I need my money to sprout

Mark works hard but has given little thought to a pension or life insurance. Now 42, he writes:

'I have been married for just over a year to Burcu, a 26-year-old Turkish girl. I run a successful franchise delivering boxes of organic vegetables around Bournemouth and make about £40,000 a year before tax, including a few thousand pounds from teaching yoga - although I am cutting the number of classes. I can't see myself doing this for more than another eight years as it is difficult to have time off.

My exact income varies depending on sales but works out at about £2,000 net, though I haven't paid any tax for the past year. My wife makes about £500 a month working at Asda.

I have nearly paid for my three-bedroom flat over five years and am buying a four-bedroom house nearby. I plan to let the flat for about £600 a month and take short-term foreign students in three of the bedrooms in our new house.

I have £130,000 equity in the two properties, worth £135,000 and £250,000, but expect the income from flat and house easily to cover the mortgages of £1,500 a month. I would like to cut the repayment period soon. Being self-employed, I had to do a self-certification for both mortgages.

We will probably aim to have children in the near future and it is very likely that we will move to southern Turkey in about eight years' time. Living costs and property prices are much lower there. We might even buy sooner as an investment. I might start a business there, such as a backpackers' hostel or restaurant catering for tourists, but will still rent out the UK properties which will provide a good income for life in Turkey.

I am keen to increase my assets and take some risks. Apart from the mortgages, which will be covered, I don't have big expenses so I will have spare cash to do something with. While I am not particularly interested in investing, I would like to make the most of my current good situation.

I don't have a pension as I was out of the country for 15 years travelling and working and have never been interested in security, though with age that is changing and I don't want to leave my wife and possible children in trouble as my father did when he died of a heart attack at 45.

We don't have life insurance and, after buying the house, will have just £5,000 left.

'It is extremely important to have life cover'



Your relaxed attitude to money has done you no harm so far but now you need to be more decisive to hold on to the solid financial base you have acquired.

Philippa Gee, investments director at Torquil Clark, is adamant: 'I cannot emphasise enough how important it is to have life cover in place even though, with Mark's family history, he could be 'rated', meaning the premiums will be higher.'

Then you need to put aside money each month for known and unforeseen expenses. One is lack of rental income, says Jane Harrison of London & Country Mortgages: 'There will be periods when not all the rooms are let so it is important that he puts some cash aside to cover this.'

Put the £5,000 into a good cash account, says Gee. 'Everybody needs a decent sum saved in cash to start with, especially if they are planning a family and taking on a second mortgage.' Cahoot's savings account pays an introductory rate of 5.5 per cent.

She then suggests putting aside £500 a month. 'Split this between a cash fund and a new investment. Even though Mark is pushing for risk, he must build up flexible low-risk holdings first before he can invest confidently in riskier areas.' She suggests a widely spread international fund such as Credit Suisse Constellation Portfolio: 'This invests in other well-performing specific funds. I would call it fairly spicy, especially as a first equity holding.'

You must prepare for the future costs of the franchise. Mark Scott, NatWest's national franchise manager says: 'A good franchisor gives you an annual review. There will be ongoing costs but don't be tempted to cut back because you need to spend money on marketing to pick up new business.' When you come out of a franchise, you can sell the business to a new franchisee who will buy your client list and goodwill.

There are the tax bills you have been avoiding. Tim Norkett, head of private clients at accountant Horwath Clark Whitehill, points out: 'He will have to pay income tax on all the rent he receives, even after they move to Turkey.' You could nominate one room under the Inland Revenue's rent-a-room scheme and earn £4,250 a year tax free but not claim expenses. Norkett believes you should maximise your claim for expenses on all three rooms instead. 'As a furnished letting, he can claim the costs of soft furnishings by deducting the cost of every purchase or claim 10 per cent of the rents each year as a 'wear and tear' allowance.

For Mark's wife to be taxed on all the rents, she would have to own the properties, says Norkett. 'That means Mark would need to give her the flat and buy the new house in her name. If he does not want to do that, he could transfer the properties into joint names so each pays tax on half the rental income.'

You also face capital gains tax. 'Once Mark has acquired the second property, he has two years to elect which home will be his "main" residence and so exempt from capital gains tax. He needs to balance which he is likely to sell first with the one likely to produce the larger gain,' says Norkett. Once a property has been a main residence, the final three years of ownership automatically qualify for the exemption.

You can gain by waiting: 'If Mark and Burcu eventually moved to Turkey, provided they were not resident in the UK for five complete tax years, any gain on selling property would be completely exempt from UK CGT although there might be Turkish tax to pay.'

You must tell your lenders about your renting plans, says Harrison, because you have changed the conditions. 'Most lenders are happy to consent to letting property, although they are less keen on rented rooms, and may charge an administration fee and will usually increase the rate of interest.'

However tempting, do not ignore pensions, says Gee. 'I appreciate that his unique situation makes the constraints of a pension less attractive but they can provide a solid foundation for retirement with good tax advantages along the way.'

Mark's to-do list


1. Buy life insurance.


2. Tell the lenders you are renting out.


2. Put £5,000 in a high-interest savings account.


3. Start a regular savings cash account for hard times and tax bills.


4. Start saving in a stock-market related investment.


5. Decide which property will be your main residence for tax purposes.


6. Think about putting money into a pension.


7. Make a will.


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