on some beach in Brazil, not reading my blog! ↩
- OK this ones far more unlikely than the Dividends example, but serves as a nice illustration ↩
- Although the IFISA was launched in April 2016 apparently there is a bit of a backlog in applications, so all the crowdfunding companies are in the same boat here it seems and we’ll just have to be patient! ↩