Conversations will take place with accountants with a view to mitigating the tax liability as far as possible.
But by being overzealous you may find if you’re looking to buy for the first time, move house or just remortgage that the level of borrowing you require is not available.
If you’re a sole trader lenders base your affordability on your net profit and for company directors with a shareholding of 20% or more, typically the salary and dividend income makes up what they consider to be your income.
While you may feel you can afford to pay the mortgage, if the evidence available to the lender doesn’t support this, then they simply won’t lend.
Nowadays lenders will generally request the past two years SA302s supplied by HMRC which is essentially a summary of your tax return in order to evidence your income.
How lenders treat the income varies: if it is increasing most lenders will take an average of the figures but occasionally a lender may take the latest year’s earnings.
This is very much on a case by case basis but if your income is decreasing the latest year’s figures will be used.
For company directors some lenders – notably Clydesdale Bank and Virgin Money – will also look at the share of net profit plus salary as opposed to salary and dividend income.
This effectively means they are looking at the base profitability of the business rather than just what the directors have taken out of the business.
If that’s you, unfortunately you will experience difficulties if you have been trading for fewer than two years.
However, all is not lost and there are lenders that will consider a mortgage after just one year of trading and of the major lenders, Halifax is arguably the most flexible – assuming you pass their credit score.
Other lenders such as Leeds Building Society may consider you if you have an acceptable projection for the second year providing the accounts show an improving position.
There are also lenders that only accept business from brokers which look at each case individually and are not ruled by credit scores that may also consider with one year’s trading figures.
So if you believe you may need a new mortgage over the coming year, then trying to reduce your tax bill may well have consequences you didn’t expect so it would be prudent to have an early conversation with your bank or broker to ascertain the position.
Mortgage & Equity Release
What Is Equity Release?
Equity release is the use of financial arrangements that provide the owner of a house, or other property, with funds derived from the value of the property while enabling them to continue using it.
How Does Equity Release Work?
Equity release is aimed at homeowners aged 55 and over. It allows you to take some of the value of your home as cash.
Equity Release categorized as Self-Employed
Equity has consistently campaigned for your right to be categorized as self-employed for tax purposes. Being self-employed for tax enables you to claim allowable business expenses against your gross earnings thereby reducing your taxable self-employed income.