Self employed mortgage question

Rosco1112

Hi everyone,

Just doing lots of research and trying to find a way to obtain a mortgage to buy a house next year

My question is this, I bought a business with savings I had so bought the business outright. The business will make approx a £20,000 profit this year which I will have filed by a chartered accountant.

Because obviously I have not paid back the initial £30,0000 investment I will avoid paying any tax at the end of the year, even though the company would have made a profit of £20,000

My question is this, will this be sufficient for my mortgage lender to see that I have this income and can lend me money based on these figures or because the company technically didn't make any money I won't be abler to use this to get a mortgage?

Very confused and would really appreciate any help.

I will get a broker to get me the mortgage as I think there are some (very few) lenders which accept 1 years of accounts

Kind regards

Ross

Thrugelmir

Rosco1112 wrote: »

Because obviously I have not paid back the initial £30,0000 investment I will avoid paying any tax at the end of the year, even though the company would have made a profit of £20,000

Not necessarily. Suggest you confirm this with your accountant.

holly_hobby

Accounts for mge affordabilty purposes are based on declared taxable income.

I am taking your post that you are to withdraw your initial investment/loan from the company, as repayment of a loan.

If so, it has not been withdrawn as income but return of capital (hence no inc tax payable) - and therefore not eligible to be classed as taxable income.

I would suggest leaving it in, and taking it as income & dividends (which will help keep inc tax down and NICs if you are Ltd) for the yrs you want your accounts considered for mge purposes, or until you can withdraw your capital and still leave the reqd profit for mge calculation purposes.

Hope this helps

Holly

Rosco1112

Hi Holly,

Thanks for the reply,

Lol I am even more confused now! So if I withdraw the £20000 as return of capital (the money I originally invested) (which is not a bank loan - simply savings) then I cant use this against obtaining a mortgage?

However like you say I am a ltd company and if I withdraw money from the company via dividends as low as possible to lower the cost of income tax and ni then I can use the £20,000 against a mortgage application?

Will I be able to get the £30,000 return of capital years later down the line?

Really appreciate you spending your time to help :-)

Kind regards

Ross

GMS

Since the demise of self cert mortgages the self employed have found themselves on the back foot.

Lenders are looking for audited accounts and/or proof of Inland Revenue submissions and will use the profits declared.

Until such time as tax rules are changed then self employed are penalised for using the sytem efficiently. The rules are there and will be maximised by accountants in order to keep tax liabilities to a minimum, all above borad and legal.

The fact that you 'loaned' money to the company does not guarantee that money back as income each year so a lender would be foolish to base your income on a one off payment.

1 years accounts will bring some lenders into the equation but only at the profits declared.

Rosco1112

Ok thanks, so can I chose to pay tax on my first years trading ad declare the money I originally invested back in year 2 after I have got my mortgage?

This way I could shoe tax paid and use my income to obtain the mortgage

Kind regards

Ross

Thrugelmir

Rosco1112 wrote: »

However like you say I am a ltd company and if I withdraw money from the company via dividends as low as possible to lower the cost of income tax and ni then I can use the £20,000 against a mortgage application?

Company profits are subject to Corporation tax. So in simple terms to repay yourself your loan , this comes out of after tax profit i.e. generated cash profit.

You should draw a salary up to the personal allowance level to maximise this. This is of course a tax deductible business expense.

holly_hobby

Ok ...

As a Ltd Co the idea is to have a lowish (but realistic enough for Mr HMRC to accept the figure) salary (with this figure obviously liable to income tax & NIC), topped up with dividends (which have a lower rate of tax up to upper level and are not liable to NIC). (really your accountant should already be discussing this with you and putting this in place, inc the fact you have corporation tax & employer NIC to also pay from your co profits - which I expect they will do if they are Chartered as you say).

You can have your investment withdraw as and when you require - but don't forget you can't have it all ways, pay yourself this way to avoid tax and Nics, yet want the same profit that you are withdrawing, treated as income for mge purposes - unfortunately it doesn't work this way.

It really depends what is important to you - obtaining a mge sooner rather than later, or withdrawing your 30k capital from the profit the company generates as quickly as it makes it !!.

As I say, mortgage affordability for ltd co's is assessed on declared profits, your income taken and dividends paid.

If you take the capital you want out now, well you would have your deposit (but what will you live on ?), and zero profit to boot.

Have a good long chat with your accountant - you are paying chartered money so make good use of him/her, tell them what your plans are ie you want your books to support a mge app, and they will give you advice and guidance on how together you will be able to achieve them, whilst also mitigating tax i.e they may advise delaying of withdrawal of your capital to ring fence this yrs profit and income ... or they may have another idea ..

To give you an idea of mge lenders who accept 1 yrs accounts -
Kensington Mortgages - Ltd Co will req full 1 yrs certified accounts i.e signed off and lodged with HMRC - (they will consider up to 90% LTV). (naturally your declard income & divs will have to be sufficient to service the loan reqd, and you must also naturally satisfy their status checks and requirements too)

A whole of market mge broker will assist with other lenders in the market, who will consider 1 yr accounts - your accountant probably has connections with 1 or more in the nature of their business.

Hope this helps

Holly

GMS

That's one for an accountant to answer.

Paying yourself a wage may seem the answer but look at lender criteria. Chances are if you own above 20% of the company you will be treated as self employed and be back to square one.

Minimising tax and expecting to maximise borrowing is unfortunately not a good combination.

Rosco1112

Hi Holly,

Thanks so much, makes a lot more sense

I will speak to my accountant and discuss what is best.

I think I will keep my capital in the business as this mortgage is very important to me

I can sleep a lot better now, once again thanks so much for your time you have spent helping me :-)

Ross

holly_hobby

GMS wrote: »

That's one for an accountant to answer.

Paying yourself a wage may seem the answer but look at lender criteria. Chances are if you own above 20% of the company you will be treated as self employed and be back to square one.

Minimising tax and expecting to maximise borrowing is unfortunately not a good combination.

Some confusion here ...

As a Ltd Co - you are technically an employee of the business, and therefore your books will show a salary and divs going out to you - all directors & shareholders of ltd cos are classed for tax purposes as employees, and duly paid a salary (and eligible to dividends). This is because a Ltd Co is in essence its own entity, with shareholders/directors etc.

And thats why, as you are also technically the ltd company, you have to pay corporation tax and employer NICs, in addition to employee income tax & NICs already paid on your drawn income. (and tax on any divs taken). In effect trading under a Ltd Co means double the bubble - but other additional tax advantages can more than offset the additional taxes you have to find from company income/profit.

When it comes to mges and finance - as a major shareholder/controlling director i.e 20% holding or more - you are classed as self employed (as you dictate your salary, dividents paid etc). So they require examination of certified books showing this data, which are reqd to certify the figs (income) given in the mge application, and to examine the trading history and activity of the business.

Hence why we have been discussing in this case, who will accept 1 yrs certified accounts.

Hope this helps

Holly