Once upon a time, in land where mortgages were offered with little or no questions asked, the self-employed borrower could dress up their business accounts however they thought best.
Today, creative accounting can prove to be a costly error. Mortgage lenders are working with the tax man to try and help cut out schemes and structures which aim to reduce tax bills.
The obvious one is claiming too many expenses. If you tell the tax man that your business has had a very small net profit, then that is what you need to tell your mortgage lender too.
Another problem which is becoming more popular, is for people in employed roles being asked by their employer to switch to being paid on a self-employed basis, with no real change in job role. Upon changing to self-employed, borrowers then start from day zero, and have no track history of self-employed income. This means they have to wait at least a year or two before they can start thinking about applying for a mortgage.
The last common problem of this type which self-employed borrowers encounter, is their accountants being too creative. An accountants main focus is reducing your tax bill, which they can do very well, but sometimes too well. Although I am sure most of the methods they use are above board, they are often not recognised by mortgage lenders, and so cause an issue when making an application. Examples of this are making family members shareholders which distorts the picture or directors loaning large sums of money to their own limited company, which then means on paper the company is then heavily in debt.
Gone are the days when you could have your cake and eat it. Before entering into any type of tax planning arrangement you must of course firstly make sure it is fully legal and ethical, but also if you are planning to borrow money, that it is a recognised structure which mortgage lenders accept as proof of income.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner
27th March 2017