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Limited Company Directors

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Limited Company Directors, Expert Mortgage Advice for CIS Subcontractors

Limited Company Directors

All about limited company directors, explained by David Sharpstone.

Podcast approved by The Openwork Partnership on 16/02/2024.

CIS Mortgage Advice is a trade name of Just Mortgages Direct Limited, which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority.

Are there mortgages tailored to limited company directors?

Self-employed mortgaging is one of my favourite subjects. The simple answer is yes, there are mortgages for company directors, but for most lenders there isn’t a particular range of products specifically designed for this type of customer.

As a mortgage broker we can look at products from an extensive panel of lenders. What’s important is that we look at the income slightly differently for a limited company director compared to somebody in a PAYE job.

How do I prove my income and document my trading history?

There are different ways we can do it. One of the first questions that I would ask a limited company director is what percentage shares do they have in a limited company. For most lenders, someone with less than a 20% share in a company will just be treated as a normal salaried employee.

If you have more than 20% or – for some banks – more than 25% shares in a company, we can look at the income slightly differently.

There are different ways to prove it, depending on different banks, and we might get different outcomes. Let’s imagine I’m dealing with somebody who has 50% shares in a company and has been a limited company director for at least two years – it’s a bit easier to deal with if you have a good track record.

To prove the income I will look at two different sets of documents: first I will see what they earned personally. A lot of limited company directors pay themselves a certain salary, but say they can increase this if needed. Banks aren’t daft – they realise this is easy to manipulate. So most mortgage lenders would look at your tax personal tax returns for the last two complete tax years.

I would expect those documents to show that you’ve drawn a salary. It doesn’t matter if that salary goes up and down month to month, because that self-assessment tax summary is the total for the previous year. Generally speaking, most company directors will take a small salary for tax efficient purposes and draw the rest of their income as dividends. So when we’re looking at income for limited company directors, the majority of the high street banks would look at the salary and dividends over a two year period.

Sometimes a company director will only draw out what they need to pay their monthly bills and lifestyle. There could be a lot of profit in the company that they don’t necessarily need to draw out. They’d rather leave it in the company to build up and expand in future. Some mortgage lenders understand the position here with retained profits.

I’ll also ask my clients for two years of the company’s full accounts. Let’s imagine a scenario where the customer and their company has made £200,000 profit in the last trading year and they own 50% of company shares. 50% of that profit actually belongs to them. They’ve just chosen not to draw it out. So another way of looking at income is to look at their salary, stated as director’s remuneration on the accounts, plus their share of net profits.

For my clients I’ll look at both to decide how to get the closest figure to what we need for the mortgage lender.

Do dividends count as income for a mortgage?

Any dividend income drawn can be used. If you’re looking at the other approach, of using retained profits in a company, this can boost the total as some lenders accept profits before any tax.

If you’re basing mortgage affordability on the retained profit in the company, using the share of profits plus salary, then profit share is taken after dividends have been paid out. So we wouldn’t use dividends on top of profits plus salary. It’s really going to depend on your situation whether we’re going to use dividends or not.

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What if I have fluctuating income?

Income fluctuating during the course of the year is very normal if you’re drawing dividends. A dividend is a share of profits, which are going to change throughout the year.

If you’re using the self-assessment route or you’re using the retained profits in the company, fluctuation doesn’t really matter. The fact is that you’re going to take an average over the last 12 or 24 months, which will iron out any creases.

Quite often limited company directors will tell me that they are earning a £30,000 salary but have decided to pay themselves £100,000 and want a £500,000 mortgage. But it doesn’t work like that – banks aren’t daft. They look at income drawn over a longer period of time.

What about PAYE income?

There’s a common misconception around this. Even if you’re an employee of your own limited company, if you own 100% of it you essentially are the company. You’ve just set it up for tax efficient purposes to put a little bit more money in your pocket.

Some people are on PAYE and take all income as a salary and draw no dividends. That might not be as tax efficient, but your tax is paid every month and you don’t have to worry about doing a self-assessment at the end of the year.

But any lender will treat that individual as self-employed for mortgage purposes, even if they’re entirely dependent on a PAYE income.

How does retained profit work in terms of income?

Retained profit in a limited company can often boost affordability – especially when the limited company director is only drawing out what they need for their own lifestyle and essential bills.

A lot of mortgage industry professionals might not explore that as an option – but it can boost your borrowing power for a property and could get you that house of your dreams.

Retained profit for most mortgage lenders is usually after tax has been calculated, but some will accept it before tax, as gross profits.

How much can I borrow as a limited company director?

As we’ve discussed in previous podcasts, mortgage lenders all have different affordability models. Most of them these days will have an affordability cap: the more you earn, the higher that cap.

Let’s imagine from lender to lender that cap is a difference between 4.5 times your income to 5.5 times income. That could be based on self assessment income, or your salary plus dividends or retained profit plus salary. Whichever documents we use, those salary caps are always going to be there.

Mortgage lenders will then factor in any financial dependencies and credit commitments that affect affordability.

Do you have any final thoughts on mortgages for limited company directors?

Being a limited company director shouldn’t be seen as a barrier to buying a home. A lot of people think their circumstances are going to make it difficult. But it’s a lot more straightforward than they realise, especially as we’re doing this day in, day out.

Most of our clients are self-employed in fact, so we’re very used to dealing with this situation. We’re very happy to have a chat with anybody and show that we can help you buy your own home.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

CIS Mortgage Advice is a trade name of Just Mortgages Direct Limited, which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority.

Approved by The Openwork Partnership on 16/02/2024.

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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE