Mortgages for Sole Traders and Partnerships
Here's our second instalment of Mortgages for Self Employed. Today we are covering Mortgages for Sole Traders and Partnerships.
Proof of income for sole traders and partnerships are essentially the same;
- Sa302’s (now known as Tax Calculation Summaries)
- Tax Overviews (If you have an accountant who acts on your behalf, then you may have no idea what these are)
Accounts can be complicated for a layman to read, especially if the turnover is great and there are various deductions from the gross income. There are also Finance costs, Depreciation, Fixed Assets, Current assets, Liabilities etc. the list can go on.
The fact of the matter is lenders only really read the following with any real interest;
- Your net profit (not turnover), this figure determines what you, the actual trader, whether sole, or in partnership, has made that year in taxable income. If you are a partnership they will assess your share of that business 25%, 50%, 75%.
- Your assets v’s liabilities, this shows the health of your current circumstances. If you have a lot of assets, vans, office and personal equipment and have little liabilities, loans, debts to other companies etc, then Lenders would look at you favourably. If, however, you have a large number of liabilities with little assets, even if your net profit is good, they may still decline your application.
- Finally, your capital account which shows how much money you have in the bank, this is extremely important. If you have made £60,000 last year and £150,000 the year before, you have to pay tax on your profit. If you have drawn out of the business account more than you would need, for example all of the profit, this would leave no money to pay your tax, or any unforeseen business expenses that may come along. This is called being over exposed.
Sa302’s (now known as Tax Calculation Summaries)
Now the good news is that like most layman, most mortgage underwriters do not understand accounts! So to speed up a mortgage application, a good 80% of lenders brought in the idea to request what was called Sa302’s (now called Tax Calculation Summaries) from applicants together with their Tax overviews. Sounds complicated, it’s not!
The Tax Overviews are what you, or your accountant sends to the inland revenue to assess your accounts, it’s basically a Tax return! When they assess this they then send back an Sa302, or Tax Calculation Summary. This gives you an itemised list of how much the Inland Revenue claims you have made in income and then how much tax and National Insurance you have to pay. Armed with these two forms, you can forgo your accounts and most lenders will only want the last two years of these forms.
The funny thing is that an Sa302 will show a greater profit than your set of accounts (well 49 times out of 50). Lenders will only use self-employed proof of income for up to 18 months after the date on that proof. This means, if you have accounts or Sa302’s for year ending April 2017 these will only be used as current income till October 2018, after this date you will have to get 2018’s accounts completed and not in January of 2019 as you normally would.
That is an overview but there are always exceptions to the rule, this is why you need to discuss this with us. We can get away with 1 years accounts as certain lenders frown on decreasing profit from the previous year. The list goes on and on! Read our reviews here to see how many people we have helped!
Please get in contact with us today, we would love to help you and get you the best rate and most importantly the right mortgage for your circumstances,
Call us on 01452 413300 or get in touch HERE!