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Credit deflation and the reflation cycle to come (part 2)


spunko

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3 hours ago, VeryMeanReversion said:

If you don't live there as your main residence, you are not entitled to claim the rent-a-room allowance. The tenants have much greater rights than a lodger if they can show you don't actually live there.  If either of the lodgers knew the laws then they can make life very difficult for the non-resident landlord and shop them to HMRC since tax-is actually payable on the rental income.

Having two lodgers means HMRC can consider that you are "running a lodging house" so you lose your PRR exemption i.e. liable for CGT on a house sale.

Some neighbours are converting their outbuildings to a new dwelling for their kids or elderly relatives. They are unaware that this triggers an immediate CGT liability (even if it's a gift!).  They told me its CGT exempt if they give it away but I've checked the rules very carefully.

I'll be doing a bit differently by building first, moving in, nominated as primary residence then moving back to old house, then give it away say 12 months later, there is no CGT due.  This will save me a ~£100K tax bill. 

 I spend a lot of time reading up on this sort of stuff since the tax savings are enormous. e.g. some rough numbers....

IHT simple planning that will save £250K+
SIPP that will save me £400K+ (income tax and NI)
Council-tax, planning-permission loopholes and CGT avoidance will save me ~£150K.
EMI options that could save me £160K (or be worth nothing)
Rent-a-room - say £78K income over 10 years, save £30K tax (@40%)
 

That's ~ £1M in tax saved long-term, completely legal and using HMRC approved schemes, no need for trusts or dodgy accountants.  That's more than 25 years of my net income saved by learning the rules of the game.  

(Biggest risk to the above is Corbyn getting in)



 

 

 

VeryMeanReversion, that's certainly valuable info. to know about... but ref. this thread, do you think CGT on private property will be a consideration in future? I suppose it depends on personal timeframe and the expected effects of ravenous inflation so Its a very difficult question to answer. 

Also, excuse my ignorance but what's EMI?

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1 minute ago, JMD said:

VeryMeanReversion, that's certainly valuable info. to know about... but ref. this thread, do you think CGT on private property will be a consideration in future?

Also, excuse my ignorance but what's EMI?

Capital Gains Tax is rarely thought about since people rarely make investment gains big enough (outside a tax-wrapper such as ISA/SIPP) to worry about it. For a house, the PRR relief means you don't pay it on your only house which is almost always the case.  I don't expect this to change. 

However, if you let property (BTL or accidental landlord due to inheritance), have 2+ lodgers or build one, you don't get the exemption. Also, if you marry someone that already has a house, you will start losing the PRR on one of them.

The CGT rate is 20-28%. The tax bills can get very big for gains on houses.

EMI is a type of stock option that is taxed at 10%.  I took a salary cut to get them since marginal PAYE rates are ~65% in the £50-60k band.   They might be worth 5x my salary, they might be worthless. I'd rather take the risk and get 90% of something/nothing than only see 35% of what I worked for.

 

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19 hours ago, JMD said:

...

For me personally, although the next cycle is expected to punish housing values, I am attempting to 'triangulate my housing equity' - a clumsy phrase I know! - but what I hope to find is a business suited/particularly exploitative of the next cycle, that can be operated from home... the triangulation bit comes from the home/work dual aspect combined with attempting to 'protect' (re. next cycle property risks) the capital invested in the property by making it generate an income (along the lines of a 10% divi perhaps?).

The ideas I am researching are holiday-letting business and storage business. Any other ideas for achieving my 'ideal' would be very welcome.

I know it isn't the point of your post, but I'm intrigued by how the economic cycle helps and hinders particular types of career.

I read a post by 'Ben Hunt' the other day, called 'the long now' -- the theory isn't spectacular and he's got an annoying style with capitals and emboldening everywhere -- but he goes on about 'Make, Protect, Teach' as the sectors to be in.  What he's saying is that he thinks the world has had 30 years of finance giving reward, and that over the next 30 years it'll become the opposite.  He calls 'Make' as being people actually making core stuff (rather than importing.  And no 'financial make' such as flipping properties after a coat of paint), Protect being police, fire, nurses, etc and Teach being actual real-world teaching (rather than university lecturers going through the motions).

I think he might have a point.

[linky: https://www.epsilontheory.com/author/bhunt/]

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14 hours ago, stokiescum said:

I must admit I love watching you rich guys say how you make cash and your plans for the future but many of you are takeing gambles which I love to see I hope you all win

but ironicly I best most of you by simply taking a lodger in 

StokieScum, I agree with you.

I plan to invest/'gamble' half my capitol on reflation assets etc, as per this thread. And then spend the other half on a residential type property that I can both live+work in. I have begun looking into holiday lets or storage (would need some land for this) as I think both are suited to do well in next cycle. Lodgers is good also, but whatever I decide the plan is for it to be small scale so that I can continue doing into retirement. But 'sweating the asset' appeals to me and if done correctly can generate 10% return on capitol.

I did post a longer description of this yesterday, so if anyone has tips/ideas, I would be grateful to receive them. 

    

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10 hours ago, Castlevania said:

You’re just sweating your asset. But yeah taking in a lodger is easy money as long as you get along. It’s painful if you don’t, but I suppose you can always give them the boot with minimal notice if that’s the case.

Is there a third bedroom which she designates as her own?

Yes,full of clothes etc.She pops in for mail and cuts the grass etc.Keeps it at two lodgers and £7200 a year rent ,max or the rent a room scheme.She pays all the bills and could make the same renting out the house after tax,but then has the problem of bad tenants.I could get rid ok anyway but keeps things easy this way.

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7 hours ago, DoINeedOne said:

Big Six energy provider SSE has agreed to sell its household supply arm to smaller rival Ovo Group in a £500 million deal.

Ovo’s planned takeover of SSE’s energy services business is expected to complete later this year or early next year.

The deal comes after SSE was forced to scrap its merger with Big Six rival npower last December after the Government’s energy price cap sent shockwaves through the industry.

 

If i remember correctly @DurhamBorn wasn't this what you wanted for them to offload their household supply arm

Yes,im well up now on SSE and happy with the deal.The next cycle should see them do very well with their hydro storage assets etc.The price is a bit low to be honest when i bought SSE i had valued that part at around £800 million,but good move for them.

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1 hour ago, dgul said:

I know it isn't the point of your post, but I'm intrigued by how the economic cycle helps and hinders particular types of career.

I read a post by 'Ben Hunt' the other day, called 'the long now' -- the theory isn't spectacular and he's got an annoying style with capitals and emboldening everywhere -- but he goes on about 'Make, Protect, Teach' as the sectors to be in.  What he's saying is that he thinks the world has had 30 years of finance giving reward, and that over the next 30 years it'll become the opposite.  He calls 'Make' as being people actually making core stuff (rather than importing.  And no 'financial make' such as flipping properties after a coat of paint), Protect being police, fire, nurses, etc and Teach being actual real-world teaching (rather than university lecturers going through the motions).

I think he might have a point.

[linky: https://www.epsilontheory.com/author/bhunt/]

dgul, he makes sense (but as you say nothing spectacular) and the Americans are ahead of us in discussing these subjects. Reminds me of the Straus-Howe Fourth Turning theory of history which has been around since 1980's (thanks Barnsey for introducing me to them, are you still a fan of theirs?), but then again nothing is new under the sun, perhaps the Chinese have had it right all along - i.e. they think in terms of cycles and have no truck with Western ideas of 'progress'. 

Economic cycles are important (as per this blog), and if understood can be navigated successfully. However, it is the social/political dislocation that scares me, and we are seeing it happen all around us now, of course the media are silent, but for example identity politics is a form of low level civil war, who knows how far it will go? 

Anyway I think his recommendations on the future job front is correct. I think environmental geology is the next biggest big thing. Medicine/teaching is also good, but so much of it will become automated, therefore I were an 18 year old i'd go for a 'pioneering' type of job. 

Unfortunately, I am no longer a young'un, more like stale-male-pale! (some more of that 'poisonous' socio-political dislocation I was talking about!!!)... so my strategy is to put my capitol to work. I think half into reflation assets and half into property (live/work asset, as described in my earlier post). 

 

 

 

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4 hours ago, VeryMeanReversion said:

If you don't live there as your main residence, you are not entitled to claim the rent-a-room allowance. The tenants have much greater rights than a lodger if they can show you don't actually live there.  If either of the lodgers knew the laws then they can make life very difficult for the non-resident landlord and shop them to HMRC since tax-is actually payable on the rental income.

Having two lodgers means HMRC can consider that you are "running a lodging house" so you lose your PRR exemption i.e. liable for CGT on a house sale.

Some neighbours are converting their outbuildings to a new dwelling for their kids or elderly relatives. They are unaware that this triggers an immediate CGT liability (even if it's a gift!).  They told me its CGT exempt if they give it away but I've checked the rules very carefully.

I'll be doing a bit differently by building first, moving in, nominated as primary residence then moving back to old house, then give it away say 12 months later, there is no CGT due.  This will save me a ~£100K tax bill. 

 I spend a lot of time reading up on this sort of stuff since the tax savings are enormous. e.g. some rough numbers....

IHT simple planning that will save £250K+
SIPP that will save me £400K+ (income tax and NI)
Council-tax, planning-permission loopholes and CGT avoidance will save me ~£150K.
EMI options that could save me £160K (or be worth nothing)
Rent-a-room - say £78K income over 10 years, save £30K tax (@40%)
 

That's ~ £1M in tax saved long-term, completely legal and using HMRC approved schemes, no need for trusts or dodgy accountants.  That's more than 25 years of my net income saved by learning the rules of the game.  

(Biggest risk to the above is Corbyn getting in)



 

 

 

Trust me on this,nobody will make things hard for my partner.One tried it and council phoned,asked a few questions and said thats all fine.It is her main residence,she just happens to stay at mine.He wished he hadnt once some very good friends of mine turned up from the Boro.Id of done it myself but had to keep my distance.Almost all are fine and know its a great deal (£320 a month all bills included) just the very rare idiot,and they get one warning,then are helped on their way by kind strangers from Southbank.

 

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20 minutes ago, DurhamBorn said:

Yes,full of clothes etc.She pops in for mail and cuts the grass etc.Keeps it at two lodgers and £7200 a year rent ,max or the rent a room scheme.She pays all the bills and could make the same renting out the house after tax,but then has the problem of bad tenants.I could get rid ok anyway but keeps things easy this way.

Wize move 

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10 minutes ago, DurhamBorn said:

Trust me on this,nobody will make things hard for my partner.One tried it and council phoned,asked a few questions and said thats all fine.It is her main residence,she just happens to stay at mine.He wished he hadnt once some very good friends of mine turned up from the Boro.Id of done it myself but had to keep my distance.Almost all are fine and know its a great deal (£320 a month all bills included) just the very rare idiot,and they get one warning,then are helped on their way by kind strangers from Southbank.

Your also allowed 2 none family members as lodgers,its 3 when it counts as an HMO

So my mate who lives in his loft and has 3 lodgers should be classed has a house of multiple occupancy fuck me im going wind him up 

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59 minutes ago, DurhamBorn said:

Yes,full of clothes etc.She pops in for mail and cuts the grass etc.Keeps it at two lodgers and £7200 a year rent ,max or the rent a room scheme.She pays all the bills and could make the same renting out the house after tax,but then has the problem of bad tenants.I could get rid ok anyway but keeps things easy this way.

To be honest it sounds like a very good deal for her lodgers.

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30 minutes ago, Castlevania said:

To be honest it sounds like a very good deal for her lodgers.

It is and most are great and move on once they are sorted etc.Present one is a Vet and i even pick him up from the airport when he has been back home to Europe.Great guy.Other is a younger lass who has split with her partner.Nice lass and getting a flat in about 8 months but saving up.

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3 hours ago, DurhamBorn said:

It is and most are great and move on once they are sorted etc.Present one is a Vet and i even pick him up from the airport when he has been back home to Europe.Great guy.Other is a younger lass who has split with her partner.Nice lass and getting a flat in about 8 months but saving up.

most are like that 

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On 12/09/2019 at 15:13, sancho panza said:

image.png.52c9fedb3c1f7ef2819d58509f475f6a.png

Here she comes....

 

https://wolfstreet.com/2019/09/12/core-inflation-rises-most-since-sep-2008-services-and-even-peculiar-case-of-durable-goods/

“Core” Inflation Rises Most Since Sep 2008, Powered by Services and Now Even the Peculiar Case of Durable Goods

by Wolf Richter • Sep 12, 2019 • 54 Comments • Email to a friend

What would the Fed do if economic factors were all it looked at?

Inflation as measured by the “core” Consumer Price Index, which removes the volatile food and energy segments, jumped in August at the highest rate in 11 years, by 2.39%, a smidgen above the prior peaks of July 2018 (2.35%), February 2016 (2.33%), and April 2012 (2.32%). The last time, it rose at a faster rate was in September 2008 (2.47%):

US-CPI-2019-08-core-.png

The US is currently undergoing the second oil-and-gas bust since mid-2014, or same oil-and-gas bust, with two parts separated by a sucker rally. And so energy prices, which have a weight of 7.8% in the overall CPI, dropped 4.4% from a year ago, with gasoline and diesel prices falling 7.0%.

These declines in energy prices reduced the overall CPI’s year-over-year increase from 1.81% in July to 1.75% in August, the Bureau of Labor Statistics reported this morning.

Inflation in services

Consumers spend 70% of their money on services, which include everything from financial services and healthcare services (not medications) to broadband and cellphone services. It’s the biggie. In August, the CPI for services rose by 2.70% compared to a year ago.

“Inflation” as expressed by CPI attempts to measure the loss of purchasing power of the dollar, and not price increases due to higher-quality products.

When your broadband speed goes from 2 Mbps to 50 Mbps in the span of 10 years, but the price you pay remains the same (as was the case with our Comcast connection), you’re getting 25 times higher quality of services for the same price – meaning you’re getting more for your dollars, though you pay the same.

Inflation measures the loss of purchasing power of the dollar, and not quality improvements. This is why quality improvements are removed from the index (via the infamous “hedonic quality adjustments”). On this conceptual level, “hedonic quality adjustments” make sense.

Price changes can be divided into two portions:

  • The price of quality improvements,
  • The loss of the purchasing power of the dollar.

Your life gets more expensive, driven by both factors, which combined account for the overall increases in your “costs of living.” And there is a never-ending debate over the hedonic quality adjustments being purposefully applied too aggressively.

So the 2.7% increase in the CPI for services measures the loss of purchasing power of the dollar, after the impact of any improvements in your cellphone service, broadband services, data storage services and the like has been removed. The services CPI has been relatively stable since 2012:

US-CPI-2019-08-services.png

The peculiar case of durable goods.

Durable goods are things like cars, washing machines, furniture, cellphones, and the like. Automation and other efficiencies in manufacturing, along with globalization (transferring production to cheap countries) have pushed down the costs of making goods.

The overall rule in a non-inflationary environment is that durable goods that are not improved get cheaper over time as manufacturing and distribution becomes more efficient and costs are pushed down.

But under fierce pressure from global competition, manufacturers are constantly trying to improve their product. These improvements allow them to charge more for their products, but since these improvements give you value for the increased price you pay, they’re removed from the inflation index (you know the drill, “hedonic quality adjustments”), so that CPI for durable goods just measures the purchasing power of the dollar with regards to durable goods, not the quality improvements.

So your cost of living goes up because the car now has a 9-speed transmission and better safety features, improved performance, fancier electronics on the dashboard, cameras front and back, automatic braking features, and the like. But when the costs of these quality improvements are removed, the car should have gotten cheaper due to the impact of manufacturing efficiencies and globalization.

And this is sort of what has been happening. The chart below shows the CPI for durable goods – the actual index not the percent change of the index. Note what might be the beginnings of an uptick in recent months, after years of declines:

US-CPI-2019-08-durable-goods.png

The trend of durable goods price declines in prior years has been a topic in the discussions by the Federal Reserve, also conceding that these price declines may be the normal condition in a competitive world with a constant drive to make production more efficient.

In terms of percent change, the CPI for durable goods in August ticked up 0.6% — the fastest increase since May 2012. The turnaround in the CPI for durable goods trend started toward the end of 2017, as price declines got smaller and smaller, until November 2018, when there was finally the first price increase since 2012:

US-CPI-2019-08-durable-goods-percent-cha

So the inflationary forces continue to be active in services, as they have been. But now these inflationary forces are also starting to push up durable goods prices for the first time in recent years.

Durable goods and services form the bulk of “core” inflation measures, including the “core” PCE measure that the Fed uses as its yardstick for its self-selected inflation target of 2%. And by the looks of it, its “low inflation” scare earlier this year, when the dollar failed to lose its purchasing power fast enough, is in the process of reversing, removing one more economic reason for further rate cuts.

Services are hopping. And the #1 Biggie is hopping the fastest. But it all adds to GDP! Read…  The Financialization of the US Economy

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12 hours ago, Democorruptcy said:

What do our resident oil experts think about this one? Suggests an oil and gas glut.

Whenever I read things like that it makes me want to do the opposite, I don't trust them. Though it could help prices to fall at least initially as per DB's expectations anyway. 
 

 

be interesting to hear if @Cattle Prod has a view on a potential near term drop.I'm agnostic in a way,if it happens ,well move more in,if it doesn't then we'll stick with plan A

Once the $ starts to weaken,I think the window for lower oil prices closes.

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17 hours ago, DurhamBorn said:

Exactly that.Im not interested in the best bacon sarnie maker in Mecca.I have the sectors i like,i avoid anything lower than middle sized companies (apart from the odd PM miner) and i buy a spread of them.I go for companies directly affected by the area.Babcock got the frigate order etc,they are direct.The likes of Cargotec though i bought because they build a lot of machines for forestry etc,they will be selling into a none price sensitive market that is quickly upgrading its fleet.

Some of the companies i buy take like you say a few minutes of research.However the road map behind the sector choice and cross market work takes years,and actually decades of work.

As I look back on my life and reflect,I;m hoping to pass on some of what I've learned to my kids in the hope they can stay safe and happy.As you say,it can take decades to develop an understanding that can make you profitable.Threads like this weren't around when I was younger, and even then you have to be introduced to the learning somehow.

 

One of my hopes is that I can cut out the first twenty years of my learning curve for my kids if they're so inclined.So many mistakes.

17 hours ago, Castlevania said:

Pro tip. Get an NUS card (you can lie that you’re studying) and get 10% off everything in the Co-Op. you could have saved 50p!

That's a one hell of a tip.We spend a lot down our local coop

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On 13/09/2019 at 05:41, DurhamBorn said:

that.Im not interested in the best bacon sarnie maker in Mecca

:-):-):-)...It's so refreshing to be in an environment (this forum) where people are not fixated (insincerley) with political correctness.

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On 13/09/2019 at 05:47, DurhamBorn said:

My partner rents two rooms out to lodgers instead of renting her house out to a full tenant.That way she gets full tax relief and we can boot out any idiots without any notice if needed.It works out she makes exactly the same money after the fact she doesnt have to pay tax.She doesnt live there of course,but does.

Appreciated the tenancy implications/benefits but never considered the tax ones...wonder how many BTL landlords (accidental or otherwise) will catch on to this now the tax regime has changed.

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9 hours ago, sancho panza said:

Here she comes....

 

https://wolfstreet.com/2019/09/12/core-inflation-rises-most-since-sep-2008-services-and-even-peculiar-case-of-durable-goods/

“Core” Inflation Rises Most Since Sep 2008, Powered by Services and Now Even the Peculiar Case of Durable Goods

by Wolf Richter • Sep 12, 2019 • 54 Comments • Email to a friend

What would the Fed do if economic factors were all it looked at?

Inflation as measured by the “core” Consumer Price Index, which removes the volatile food and energy segments, jumped in August at the highest rate in 11 years, by 2.39%, a smidgen above the prior peaks of July 2018 (2.35%), February 2016 (2.33%), and April 2012 (2.32%). The last time, it rose at a faster rate was in September 2008 (2.47%):

US-CPI-2019-08-core-.png

The US is currently undergoing the second oil-and-gas bust since mid-2014, or same oil-and-gas bust, with two parts separated by a sucker rally. And so energy prices, which have a weight of 7.8% in the overall CPI, dropped 4.4% from a year ago, with gasoline and diesel prices falling 7.0%.

These declines in energy prices reduced the overall CPI’s year-over-year increase from 1.81% in July to 1.75% in August, the Bureau of Labor Statistics reported this morning.

Here she comes eh? https://wolfstreet.com/2017/11/15/why-core-inflation-rose-why-itll-rise-further-and-what-it-means-for-fed-rate-hikes/ (notice the date)

 Also seems a bit hyperbolic, when it says by rather than to, additionally when it's basically at the same made up level from a year previously, and the year before that etc etc.

Does Mr Wolf ever reflect on his previous articles? What happened since this article in 2017 when he wrote about the same thing?

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On 12/09/2019 at 23:48, stokiescum said:

I must admit I love watching you rich guys say how you make cash and your plans for the future but many of you are takeing gambles which I love to see I hope you all win

but ironicly I best most of you by simply

takeing a lodger in if we are simplyfying matters 

This post has so much truth it.

Stokie you're probably in the top 10% when it comes to wealth. You have an in demand, secure, well paying job. Live in a low cost of living area and don't live beyond you're means. In a far better position than most. Simplicity really is the tried and tested method. Probably a lot easier on the mind and soul too

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1 minute ago, A_P said:

This post has so much truth it.

Stokie you're probably in the top 10% when it comes to wealth. You have a in demand, secure, well paying job. Live in a low cost of living area and don't live beyond you're means. In a far better position than most. Simplicity really is the tried and testing method. Probably a lot easier on the mind and soul too

The stock markets fun but these guys take it to another level even I find it interesting to watch

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9 hours ago, sancho panza said:

be interesting to hear if @Cattle Prod has a view on a potential near term drop.I'm agnostic in a way,if it happens ,well move more in,if it doesn't then we'll stick with plan A

Once the $ starts to weaken,I think the window for lower oil prices closes.

You all know my thoughts on this,i think oil goes into the $30s at some point,then if/when we get a bust sharp short falls down to below $20,for a very short period,then next cycle $200+ or even $300+.I bought a few oil stocks though and have the ladders in place.Road map is clear down the road.Its one of the few areas to protect wealth in the next cycle.Its a classic really.Everyone thinks oil has no future (India alone is seeing massive growth in use,no chance electric takes over for 50 years) at the same time as it will have the best macro conditions since the 70s and probably falling supply.Its one of the reason i like transports as they will hedge for 4 years so avoid a lot of the pain at the same time as driving is costing more and more.

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