FIRE v London

Borrowing £2m to buy equities… two years later

2018-01-072020-07-12 FIRE v London27 Comments

It was just over two years ago that I first decided to use a margin loan to buy a multimillion pound Dream Home. It seems I’m one of very few folks, worldwide, to explicitly make this decision. So how’s it turned out? This post describes my journey so far. If you have no interest in margin loans or debt then this post isn’t for you – be warned.

What was I thinking?

The full story of that house purchasing whim is told in various posts (starting here), but it’s worth recapping a moment on my logic for using a margin loan.

The decision to buy the Dream Home arose very suddenly. I am not joking when I say it was a whim. All I knew for sure when I committed to the transaction was that I had liquid assets of a value significantly in excess of the Dream Home™, and that a mortgage wouldn’t be of much use to me. So I assumed that I could, worst case, sell assets to raise the funds necessary.

I needed to raise about 110% of the value of the Dream Home, to cover the purchase price, the stamp duty, and transaction costs.

My plan was to sell my Previous House shortly after buying the Dream Home (but not in a chain transaction). I assumed the Previous House was worth about 60% of the Dream Home. I also assumed the Previous House would be difficult to sell until after the Brexit referendum was behind us, at which point we would be safely confirmed as remaining in the EU. Hah. But even in my fantasy scenario, there were going to be many months between the purchase of the Dream Home and any sale of the Previous House, so I needed to ignore the Previous House when finding funds to complete the Dream Home transaction.

At around the same time, I was also expecting a windfall sum from the partial sale of one of my illiquid investments. This sum was going to be more than enough to pay for the stamp duty, i.e. a very significant windfall, of over 10% the value of the Dream Home. But I didn’t have control over the transaction timing and I knew that the deal could be delayed by weeks/months or, worse still, derail completely.

So, in crude terms, I thought that I could, over a few months and with a bit of risk, find about 70% of the ~110% I needed without needing to touch my portfolio, and that the balance of about 40% would come from liquidating a suitable slug of my portfolio. But in the meantime I would need to find potentially all 110% by liquidating the portfolio; this was going to be painful, but, hey, wasn’t the whole point of my liquidity-seeking investment strategy to be able to use the portfolio tactically when unexpected situations arose?

What should I have been thinking?

Once I thought about the funding requirement in more detail, in December 2015, a couple of things became clear.

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Reducing my tax rate

2017-12-222018-02-03 FIRE v London29 Comments

Avoiding tax is probably the best-known investment advice, and the mission that unites even the least sophisticated investors with the most financially literate.

How the government wants you to avoid paying tax

As a wise blogger (SHMD, I think it was, but I can’t find the link) pointed out recently, the UK offers unusually generous investing tax breaks (and that’s even before we get onto SEIS and EIS angel investing tax breaks). There’s almost no point in calling Panama.

For most UK investors, the simplest way to avoid taxes involves two manoeuvres, each done annually:

Topping up your ISA(s). ISAs remain the biggest potential tax break in the UK, but they require multi-year patience; there is an annual ‘use it or lose it’ allowance so to maximise the benefits you need to act annually. The limit these days is £20k per adult, so £40k per couple – which is a lot of money to find from disposable income but not enough to squirrel a large inheritance/windfall/25% pension drawdown away all in one go.
Making pension contributions. For most retail investors, pensions are a fairly straightforward tax break; in exchange for locking my money up until I’m c.60, I avoid any tax on the money from now until I start accessing it. For more affluent but nowhere-near-retirement-age investors, such as me, the UK policy is pretty crazy, because knowing whether your pot is going to breach the ceiling 20+ years out is a mad Monte Carlo guessing game. A 30 year old expecting to retire at 70 and expecting annual returns of 7% should be careful about taking their pot above £60k.

It is worth stating the obvious that not only are these two manoeuvres both 100% legal but they are in fact actively encouraged by government policy.

Practically all the readers of this blog are at least higher rate tax payers – i.e. their marginal income tax rate is 40% or more. For them the two key rates on offer are 40% and 0%.

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Nov 2017: The King is gone.

2017-12-03 FIRE v London4 Comments

Without meaningful term limits, the tyrant just went on and on. Well into his dotage, he seemed to have become preoccupied with furthering his dynasty by handing over power to his family. And to preserving the family billions. As his grip on power finally began to slip, the superficial stability of his regime visibly crumbled, replaced by an excited whooping and baying by the masses. A mighty era, ending, this very month?

In fact, Rupert Murdoch remains in power for now. But the rumours are that the dirty digger may sell critical parts of his empire – studios, newspapers etc.

Slightly closer to home, Robert Mugabe is gone. The king is dead, almost. And good riddance. I’ve held off visiting Zimbabwe until he’s gone and now the place has just opened up for me. Except that his thuggish henchman, by all accounts, has replaced him with the full support of the army. I may be waiting a little longer.

Meanwhile, out in the markets, what’s been happening? Supposedly Brexit is all starting to come together, notwithstanding the not-very-minor issue of the only land border between the UK and the EU. Certainly the forex markets cheered both the EU and the UK, with GBP up to a level it hasn’t seen since its steep Brexit slide. Meanwhile US markets continued their relentless upward glide, providing a benign backdrop for the bitcoin hysteria.

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