Getting a mortgage with profit not dividends?

Getting a mortgage with profit not dividends?

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rich12

Original Poster:

3,461 posts

153 months

Saturday 11th April 2015
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Next year, I will hopefully be moving. Our profit will be more than what I am 'paying' myself so can I get a mortgage on the profits? I own 50% so realise it would work on 50% of the profit but can this be done?

If not, What is the best way to maximise my salary with paying as little tax as possible? I am currently withdrawing an amount where I pay no personal tax. What is the maximum I can take without being liable?

Found a few sites but they're all different figures.

Sarnie

8,025 posts

208 months

Saturday 11th April 2015
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rich12 said:
Next year, I will hopefully be moving. Our profit will be more than what I am 'paying' myself so can I get a mortgage on the profits?
Yes you can smile

Jockman

17,912 posts

159 months

Sunday 12th April 2015
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At 50% ownership I'm sure lenders will regard you as self-employed anyway, in which case they will want to see your accounts and profit figures anyway.

The rules have tightened markedly but a decent broker can sort you out. Have a look at moving some of your % ownership to your wife?? And use up her nil rate band and 10% bracket.

rich12

Original Poster:

3,461 posts

153 months

Sunday 12th April 2015
quotequote all
Sarnie said:
Yes you can smile
Thanks.
Just didn't want to get penalised for not withdrawing enough.

If I was to currently own 50% now and say 70% of it in the next few months, would they care/know it's changed?

Eric Mc

121,779 posts

264 months

Sunday 12th April 2015
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Why would a mortgage company lend to an individual based on income that isn't his and that he hasn't had yet?

westberks

925 posts

134 months

Monday 13th April 2015
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F
Eric Mc said:
Why would a mortgage company lend to an individual based on income that isn't his and that he hasn't had yet?
A few lenders use the share of profit as the income figure, which is just a different interpretation of income. For someone that has previously been profitable and now isn't this is less beneficial, but for someone that has substantial profits but has chosen to leave funds in the business lenders use profit(or share of) rather than SA302 figures.

thepeoplespal

1,615 posts

276 months

Monday 13th April 2015
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Would it be trolling if I was to say that I think you should be limited to your income from your job and that even if artificially lowered, you shouldn't get to benefit twice from paying less tax.

Can't say I wouldn't do what you're doing myself given the same circumstances, but it could be argued, if mortgages had to be paid out of earned income, people in your shoes would be paying a lot more NI & Tax.

Eric Mc

121,779 posts

264 months

Monday 13th April 2015
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westberks said:
F
Eric Mc said:
Why would a mortgage company lend to an individual based on income that isn't his and that he hasn't had yet?
A few lenders use the share of profit as the income figure, which is just a different interpretation of income. For someone that has previously been profitable and now isn't this is less beneficial, but for someone that has substantial profits but has chosen to leave funds in the business lenders use profit(or share of) rather than SA302 figures.
The legal position is that the individual has no income until the dividend is formally agreed at board level and the formal paperwork of issuing the dividend has been processed. Indeed, it is very strongly advised that these procedures are gone through.

Assuming that a limited company's profitability will automatically translate into the personal income of the directors or shareholders is a bit risky as it isn't always the case.

Dr Jekyll

23,820 posts

260 months

Monday 13th April 2015
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thepeoplespal said:
Would it be trolling if I was to say that I think you should be limited to your income from your job and that even if artificially lowered, you shouldn't get to benefit twice from paying less tax.

Can't say I wouldn't do what you're doing myself given the same circumstances, but it could be argued, if mortgages had to be paid out of earned income, people in your shoes would be paying a lot more NI & Tax.
My understanding is that the mortgage is paid out of earned income after tax and NI. The point is that up until they have a mortgage to pay a business owner might take the opportunity to leave cash in the business and not take it as income until they need it. So if the lender purely looks at how much they've taken out previously this would understate how much spare they have to pay the mortgage.

gregf40

1,114 posts

115 months

Monday 13th April 2015
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Eric Mc said:
Why would a mortgage company lend to an individual based on income that isn't his and that he hasn't had yet?
Are you being obtuse on purpose?

It's no different to wondering why a mortgage company would lend to someone who could lose his job the next day.

It's a risk they are willing to take and the interest rate on the mortgage will reflect it.

Edited by gregf40 on Monday 13th April 11:06

98elise

26,376 posts

160 months

Monday 13th April 2015
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Dr Jekyll said:
thepeoplespal said:
Would it be trolling if I was to say that I think you should be limited to your income from your job and that even if artificially lowered, you shouldn't get to benefit twice from paying less tax.

Can't say I wouldn't do what you're doing myself given the same circumstances, but it could be argued, if mortgages had to be paid out of earned income, people in your shoes would be paying a lot more NI & Tax.
My understanding is that the mortgage is paid out of earned income after tax and NI. The point is that up until they have a mortgage to pay a business owner might take the opportunity to leave cash in the business and not take it as income until they need it. So if the lender purely looks at how much they've taken out previously this would understate how much spare they have to pay the mortgage.
This. The OP will not be getting some sort of tax benefit on the mortgage.

What is happening is that the OP is paying themselves less than the company makes (i.e. they are not emptying the company account into their personal account each month). The facility is the though, so the OP wants to get a mortgage based on that (and it is possible).

This happens a lot for one man band companies (me included). I only pay myself about 50% of what's available to me in the company. The other 50% stays in the company account and will continue to pay me when I have no work, or am on holiday, or sick etc. There is nothing to stop me paying it all to myself (and incurring the tax bill), but that wouldn't be sensible.

As Eric points out though, the company actually owns the money at the moment not the OP. Even if you are the sole shareholder its not your money.


sideways sid

1,371 posts

214 months

Monday 13th April 2015
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OP, if you haven't already contacted Sarnie (who responded above) I recommend you do so.

I am in a position not dissimilar to you, and Sarnie was a great help when I needed to borrow an amount in excess of affordability based purely on my actual salary, but perfectly affordable based on salary and dividend income.

Having said that, I guess that releasing some funds from the business in the form of quarterly dividends will make life more straightforward when proving income over the three/six months prior to making a mortgage application.

rich12

Original Poster:

3,461 posts

153 months

Monday 13th April 2015
quotequote all
Thanks for the comments. I'm not going to waste Sarnie's time as it won't be for another year and a bit. I just wanted to know if I need to start taking more out of the business just to show 'income'.

I am wanting to leave as much money as possible in the business so we can continue to expand.

westberks

925 posts

134 months

Sunday 19th April 2015
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Eric Mc said:
westberks said:
F
Eric Mc said:
Why would a mortgage company lend to an individual based on income that isn't his and that he hasn't had yet?
A few lenders use the share of profit as the income figure, which is just a different interpretation of income. For someone that has previously been profitable and now isn't this is less beneficial, but for someone that has substantial profits but has chosen to leave funds in the business lenders use profit(or share of) rather than SA302 figures.
The legal position is that the individual has no income until the dividend is formally agreed at board level and the formal paperwork of issuing the dividend has been processed. Indeed, it is very strongly advised that these procedures are gone through.

Assuming that a limited company's profitability will automatically translate into the personal income of the directors or shareholders is a bit risky as it isn't always the case.
How a lender chooses to interpret someone's income and affordability is down to them and the agreement of the FCA. If my business has declared profits, paid corporation tax on them and I choose to leave it in my business account of which I own a certain % then that is acceptable to a few lenders, they also look at the net assets on the book to ensure you aren't artificially increasing profits.

Personally I'd rather see that in a clients books than them manipulating their taxable income for an improved (higher) SA302 figure to obtain higher borrowings. Banks are carrying out far greater due diligence on self employed and director income than ever before, so a couple of lenders taking a slightly different stance is just helping give balance to the market for genuine cases.

Eric Mc

121,779 posts

264 months

Monday 20th April 2015
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Sole traders are different to companies.

A sole trader's business profit is his personal income.

A company's business profit is not.

Jockman

17,912 posts

159 months

Monday 20th April 2015
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westberks said:
How a lender chooses to interpret someone's income and affordability is down to them and the agreement of the FCA. If my business has declared profits, paid corporation tax on them and I choose to leave it in my business account of which I own a certain % then that is acceptable to a few lenders, they also look at the net assets on the book to ensure you aren't artificially increasing profits.

Personally I'd rather see that in a clients books than them manipulating their taxable income for an improved (higher) SA302 figure to obtain higher borrowings. Banks are carrying out far greater due diligence on self employed and director income than ever before, so a couple of lenders taking a slightly different stance is just helping give balance to the market for genuine cases.
Retained Profits on a Balance Sheet are just a paper figure. I have substantial retained profits in my limited company but cashflow (far more important) will not permit me to take these profits any time soon. When I do I will be taxed on them accordingly so they will be worth less than the headline figure anyway.

To confuse things further, because I own more than 25% of the limited company, many lenders class me as 'self-employed' !!!! smile

worsy

5,776 posts

174 months

Monday 20th April 2015
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As posters have pointed out, much harder to use divi (projected or not) as income. I was turned down recently for a mortgage through my current account provider as my turnover has reduced. The reason being I'm working at home and therefore not expensing my travel to my client. (IT Contractor) Profit was broadly similar though. In the end used my SA returns with another lender.