By Lisa Orme
A regular debate I have with clients and their accountants is about whether to declare their income for tax.
I understand that people don’t like paying tax and further that its an accountants job to minimise the tax they do pay however the long and short is that if you want a mortgage you need to pay tax and you need to plan it well in advance.
Prior to 2008 there were mortgages called self-cert, or self-certification, where you stated your income and lenders pretty much accepted this self-declaration of income.
However they got widely abused and became known as ‘liar loans’. Following the credit crunch self-cert mortgages were banned.
This means that any borrower must have a provable income and by provable that means taxable.
If your income is derived from a Limited Company or LLP then lenders will usually request 2 years accounts, some require 3.
You can see therefore why you need to plan well in advance of wanting a mortgage to ensure that the income you require for the mortgage you need is showing on your tax returns for several years before you need it. Unfortunately this means paying even more tax!
A couple of elders will consider one year’s accounts with a projection from an accountant.
It’s worth noting that lenders usually require accountants to hold a professional accountancy qualification and often be from a sizable practice so be careful of using bookkeeping services if you may need accounts for mortgage purposes.
Lenders typically average out the last 2/3 years or take the lower of the average or those years taxable income, so if last year was bad and this year was good that may reduce your lending capability. Also lenders don’t like declining profits so they may decline even if you did well in previous years.
If you own more than 25% share of your company you will be classed as self-employed not employed as a Director.
Income can either be share of net profits or PAYE and dividends but again each lender is different and you can sometimes borrow significantly more by using one lender over another based on what income they will use in their calculations.
If you are self-employed, sole trader or in a partnership lenders will usually require the last 2/3 years tax returns with your taxable income verified by way of your SA302s.
In 2009, HM Revenues and Customs (HMRC) introduced a tax calculation form SA302 to verify the amount of tax you have paid.
These are NOT issued automatically and have to be requested direct from HMRC.
Your accountant can produce a version of these however these are unacceptable to lenders, they must be the ones issued on HMRC headed paper.
They usually post them inside 2 weeks though they will fax them and most lenders accept the faxed version.
Even though your tax returns aren’t due until 31st January 2014 lenders are now starting to refuse 2012 SA302s as proof of income and requesting 2013’s so get your tax returns in ASAP if you’re looking for a mortgage as getting in your tax returns and waiting for SA302s can create long delays and you may lose your mortgage or property as a result.
On this point make it a habit to request your SA302 EVERY year.
Call 0300 200 3300 to request them.
Most lenders will not accept rental income as earned income unless from an unencumbered property, some won’t lend if your income is derived from property development activities or indeed if the income is related to property at all, so the ‘pay yourself as an agent’ strategy often promoted rarely works.
It is worth noting that most of the above applies equally to residential mortgages as well as buy to let and commercial loans. Some buy to let and commercial lenders are more willing to look at rental income as an income source but in all cases where a need to prove income is required it must be in accounts and/or tax returns – always think in terms of taxable income.
Lisa Orme is an experienced property developer, investor and mortgage broker and specialises in property and financial services for new and established property investors.
If you’d like to discuss your property investment strategy or indeed any mortgage or financial requirements you can contact Lisa at firstname.lastname@example.org or call 02476 455 445.
You can get updates, tips and advice at Lisa’s blog www.lisa-orme.com
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