After marginal decreases in property values in the latter part of 2023, and with mortgage interest rates still at their highest in more than a decade, some are using the chance to jump out of the property market, downsize or sell second properties and invest the cash.
With a handful of halfway decent fixed term bond rates, strong cash ISA rates and even current accounts like that offered by digital challenger bank Kroo offering a no strings, 4+% on all balances, it’s the first time in a while that investing cash is potentially as productive as leaving it in property – especially if rental margins have been eaten up by mortgage rate increases.
Whatever your driver, if you’re thinking of selling your property or downsizing and investing the proceeds, even for a brief period, there are a few things you need to consider!
Moving the cash
If you’re taking six-figure+ amounts out of a property with a view to investing it, be aware of some restrictions that exist around the movement of cash.
Firstly, we may be doing most of our routine banking online and via apps these days, but this means there are security protocols in place that restrict you from moving significant amounts within each 24-hour period. Daily limits in your app will be set quite low, around the £1,000 – £5,000 mark, but subject to your banks own rules, you may be able to increase this. However, the likelihood is this will still have an ultimate cap of around £20,000. You may be permitted to make single, one-off, payments in excess of this cap but again these will be limited, and you may only be able to do this once or twice in any seven-day window. So, when you’re trying to move balances into bonds and savings accounts, you may have to drip the funds in over an extended period. Bizarrely, telephone banking limits are probably lower than those in the app because they lack the biometric security checks! The only other way of moving significant funds out of your bank account in single transactions is to visit a branch and make the request in person – easier said than done these days!
‘Funding windows’ may also restrict the movement of money into investments. If you’re looking at fixed term bonds (6, 9 or 12, 24 or 36 months typically) that pay interest on maturity, then once your account is approved, you will be given a dedicated funding window – a period in which you can invest. This may only be a matter of days. When combined with restrictions on moving the money out of a current account, this may mean you cannot move everything into the bond in sufficient time before your window closes.
Assuming you can move the cash in plenty of time and overcome restrictions, the final thing to be aware of are nominated accounts. These are the accounts linked to your bond or investment and are the only accounts you can use to transfer cash in and receive capital or interest out. Try and pay funds into your investment from the wrong account and they will be rejected and returned immediately. If you’ve used up your single, one-off payment limit for that week in doing so, you may be stuck and may then fall foul of your funding windows…
Setting up accounts
If you’ve sold your main residence to downsize, you’re moving into a rental property or you’re even crashing with friends and family whilst you search for your next property; the lack of time in your new address may impact your credit rating and mean you are refused on application for certain types of bonds and accounts. To get round this, you may want to apply for the accounts whilst still at your old address, but as noted above, beware of funding windows. If you’ve not completed, you won’t have the money in time to fund your investment.
If you’re moving to an entirely new area, one of the things you can do is apply to all the statutory authorities in advance to change your address. This means council tax, electoral register, DVLA, TV licence, child benefit etc. – effectively government agencies. From a credit rating perspective these hold the highest value and are often the ultimate arbiters when it comes to residency.
Investment interest income tax
As we covered back in October, it’s a good time to be investing cash. Because rates are at a 10-15 year high currently, you can expect returns on shorter term (up to 18 months) cash investments of around 4-5%. If you’ve sold property to invest, then you need to be aware that the interest you receive may be taxable. In the UK, basic rate taxpayers are allowed up to £1,000 of interest income a year (£500 for higher rate taxpayers). Assuming you have £100,000 to invest and went for a fixed rate bond paying 5.15% on maturity, you’d make £5,150 in the year. If your income sits just below the basic rate, then your interest could effectively push you into higher rate tax, reducing your interest allowance and increasing your tax!
The other aspect to consider is when the interest will hit your income. A fixed rate bond for 12 months that pays interest on maturity will mean the interest (and the tax liability) hits you on day 365/6, which will be a consideration for the next tax year.
Therefore, when planning your investment, make sure you have taken your income tax position into consideration and used up any valuable tax-free allowances (cash ISAs and Premium Bonds) first.
Seek advice!
This insight comes from a recent real-world client example and is designed to provide awareness only. It does not constitute financial advice and we always recommend seeking the advice of a qualified financial adviser before making any decisions to invest on either a short-, or long-term basis.