Reconcile tax efficiency with getting a mortgage
Limited company directors often aim to keep their profit and personal income down to pay less tax. But if you would like to get a mortgage, you have to show a healthy profit, salary and dividend figures. As you can’t have both (tax efficiency and high income), it is a case of having your cake or eating it.
And no, increasing your salary and dividends for 3 months prior to a mortgage application won’t help. A mortgage for a limited company director is assessed based on closed business year accounts, not based on current business year takings.
However, lending criteria for income assessment are different from one lender to another. It’s a complex field and to calculate the maximum mortgage amount you can borrow, we use the individual criteria for each lender.
Proof of income for company director mortgages
The amount of paperwork you receive from the accountant can be confusing. You may have abbreviated accounts, trial balance sheet, unaudited financial statements, corporation tax computation, company tax return, personal tax return and personal tax computation among others.
So, what does a lender need for a mortgage application?
As a generic answer, lenders normally ask for the full, finalised and signed accounts (unaudited financial statements), which historically showed all the necessary figures.
However, following recent changes in the accounting requirements, the new format does not show dividend figures. Therefore, it is likely that a letter from the accountant will be required in addition to the accounts.
Some lenders will ask you for other documents as well. In contrast, others wont’t bother you at all, as they just send a form to the accountant to complete. Whatever the case, we are here to help you, so don’t despair, help is at hand! We are also happy to liaise with your accountant directly if that’s your preference, when it comes to gathering the necessary paperwork.
Company director mortgage calculation
When you find a limited company director mortgage calculator online, what income figure do you put in? Latest year salary and dividends? Or the average of the last 3 years? Or your profit and salary figures for the last 2 years? It is confusing, isn’t it? Well, the answer is – it depends.
As an independent mortgage broker, we have access to the lenders’ own calculators and criteria, so we do the calculations individually. This means that we are your personal shopper. We compare the market on your behalf and come up with accurate results. This saves you time. And you can spend more time finding the perfect property.
How to transfer property to a limited company?
Apart from buying a property through a limited company, you could also consider transferring property to a limited company. This may help you reduce your personal tax liability or make it easier to invest your profit in new properties.
Be aware that this transaction is a sale, so the buyer (the limited company) may be liable to paying stamp duty land tax. Your accountant or tax advisor will be able to advise you regarding the stamp duty liability.
On the positive side, many lenders accept the equity in the property as a “gift”. This means that the limited company wouldn’t necessarily have to put down any cash as a deposit for this purchase.
When moving home and renting out your old home, you could also transfer the property to a limited company. Not every lender will allow this move, but we can help you arrange this type of transaction as well.
Buying a buy to let property through a limited company has its pros and cons compared to buying in your own name.
The former option may be more tax efficient, you can more easily partner with others to buy an investment property and may even find it easier to re-invest the profit in other properties. In other words, it is like running a property business. However, you have to be prepared for higher costs versus a traditional buy to let mortgage.
Ultimately, the decision lies with you based on your plans and preferences. A tax advisor will help you understand the tax implications, while a mortgage broker will help finance the transaction. We are here to make sure that you get the best mortgage deal possible.