In this scenario, our enquirer and his wife both ran a limited company and, in each case, the partner was a 100% shareholder in the company. They had found the property they wished to purchase and had already had an offer accepted.

They had engaged an independent mortgage broker some months before and assumed that they wouldn’t encounter any issues getting a mortgage as limited company directors because the broker had advised them to pay themselves PAYE to support their application. It also tells the lender if the applicant will be making the decision on whether dividends are paid (+50% shareholding), or indeed if the shareholding is small enough that the lender can consider the applicant as an employee (-25% shareholding).

At the time of the mortgage in principle application, they were paying themselves £3,000 and £4,000 per month respectively via the PAYE system. They submitted their application which was refused by the lender because the profit from their businesses did not indicate that the PAYE being received was affordable for their limited company.

During our discussion with the client, it became apparent that they had no chance of raising the £200,000 mortgage borrowing they needed at the current time, for the current purchase. In fact, they had simply paid out a lot of employer and employee National Insurance and income tax to no benefit.

So, what was the problem, and how do lenders look at this issue?

What you need to know when getting a Mortgage as a Limited Company Director

If we take matters back to basics and consider how both limited company income and company director income work, we can better understand how lenders think.

A business generates monthly revenue which totals over a year into an annual turnover. The business also incurs costs to generate sales and run the business such as office and sales support staff and finance departments (known as overheads). These costs are taken from the turnover of each annual trading period to arrive at a pre-tax profit figure. The business then pays Corporation Tax on the profit figure leaving a post-tax profit figure.

How a Limited Company Director takes personal income from the business matters

A company director can take personal income from the business in two ways:

• via PAYE as a limited company director
• via Dividends as a company shareholder

(The director may also take expenses or repayments on a loan to the business, both are not an income as they are simply a return of funds already paid out)

When getting a mortgage as a limited company director what factors are important to the mortgage lender?

What is the level of shareholding in the limited company of the mortgage applicant?

This percentage share of the limited company is important because it informs the lender as to the share of profit to factor in for the applicant.

Is the limited company profitable, and if so at what level?

If the limited company director is taking PAYE and or dividends from the business, the mortgage lender will work out if this can be sustained given the profit the business is currently generating. If a limited company director is taking PAYE and the business is making a loss, then that is not a sustainable situation, and they will therefore be less likely to lend.

How long has the limited company been profitable, and at what level?

If the limited business has only recently been profitable the mortgage lender takes a risk knowing that profitability may not continue. If there has been a material dip in profit the lender will want to know if that pattern is likely to happen again.

Has there been a big change in the profitability of the limited company?

If so, the mortgage lender will seek what activity accounts for the change. They will investigate whether there has been one large order that has skewed the figures for example, and if this is the case they will need to know if they can rely on the profit figure.

The Mortgage Lender’s response as a result of your answers

The majority of mortgage lenders will underwrite for limited company directors based on PAYE and dividends averaged over the last two tax years (with the most recent year completing within the last 15 months).

Some lenders will work on the most recent years’ figures alone if they are higher. Some lenders will work on a single year’s figures for a newly established business. See our mortgage with 1 years accounts page for more information.

What if I don’t take or want PAYE or Dividends from the business?

There are mortgage lenders in the market that will work on post-tax profit and PAYE (ignoring dividends) for limited company directors.

Other points to consider when getting a mortgage with a limited company

Lenders will look up your limited company on the Companies House register and it is easy for them to establish who the directors are and whether you have a substantial shareholding (controlling interest).

They can also see when the business was established, and check balance sheets on recent micro account returns.

What do you as a Limited Company Director need to provide to your Mortgage Lender?

A mortgage lender will typically look for tax calculations and tax year overviews covering the last two tax years. They may also require signed full accounts covering the last two trading years (this means accounts signed by you and ideally by your accountant, and full accounts not abbreviated accounts).

Some mortgage lenders will work from a reference from your accountant, but this is rare.

A lender may also ask for copies of limited company bank statements to evidence recent revenue and good conduct.

Common mistakes when getting a mortgage with a limited company

The most common mistake when getting a mortgage as a limited company director is to assume that paying yourself PAYE mitigates any issues with the mortgage application.

Another common mistake is expecting mortgage lenders to work on current trading year figures ignoring previous completed years – a sudden upshot in trading revenue cannot be relied on for lending purposes. You can read more information about this on our mortgages for company directors page.

Some of the borderline fraudulent mistakes that can be made by limited company directors include:

• pretending to be employed and not mentioning limited company ownership
• changing ownership of the business just prior to application

The golden rule when getting a mortgage with a limited company

We frequently quote our golden rule to limited company directors which is:

Do not make business or taxation decisions based on targeting a successful mortgage application. Run your business and tax affairs first and worry about your mortgage afterwards.

How can I increase my chances of a successful Mortgage Application?

• Always use an experienced mortgage broker
• Submit your tax returns and pay your taxes to ensure your Tax Calculations and Tax Year overviews are in order
• Be upfront and open with your broker about any information regarding your limited company that could be relevant

If you are interested in getting a mortgage when self-employed please contact us to speak to a mortgage expert today.

The post Getting a Mortgage with a Limited Company appeared first on A Mortgage Now.

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The post Mortgages for Company Directors appeared first on A Mortgage Now.

This is not a simple question. What a self-employed applicant can consider as income will depend on the mortgage lender they’re using and most importantly their trading style. Other factors include ownership of the business, type, and history of trading, and how income is drawn from the business.

To help you get a feel for how things work we outline some main points below.
[7 min]

Limited company directors

If you are making a mortgage application as a limited company director, this is perhaps the most complex area of all.

Key considerations are:

• Your shareholding within the business
• How long the business has been trading
• How much PAYE you receive
• How much profit the business generates
• What you do with that profit (i.e. have dividends been paid)

Shareholding under 25%

If you have a shareholding of under 25% many lenders will consider you as employed for mortgage purposes.

Contractor

Sometimes a limited company is set up purely to support the contracting of your services to another business. In these cases, business accounts and profits are not always relevant as some lenders will underwrite your income based on your day rate.

Typical Contractor calculation – Day Rate X 5 X 46 weeks

Assessing income on a mortgage application for a standard limited company director.

PAYE

Anything you pay yourself under the PAYE scheme will be considered income by all mortgage lenders.

Please note this does not mean you can simply make yourself some PAYE payments regardless of business profit just to get a mortgage. Lenders expect to see that the business can afford the PAYE and that it has been consistent.

PAYE will be shown on your Tax Calculation as ‘Pay from all employments’.

Dividends

All lenders will consider dividends from a limited company owner provided it is evidenced that the company can afford the dividends paid.
As an example, if a business has built up £100,000 of profit over a period of years, and the business owner decides to take £60,000 in dividends following a year of no profit, that would raise alarm bells for the mortgage lender.

Dividends are evidenced for mortgage lenders via your Tax Calculation and are shown on the Tax Calculation as ‘Dividends from UK companies (plus 10% tax credits)’.

Profit

Many limited companies ‘retain profits’, in other words, the money left after expenses, PAYE, and Corporation tax, is left within the business.

Some mortgage lenders will consider PAYE plus profit, rather than PAYE plus dividend.

Points to watch

Most lenders, where they consider profit, work on ‘post-tax profit’. Occasionally a lender will work on ‘pre-tax profit’.
Lenders are interested in profit only where the applicant is in control of that profit and can decide whether dividends are paid. Therefore, most will ask that the mortgage applicant(s) own the business outright, others will want the applicant(s) to have a majority shareholding, and some are comfortable if the applicant(s) own at least 25% of the business.

Track record

You need a track record to raise a mortgage against self-employed earnings. With some lenders that track record has to be at least three years, other lenders will consider you after two years of trading.
Lenders will generally average your ‘income’ over two or three years. In these cases, if income has dropped over that period, lenders will work on the lower figure.

One year’s trading

There are a handful of lenders that will consider a self-employed applicant after one year’s trading, which is a useful addition to the options available in the market. See our page on getting a self-employed mortgage with 1 years accounts for more information.

Less than one year’s trading

Obtaining a mortgage when you have just started, just bought, or just bought into a business is not impossible, but can only be achieved in certain specific circumstances – in these cases you should speak to a mortgage broker highly experienced in the self-employed arena.

A and B Shares

We occasionally see cases where a limited company has two styles of share issued classed as ‘A’ and ‘B’ shares. This is a trick sometimes used by Accountants to add some flexibility to the entitlement of shareholders to profit and management. It causes numerous complications with mortgages for a limited company director. If your business runs different share types speak to a mortgage broker every time.

Self-employed as a partnership

A business partner is taxed on their share of the business’s income after expenses. Therefore, it is an easy assessment for a mortgage lender. A business partner’s income is clearly stated on their Tax Calculation (statement of taxable income available via HMRC Gateway).

Partnership income is listed on the Tax Calculation as ‘Profit from Partnerships’ and is what the mortgage Lender considers as income.

Limited liability partnership

Members of Limited Liability Partnerships are taxed in the same way as partners in a standard partnership and are therefore considered for a mortgage in the same way.

Sole traders

For sole traders, the typical area of confusion is when the applicant considers their turnover as their income for mortgage purposes.

Mortgage lenders do not consider turnover as income for mortgage purposes.

A sole trader will have deductible business expenses which are subtracted from turnover to give a net income figure on which income tax is payable each year. It is that figure, which is clearly shown on the Tax Calculation under ‘profit from self-employment’.

This is what the lender considers as income.

Multiple sources of income and styles of trading

We occasionally see applicants who are trading self-employed across more than one business and across more than one trading style.

In these cases, each business and trading style is considered on its own merits. The prospective mortgage borrowers should be aware, however, that where lenders consider two sources of income, they typically only consider, half the total of the lower of the two incomes.

Change of trading style

Sometimes self-employed mortgage applicants will have changed trading style within the last two or three years. For example, a sole trader that has been advised by his or her Accountant to incorporate as a limited company. This can be a problem as the trading history clock is set back to day one and most mortgage lenders will wait for one, two, or three years trading in the new style before considering the applicant.

Fortunately, there are lenders that can manage an applicant who has recently changed trading style. Again, this is an area where you need the help of an experienced independent mortgage broker.

Tax Calculations

Tax Calculations are statements HMRC of your self-assessment account for each tax year. These are now crucial documents for assessing mortgage lending and need to be accompanied by a sister document known as a Tax Year Overview. Your tax year overview is an account of tax due on and pa for each tax year.

More about Tax Calculations and Tax Year Overviews and how to obtain them here

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