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How I lost £436,957 trading Tesla shares

by The Investor on March 18, 2021

Image of Elon Musk with the caption Totalling Tesla

I sold my Tesla shares too soon, for spurious reasons. It’s the biggest single investing mistake I most regret.

Anyone who picks stocks or studies active fund performance will know how a few multibaggers can drive the total return.

Indeed critics of active funds often point to such out-sized gainers and cry “luck!”

But we should see owning multibaggers in our portfolios as a feature, not a bug.

A multibagger is a share that goes up by multiples of what you paid for it.

For instance, you buy into Monevator PLC at £10 and sell at £20.

That’s a two-bagger. The share price doubled.

If you hung on and it hit £50, that’s a five-bagger to boast about on Reddit.

Passive investors, too, will see multibaggers driving returns at the index- level. Some (disputed) research suggests only a tiny handful of stocks are responsible for the majority of the market’s long-term gains.

How often in 2020 did we see charts like the one below from The Financial Times? Usually alongside warnings that a handful of giant tech firms – the FANGs – were behind the market’s advance:

Pundits warned that mega-cap multibaggers like Apple and Amazon had grown to represent a massive share of the S&P 500.

Well… good!

Passive investors are lucky their robot funds aren’t subject to the whim of a human manager musing how: “Nobody ever got fired for taking a profit.”

Maybe not – but selling winners can still be bad for their clients’ wealth.

How I messed up with the stock of a lifetime

The good news is you don’t need to pay a career risk-dodging fund manager to lose out by selling multibaggers too early.

No, with enough time, money, and stupidity you can do it yourself.

Just (please don’t) ask me about my Tesla shares.

I’ve put off publishing this article on how much I lost trading Tesla shares for months now.

Not only because at Monevator we believe most people should be passive investors in index funds – and I’m about to show you another reason why.

And not even because it’s embarrassing.

No, mostly it’s because I’ve had to keep re-editing the headline.

When I started writing I’d lost around £388,000 trading Tesla shares.

As I edited the draft my losses hit a peak of £436,957.

Then the share price fell and I was only £402,000 out of pocket.

This shifting loss isn’t because I was trading thousands of Tesla shares every day on Freetrade.

And I wasn’t doing anything so dumb as shorting a great company. (That’s best left to hedge fund geniuses.)

I was a fan of Tesla for a decade and a proud shareholder for most of it, too.

So how I lost nearly £437,000 trading Tesla shares is that in December 2016 I owned shares that would have been worth that much in 2021.

But – dolt that I am – by then I’d sold them all.

Missing multibaggers

Now I know what you’re thinking.

You reckon I didn’t really ‘lose’ money trading Tesla shares – no more than your gran lost money by not buying shares in fancy pants firm Lululemon.

Or than you lost money because you didn’t buy Bitcoin in 2010.

I take the point. There are an infinity of missed opportunities out there.

But the opportunity cost I’m talking about with me and Tesla is different.

Roughly 99.99% of people didn’t know anything about Bitcoin in 2010. If you did you probably called it bollocks.

That was why you (and I) didn’t buy Bitcoin back then.

As for your 79-year old grandma getting into Lululemon…let’s not go there.

But the sad reality is I did own Tesla shares. This isn’t a hypothetical.

I hugely admired the company and I judged early that Tesla could be worth at least $100 billion someday.

Indeed I’m as close to an Elon Musk fanboy as a rational, slightly envious middle-aged curmudgeon can be.

Yet I still sold my Tesla shares.

Omission versus commission

When you’re a naughty active investor like me, the profits you miss are as important as the losses you inevitably book.

They’re all mistakes. They all count. Even if the gains foregone are hard or impossible to calculate.

As the old G.O.A.T.1 Warren Buffett says, your sins of omission (i.e. what you don’t buy) hurts your returns far more than your sins of commission (i.e. those investments you do make that go down).

The most you can lose on a particular stock is 100%.2

But the upside is theoretically unlimited – as Tesla been demonstrating:

Tesla: from nearer-nought to nearly $900

At their peak in January 2021, Tesla’s shares cost $900, up from $48 at the end of 2015.3

That’s nearly a 19-bagger in five years!

This asymmetry in the downside of loss versus the potential for uncapped gains is why selling can be so costly.

Monster gains will make up for a myriad of flops in your portfolio.

My missing Tesla shares

The good news is I do own Tesla shares today, even after my idiocy.

The bad news is I owned many more just a few years ago.

How many? Let’s step back in time.

It’s December 2012 and I’m minding a friend’s house in the country.

It’s a big house, and it’s snowing outside. There’s even a log fire!

All very Dickensian, and like in all Dickens’ most popular novels I’m considering making an investment in an electric vehicle start-up.

Specifically, I’m reading about Tesla and how it’s hated by the market.

Some doubt Musk. Some say only nerds will ever want electric cars. Others concede electric cars are the future, but they doubt Tesla.

I see risks, too, but also immense potential.

By 2012 I’ve been tracking solar energy for years. I believe a turning point in the economics is approaching.

As for Tesla, by December 2012 CEO Elon Musk was a proven entrepreneur – something ignored by his critics, who inexplicably call him a fraud.

And Tesla’s second car, the Model S, was out to rave reviews – a fact brushed off by Tesla’s critics, who inexplicably call the firm a sham.

Technology and growth shares languish in late 2012. People are crazy for gold miners and dividend payers.

My contrarian senses are tingling.

So I bought some Tesla shares. Just a few, due to the risk, priced well below $10 a pop.4

We don’t need to be precise – because within a month I’d sold them!

Yep, I’ve bungled owning Tesla shares more than once.

Happily though, I bought back into Tesla shortly thereafter.

What I thought people had wrong about Tesla

The value of my Tesla shareholding pretty much doubled in a few months.

But I just sat on them. I ignored the controversy and the high-profile shorting and the prophecies it would go bust.

I was never very concerned about Tesla running out of money, for two reasons.

Firstly, the world is awash with cash looking for returns. Yet the fastest-growing companies of our time don’t need our money to grow.

Tech giants like Facebook and Alphabet are asset-light and cash-rich. Unimaginable profits have been made with very little capital, turning the notion of capitalism on its head.

Tesla though is old-fashioned in that it needs vast amounts of capital to build factories to make batteries and cars, as well as to write software.

This was touted by bears as a weakness, but I saw an opportunity.

Provided Tesla kept demonstrating progress, I believed capital would flood in to profit from a rare modern industrial-sized scale-up.

Secondly, I heard one of Alphabet’s founders say he thought the best use of his billions might be to give it to Elon Musk.

Many others in Silicon Valley also admired Musk as a one-off genius.

I saw this as a ‘put’ on Tesla’s solvency. I believed Tesla could go nearly bankrupt at least once, yet be bailed out by Elon’s billionaire buddies.

Rightly or wrongly, this belief was an uncommon insight (I don’t claim unique) that I had versus the market.

Of course I loved the cars and the mission and Tesla’s roadmap.

But my contrarian beliefs on funding were my thesis for being long Tesla.

How much?

I held Tesla as the cost of renewable energy fell, climate science became consensus, and as Tesla made more cars.

For capital gains tax management reasons I did trade around my position in 2016. I defused some of my unsheltered Tesla position and bought back in a tax efficient account. My shareholding fluctuated.

But my records show that by December 2016 I held 670 Tesla shares.5

Let’s count my pseudo-losses from there.

Mr Market makes a fool of me

My first mistake was I sold some shares in 2017, for reasons I can’t recall now. Most likely I wanted funds to buy something else.

But what eventually did for my entire Tesla shareholding was my growing concern about Elon Musk’s mental state.

Unlike most people nowadays, I don’t expect public figures – let alone geniuses – to live their lives without warts and all.

Have you met other humans? Looked in the mirror?

We all have flaws. The only difference is most of us are not tracked 24/7.

All the great artists, business people, and politicians of history had quirks at best, and at worst, much worse. They were lucky to be born before Internet pile-ons.

So I wasn’t worried that Musk was outspoken or eccentric.

However I was concerned that by 2018 he seemed to be struggling to cope.

Investing in Tesla for me was betting on Elon Musk. My thesis was that his friends and admirers would support him, at the last resort.

But if Musk himself was impaired then that went out the window.

During 2018 Musk trolled the regulatory authorities, suggested he’d take Tesla private in a random Tweet, and started a bizarre name calling bout with a British cave diver, among other things.

My concerns compounded. I was still enough of a believer to actually buy more shares when Musk made his infamous funding secured Tweet in 2018. But eventually I started to see his antics through the eyes of his critics.

I sold all my shares.

I’m not going to dwell on my reasoning any further. I made lots of bad investing decisions in 2018 and most of 2019. I had a big mortgage for the first time in my life. It screwed with my judgement for a while, I suspect. It made me fearful.

The bottom line is that by June 2019 I was completely out of Tesla.

Oops! There goes a 100-bagger

Turned out I’d pretty much bottom-ticked Tesla’s share price fall. It began to recover right after I sold. Good news seemed to come daily.

Even better – especially if you hadn’t recently sold all your shares in his baby – Musk was stabilizing. Still eccentric and insufferable to some, but to me he looked like he was having fun again.

And so the pain of trying to buy back into Tesla began.

Probably the only thing worse than selling out of a multibagger is regretting doing so just as the price goes parabolic.

That Tesla graph again, once more with feeling:

When you’re price anchored to the seabed

Buying most of the way up Tesla’s ascent was profitable – with hindsight.

But good luck biting the bullet if until relatively recently you had a cost basis of under $10 a share. The struggle is real.

I dithered for months but did eventually start to buy back into Tesla. I paid as much as ten-times the price where I’d sold. Or nearly 100-times above where I’d first bought Tesla in late 2012.

For a while I also had exposure via Scottish Mortgage Trust, which I bought during the Covid crash. It owned a garage full of Tesla, and rallied hard, too.

Exaggerated accounting

I traded around my new Tesla position and I’m up well into five-figures from its crazy stock price rally, all told.

So my talk of a £436,957 ‘loss’ from trading Tesla shares isn’t really accurate.

Especially as I’ve also ignored the gains I made from initially selling Tesla. I didn’t sell my shares for nothing!

I’ve also not accounted for what I made from reinvesting that liberated money. Most boats have risen over the past couple of years, after all.

But life is too short for all that maths when this is a story, not an academic paper. My aim was to give an illustration of the cost of missing multibaggers.

These things happen if you invest actively. You’re hearing from a man who once sold ASOS at around 30p. Today it’s more than £55.6

But the fact remains I really would have more than £300,000 in Tesla right now – even at today’s much lower stock price – were it not for my mental wobble.

That would have been enough to buy half-a-dozen Teslas. From investing less than £20,000.

Let that be a lesson to you – and me – and all that malarkey. Harrumph.

Luckily I’ve managed to hold on to other stocks that have multiplied in value, so don’t miss my follow-up on multibaggers. Subscribe to ensure you see it!

Greatest Of All Time. [↩]
Assuming you’re not levered – that is, you’re not borrowing to invest using margin. Leverage is a right/wrong multiplier, so you better not be wrong! [↩]
Tesla shares were split five-for-one in 2020. This split has no direct impact on valuation. Shareholders got five times as many shares they previously had, and the share price fell 80%. The idea of such a split is to make the shares more liquid. I use split-adjusted prices throughout this post for simplicity. [↩]
Again, as throughout, split-adjusted. [↩]
Again, as throughout, split-adjusted. [↩]
Disclosure: I hold. [↩]

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How to automatically donate share dividends to charity

by Guest Author on March 16, 2021

Here’s an elegant way to donate money from share dividends to charity in perpetuity, from Monevator reader Reza. With this guest article neither Reza nor we at Monevator are saying this is the best way for everybody to donate money to charity. But we do love the thinking behind the ‘donation machine’ concept. Over to Reza…

While reading American Psycho by Bret Easton Ellis, I took a break due to how grim it is. During my break, I began to look into homeless statistics and came across the Crisis website.

Crisis is a charity that directly helps homeless people find a home. It also campaigns for changes to solve homelessness altogether.

After browsing through the Crisis site and learning more, I spotted its investor page. This introduced me to the concept of Social Return on Investment (SROI).

My understanding of SROI is that by donating money, you are making an investment in society that yields dividends and/or savings through a compounding effect.

Crisis and other charities conduct research to provide estimates on the value that a donation makes.

For each £1 you invest, Crisis estimates an impressive SROI of £3.30.

The return on investment here comes from helping people to find homes and providing them with the support they need. This makes it more likely an individual will escape from their homeless circumstances and that ultimately they will start to pay taxes.

Conceiving a ‘machine’ to donate share dividends to charity

It all got me thinking of stocks and shares investments in relation to charities.

I soon hit upon the idea of a set of shares that are dedicated to perpetually creating money for charity. That was something I found very appealing.

How do shares generate money?

When you buy shares you are buying a piece of a business. Some of these businesses distribute cash to shareholders in the form of dividends.

Dividends are typically paid out periodically – usually a few times a year.

Although not all companies distribute dividends, many do.

It’s also important to know that the dividend payout can fluctuate, just like the share price.

Why make a ‘machine’ to donate money?

I believe my idea to automatically donate share dividends to charity could appeal to other Monevator readers for a few reasons.

The machine perpetually generates money

The key benefit is that once you have created your set-up to donate dividends to charity, in theory it should generate money indefinitely.

Share prices go up and down, but British companies are pretty good at paying out increasing dividends over the long-term.

A good way to take advantage of this is through a low-cost ETF that sports a good dividend yield.

When you invest in an ETF, you are buying into a group of companies. For example, if you bought a FTSE 100 ETF, you would be buying a slice of every company in the FTSE 100.

With an ETF you do not rely on a single company to dish out the dividends. Your risk and expected dividends come from many different businesses.

You can build up the machine over time

To make your machine more powerful, you simply add more cash to it.

By periodically adding money and buying more shares, the dividend payout should increase over time. This will mean more cash to donate to charity.

You still have a lump sum if you need it

With my approach, you retain control of your lump sum in a broker’s account. You can call upon this if things go really bad and you need cash.

However, let’s stay positive and go with the plan of never needing to touch it. Hopefully it will continue generating cash for donation for a long while.

The donation machine should grow by itself

Share prices and dividends, in aggregate, have in the past increased over time. So we should find that our machine gets more valuable and generates more cash as the years go by.

Building the core of the machine

Here are the steps involved to get this project off the ground:

1. Open a cheap brokerage account (just for charity donations)
2. Deposit cash into the account
3. Purchase some shares (I chose Vanguard ETFs)
4. Set dividends to be paid to a bank as soon as they arrive
5. Bank transfer that cash over to your chosen charity

My results: One year on

It’s just over a year since I set up my own donation machine.

Although I haven’t yet got everything automated and I’m still involved in the process, it otherwise looks to have been a success.

My chosen ETFs have increased in value by around 12%. And the machine has generated just over £30 in dividends to donate to charity.

The cash from dividends was moved from the brokerage to a bank account and from there I transferred it to Crisis.

If we plug £30 into Crisis’ SROI calculation (£30 * 3.3) it equates to a £99 impact from the donation machine in its first year of operation.

Okay, humble beginnings, but not a bad start. As dividend growth kicks in and I add more funds to the pot, my machine should deliver a larger round of dividends in year two.

Hopefully it will continue to grow from there!

Towards a truly automated donation machine

Currently my donation process is manual.

I take a look at the brokerage account occasionally and check if any cash has been generated. If cash is available I move it to my current account and then I do a bank transfer to the charity.

So the outline of a perpetual donation machine is there. But the implementation is not.

However I have a clear idea of how I can completely automate the entire process.

Here’s what I need to do to assemble a truly automatic solution.

Parts required

In order to automate this, a few things are going to be needed. Namely a broker, a bank account, and of course the charity you wish to donate to.

My bank of choice is Starling. The primary reason for this is that Starling offers something called an Application Programming Interface (API).

With this API, Starling provides a toolkit that enables you to write computer programs that interact with your bank account

Other banks do offer APIs, but where Starling really stands out is that it allows you to make payments – to existing recipients – by using the API.

My broker will be Vanguard Investor and the account would be an ISA.

The key reason for choosing a Vanguard ISA – other than those previously covered by Monevator – is that Vanguard allows dividends to be automatically transferred to a bank account as soon as they are paid.

To find this, look under My profile > Product > Edit > Distribution and then Dividends options.

Surprisingly, this is not a ‘flick of the switch’ option on all brokers.

From my own research, it appears to be completely absent in the AJ Bell YouInvest control panel, for example.

Lloyds and Halifax do have quite flexible automatic payout options – quarterly, annually, or as soon as dividends are paid – but it appears cash can only be automatically paid out if you have a bank account with them.

Finally, you need a charity. My choice for now as I said is Crisis.

I sent a short email to Crisis explaining that I would like to donate by bank transfer. It promptly replied with the details required: account name, number, and sort code.

I am sure other charities would respond the same way.

Assembly

Now we have all the ‘parts’ needed, the next step is putting them together.

The first step is to link the current account with the brokerage account and confirm that it enables both withdrawals and deposits from the current account.

Next, transfer some cash into the brokerage and purchase a fund that distributes dividends.

Set the ‘Distribution and dividends’ option to ‘Pay to My Bank Account’, so as soon as dividends are paid they leave the broker for the bank.

Moving over to the current account, the charity would need to be added as a payment recipient in order that payments can be made.

This setup now allows for dividends to be automatically paid into a new bank account periodically.

All that’s left is to automatically pay the charity when cash is available.

Things now becomes slightly more complex. I will need to write a small computer program that interacts with the Starling bank API balance and payment endpoints.

I won’t go into the nitty-gritty as it’s more important to convey the process itself.

The program needs to:

1) Check if there is cash in the bank account
2) If you do have cash then transfer it to the charity
3) Send a notification that the donation has occurred

Below is some top-level pseudo code – in reality the program would be perhaps a few hundred lines long – showing how it may look.

If balance > 0:
    donation_amount = balance
    make_payment(charity_account, donation_amount)
    send_notification(me)
    send_notification(charity)
    send_notification(accountant)

This program will need to be carefully tested to check it’s working correctly. Once it looks good, scheduling the program to run daily on a server would be the last step.

With all that done, we would have an automated system that creates and donates money to charity. Wonderful!

A taxing matter

When I discussed this idea with The Investor, one topic he raised was tax relief and how to go about claiming Gift Aid.

This was not something I had considered, but it shouldn’t be a problem.

With Gift Aid, a charity gets an extra 25p for every £1 you have donated (or that it raises from selling your donations).

Making a Gift Aid declaration for the charity to claim with our donation machine could be quite straightforward.

If you’ve ever brought things into a charity shop to donate, you will already be familiar with the routine: “Would you like to do a Gift Aid declaration?”

Doing so takes barely a minute.

Handling Gift Aid could be be a snap in the automated program, too.

You may notice a line in my code above saying:

 ‘send_notification(charity)’

The idea behind that is to let the charity know you have made a donation with a bank transfer. You could include a Gift Aid confirmation here.

Next steps and final thoughts

There may be other brokers out there offering greater dividend payment flexibility so that the program and/or bank account stages are not needed.

However I have not personally come across one.

I’m hoping to write the automation program in the near future. When I do so I will make the code publicly available.

In the meantime, the businesses in my donation machine’s ETFs are busy ticking away producing the next batch of dividends.

This system provides me with some much-needed structure around the way donations are made.

There is now no question about how much and when to donate to charity because all that is determined by the dividends. It’s also something I look forward to building on.

And of course it’s rewarding to see the cash generated by the dividends being sent towards good causes!

Any comments about this way to donate share dividends to charity are very welcome. Hopefully I can incorporate any suggested improvements in the future.

The Investor again! I love this idea. It may seem a slightly complex way to donate share dividends to charity, but I believe the idea of growing a donation machine over time will appeal to others with the ‘snowball’ mentality, too. The idea of putting more money into my own donation machine whenever I have spare cash and then seeing it grow in earnings power and impact over the years hits the spot for me. As Reza says, the cash is still there if you need it – so unless and until then you could potentially put more money towards charity than you otherwise would with a one-off contribution. You could also end up with a chunky final bequest for your favorite good cause! Please be gentle with our guest author, but otherwise let us know what you think in the comments below.

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Weekend reading: Coinbase cashing in

by The Investor on March 13, 2021

What caught my eye this week.

Perhaps it’s too early to tell what category the Coinbase IPO falls into.

The companies that choose to go public in a mature stock market boom often make interesting watching.

At one extreme you get the flakier – sometimes borderline fraudulent – firms cashing in on giddy investors who’ll pump up the price of anything.

At the other end you have demonstrable juggernauts and cash cows. Very successful companies that float because… if not now, then when?

Roblox – the computer game creation kit that’s bewitched a generation of kids – and Bumble – the dating app that’s sowing the seeds for the next-generation – come to mind.

Coinbase is coining it

With many investors still skeptical that they should own any cryptocurrency, the public listing of the dominant platform in the space may well seem chum for the credulous.

On the other hand Coinbase has already been valued at around $100bn, pre-IPO.

That’s a loot of moolah for a firm trafficking in supposedly made-up money.

Clearly, present conditions seem exuberant for blockchain technology.

Bitcoin flirted with a new high near-$58,000 this week. Coinbase boasts $90bn in assets under administration. And the NFT (non-fungible token) craze continues, as I cover in a second mini-special in our links this weekend.

I wonder why Coinbase is IPO-ing right now?

I would suggest anyone interested in learning more about cryptocurrency has a read of the Coinbase’s S1 filing. This pre-IPO document is a primer on the entire crypto ecosystem, with pretty graphics and all.

You could also check out The Conventional Investor’s Guide to Bitcoin, published by Morningstar this week.

Can Coinbase cut charges?

I don’t think I’ll be racing to pick up Coinbase shares. I like and use the business, but I can’t stomach the forecast valuation.

Coinbase’s fee margin is enormous, and seems unsustainable. It’s not clear to me whether it can achieve the scale presumably needed for fees to come in closer to what we’re charged for trading securities on other platforms.

Still, $100bn eh? That’s almost as big as Lloyds, Barclays, and Natwest combined!

Have a great weekend everyone. Hope you manage to legally meet a chum for a coffee on a park bench somewhere.

[continue reading…]

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Should you invest in a buy-to-let property through a Limited Company?

by The Investor on March 11, 2021

Look into investing for rental income in the UK, and you’ll invariably be told to purchase your buy-to-let property through a limited company.

Old property codgers and young influencers are united: it’s a no-brainer.

Well, perhaps senility is setting in at Monevator Towers, but I don’t see the case for acquiring a buy-to-let property through a limited company as completely clear cut.

At least, not for me. And probably not for all of you.

I’m thinking here of people who’d invest in just one or two buy-to-lets (BTLs) to create an income to help fund their (early or other) retirement.

Sure, if you’re a budding property mogul (like every second YouTuber it seems) then build out your BTL empire through limited companies.

Similarly, if you’re a high-earner and hence a higher-rate tax payer and you expect to stay that way – maybe even into retirement – then yep, No Brains Required. A limited company is the best choice.

But everyday escapees from the 9-5?

The likes of my co-blogger, The Accumulator, who aims to sustain him and his missus on an annual income in the £20-something thousands?

In that case there are pros and cons.

Owning a BTL in your name might actually be a better route, as we’ll see.

Why own rental property?

First a quick summary of why you’d invest in a buy-to-let for income.

Here at Monevator, we focus on the liquid, low-hassle advantages of shares, bonds, and their various fund incarnations.

However it’d be silly not to see how valuable a rental property can be.

Indeed in most corners of the UK and in the media – where property appears to be ‘my pension’ under some ancient Trade Descriptions Act – the argument hardly needs to be made.

For millennia, give or take the odd rough patch, the rich stayed rich by owning property (and land) and charging the common oiks for using it.

A skim through The Sunday Times Rich List shows little has changed.

It’s not easy to get wealthy via real estate, starting from scratch.

But as a way of preserving wealth got some other way, it’s tough to beat.

In the UK, property prices have mostly been rising since World War 2, even after adjusting for inflation:

Source: Economics Help

Lots of people are angry about this, of course. But that’s for another day.

The point is while it’s subject to fluctuations like all risk assets, residential property has – over time – preserved (and grown) spending power.

Better yet, let out your property to tenants, and you can expect the income you receive to rise, too:

Source: Office for National Statistics

True, rents have softened recently in some cities, thanks to the Covid pandemic. But short-term fluctuations aren’t the point with property.

Real estate is a long-term asset. Prices and rents have risen faster than inflation for generations.

Buy a decent property with fair rental potential, and you can reasonably expect to enjoy a rising income throughout your retirement years.

It’s not all kerching!

Before the peanut gallery gets going, let’s agree there are other factors to consider with rental property.

Tenants can be a hassle. Houses can fall down. And do you really want to be refitting a two-bedroom flat on the sixth floor in your seventies?

But this article isn’t about all the issues with buy-to-let. I’m just pointing out that rental properties have appealing characteristics. Bought right, they can play a role in a diversified retirement income strategy.

Personally, I’d always consider a mix of different assets. Rather than devolving down to the usual Internet stance of A Is Good but B Is Evil.

There are many ways to skin a cat, as they say (although I can only think of one ghastly method. Pretty horrid, even if you’re not the cat.)

With an open mind, let’s crack on!

The BTL boom

Buy-to-let used to be so easy, as Simon Lambert noted back in 2015:

… £1,000 invested into buy-to-let in 1996 would be worth £14,900 at the end of 2014.
It comfortably beat all other assets. The same £1,000 invested in shares would be worth £3,119, while a cash pot grew to £1,959.
ThisIsMoney, 16 April 2015

In the 1990s, City boys with bonuses and 50-somethings paranoid after pension scandals found they could deploy newly-competitive BTL mortgages to outbid first-time buyers for the proverbial two-bedroom flat.

Finance the purchase with an interest-only mortgage, rent it back to the poor sods you priced-out, and boom!

Literally. UK house prices soared.

Lots of new landlords got legions of renters to finance growing portfolios of buy-to-lets. If you weren’t worried about a price crash (alas I was) then the economics of leveraging up even as rental yields fell were compelling.

It all got a bit embarrassing for politicians. Governments like high house prices, but the affordability argument was becoming impossible to ignore.

Conservative politicians were torn between promoting home ownership and the perception that it was becoming concentrated in fewer hands.

That didn’t matter at first – landlords being more a Tory’s natural constituency than public sector renters, say – but the numbers got silly.

Why limited companies are even a thing with buy-to-let property

Thus it was oddly enough a Tory government that began to turn the tide.

Various bungs to help first-time buyers get into the market and compete with landlords were extended. (Whether sensibly or not.)

And a more hostile environment for landlords came into being.

Within just a few years an additional stamp duty rate for the purchase of second homes was introduced. Capital gains tax breaks on BTLs you’d previously lived in were harder to qualify for. And – slowly, but most significantly – the economics of using a mortgage to finance a buy-to-let were squeezed. Hard!

In Ye Good Old Days, a landlord set all of their mortgage interest payments on a BTL against the rental income. They only paid tax on what was left.

But since April 2020, landlords cannot set any interest expenses against rent. Instead there’s a tax credit worth 20% of the interest payments.

This is bad for higher-rate taxpaying landlords using mortgages. It means much higher tax bills and a lower net income.

The tax maths as a higher-rate tax-paying BTL owner

Let’s suppose that higher-rate taxpayer Bob gets £1,000 a month rent on his BTL and his mortgage interest expenses are £700.

Prior to the new rules, Bob could have set his annual interest-only mortgage cost of £8,400 against his £12,000 of rental income.

That left £3,600 in profit, of which £1,440 went to tax (levied at 40%) and £2,160 ended up in Bob’s pocket.

Today, however, Bob is liable for tax on the £12,000 of rental income at his highest rate of 40% – so £4,800. He is only able to reduce this with the 20% tax relief on the £8,400 interest payments, which equates to a £1,680 credit.1 This means £3,120 goes to HMRC.2

Bob still has his mortgage interest to pay, so his total costs are £8,400 plus £3,120 in taxes. Deducting both from the £12,000 income leaves just £480 in Bob’s bank account. (And that’s ignoring all Bob’s other expenses).

A dramatic collapse in net income from £2,160 to just £480.

Note that if Bob was a basic-rate taxpayer, nothing has changed. Under the old system he’d have paid £720 in tax.3 Under the new system, basic-rate Bob has a £2,400 tax liability, but gets the same £1,680 tax credit. Hey presto: £2,400-£1,680 = £720 tax to pay, as before. Bob’s net income would be £2,880.

Tax under limited company ownership

When a limited company owns rental property, it’s treated like any business with income and expenses. This means the entire mortgage interest cost can be set against the rental income (again, along with various other expenses, which I’m ignoring for simplicity).

Corporation tax is paid on the resultant profit.

This makes a rental property owned by a limited company a much more lean, mean profit machine.

For example, let’s assume for now all the numbers stay the same. (In practice expenses would likely be higher with a limited company).

Income of £12,000 minus £8,400 in interest payments leaves £3,600 profit. At a corporation tax rate of 19%, that sends £684 to HMRC, leaving £2,916 in net profits.

On the face of it a stellar slam dunk for limited company ownership! But keep reading. (Spoiler: It’s more complicated.)

Other pros and cons of purchasing a buy-to-let property through a Limited Company

These tax changes are why BTL landlords have rushed to set-up limited companies (or SPVs4 as they like to call them. It’s just a sexier name for a limited company with a relevant tax code).

But there are other advantages – and disadvantages – to owning and letting out property this way.

Advantages of owning BTLs in a limited company include:

Profit being taxed at lower corporation tax rates, as above.
Some mortgage providers may be satisfied with less onerous stress tests on a property’s ability to cover the mortgage (but should you be?)
In theory you have limited liability, since it’s the company not you that owns the property. However you’ll probably have to give personal guarantees to get a mortgage, and directors can be sued, too. Also many landlords take out comprehensive insurance against mishaps, anyway.

There are also disadvantages to going down the limited company route:

Limited company mortgage interest rates have fallen, but rates are still higher than the best personal BTL rates.
You’ll probably need to use an accountant, and do more paperwork.
That will add extra expenses to running your rental property.

It’s worth noting too that a limited company still has to pay the extra 3% stamp duty payable on additional homes. So you’re not dodging that.

And corporation tax is rising, as per the March 2021 Budget. The limited company advantage might theoretically be trimmed.

The new 25% rate will only begin to be phased in for businesses with profits over £50,000, though – which will exclude the vast majority of ordinary landlord’s portfolios. (For the time being, anyway).

End of story? Not for basic-rate taxpayers

By now you might think owning a BTL through a limited company has an unassailable edge, even for the humblest landlords in retirement.

Income is the point, right? And on the face of it, limited companies clearly chuck out more cash.

However in some circumstances that might not be the case.

Remember my note above that the tax changes didn’t alter the economics for basic-rate tax payers?

Well that might be a throwaway side-note for high-earners looking to build out chunky rental portfolios.

But for basic-rate taxpayers – such as a great many retirees, especially FIRE5 devotees who pull the plug early – it’s a very big deal.

My sums above showed limited companies deliver higher cashflow at the per-property level.

But you must extract the money from the limited company to spend it!

And it’s here the picture gets more nuanced for basic-rate payers.

You might get a higher income than if you own your BTL through a limited company

This is not something those empire-building property gurus focus on. Good luck to them, but know that using a limited company for one or two properties might actually result a lower income for you.

The issue is that corporation tax isn’t the end of the story.

When you come to remove money from your company – as you would if you were living off the rental income – you’d normally do it as a dividend.

Depending on your other sources of income, there could be dividend tax levied at:

A basic-rate of 7.5%
A higher-rate of 32.5%
Or even 38.1% if you’re a retired oligarch paying the additional rate

You do get a tax-free dividend allowance of £2,000, which helps.

But remember dividends from other sources (such as shares held outside of shelters) count towards that £2,000 allowance.

We saw that as a private landlord, basic-rate taxpayer Bob paid only £720 in tax and got an income of £2,880 from his BTL.

If Bob had acquired his BTL inside a limited company, we’ve also already seen the company would have been left with £2,916, after corporate tax.

Now let’s say Bob extracts this as a dividend, and is able to use his full dividend allowance. In his case £916 is liable for tax at 7.5%, which means £68.70 goes to HMRC and Bob is left with £2,847.

That’s slightly less than he got as a private landlord.

Worse, if Bob had already used up his dividend allowance elsewhere, his net income falls to £2,697.

The net income from the limited company would probably be even lower still in practice. Bob would have accountancy bills to pay of £1,000 or so a year, albeit these are also expenses that will reduce corporation tax.

All told, it’s not hard to see the annual income after expenses and taxes from the limited company falling towards the £2,000 mark.

Other complicating factors

I could give other examples that made things look better or worse.

The important thing is to apply the numbers to your own situation.

When you do so, there are other issues you need to consider.

Most importantly, rental income might push you into a higher tax band.

This is especially important if you’re not using a limited company, since the full rental income is going to be added to your income from other sources.

With a limited company, you might want to make payments into your own pension, which is a more tax-efficient way of getting the money out.

Indeed, in either scenario, an early retiree will likely have various income levers to pull.

For example you might reduce the drawdown from your SIPP to keep your pension income plus rental income below key tax thresholds.

There’s also the usual opportunities for shenanigans for couples involving who owns what.

But this post is already insanely long, and I can’t cover every scenario.

The point is to think carefully about what you hope to get out of any rental property, and where you are in life.

Then run the numbers for yourself.

Two’s not a company, but three or four…

With all this written, I would probably invest in buy-to-lets through a limited company if I ever go down this path.

That’s because if you don’t intend drawing the income for a long time, it’s definitely more tax-efficient to keep the profits inside the company.

Retaining more profit means more money to put into your next purchase.

Also, the more rental properties you own, the more you spread the limited company hassle factor – and your accountancy fees, too.

And if you want to invest with other people, you’d best do it through a limited company (or possibly a limited liability partnership, but please do your own research on that). It’ll be the proper way to structure it, legally.

Finally there may be estate planning advantages with limited companies. Consult your professional advisors if that’s a factor for you.

Know your limits

I suspect the government wants to see the whole rental sector inside limited companies. That way it can better monitor – and regulate – what’s going on.

So maybe things will get even harder for landlords operating outside them.

What’s more, even if you only intend to own one or two rental units, you might unexpectedly become a higher-rate taxpayer further down the line.

Moving existing BTL properties into a limited company will be an expensive pain. So you may decide it’s better to start that way.

Fair enough.

But if you are on the cusp of retirement and you just want to buy and let out a flat or two to add £500 a month to a fairly modest retirement income, I’m not sure it’s worth the bother.

Do your own sums though, and figure out what works best for you.

Many readers have lots more experience with property than me, and I’d be interested in your insights. Remember my modest use case: I agree you should always acquire a larger portfolio of buy-to-lets through a Limited Company, or if you’re a higher-rate payer. Also let’s please minimize the landlord name calling and predictions of property Armageddon, for the sake of a good discussion. Thanks!

£8,400*20%. [↩]
£4,800-£1,680. [↩]
£12,000-£8,400, then taxed at 20%. [↩]
Special Purpose Vehicles [↩]
Financial Independence Retire Early. [↩]

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