I frequently share my clients’ frustrations at the lack of joined-up thinking from mortgage lenders when it comes to potential borrowers who are either self-employed or in a position where their monthly income is not ‘conventional’.
As a tax adviser, the part I am required play in the process can sometimes simply involve providing copies of P60s and associated information in support of figures detailed on the mortgage application. However, there are a raft of problems which can arise for individual borrowers with their own businesses, where their remuneration from that business may not fit the ‘tick box’ parameters of the lending institution.
In these cases, the taxpayer faces a ‘computer says no’ response. There is little discretion brought to bear and certainly no acknowledgement that the applicant is often a successful wealth creator. The irony is the applicant may well be responsible for employing a workforce of individuals, all with the ability to produce P60s and three recent payslips – and who can all therefore secure a mortgage without coming up against the hurdles faced by their employer.
The most typical problems I am seeing include lenders not accepting total income figures and only looking at information on a P60 or payslip. This is common where business owners may have a very low salary, but their ‘remuneration’ is made up with the payment of dividends. The total sum of dividends could be substantial, but payments may be infrequent and with no established pattern.
I have also had difficulties with lenders not accepting tax summaries produced via commercial software and insisting on an SA302 from HMRC. This can cause unwelcome delays as SA302s are not available online and HMRC will no longer fax them to agents. It can be a week or two before HMRC get these out in the post to taxpayers.
On many occasions I have seen lenders applying peculiar logic when faced with a business owner borrower. In a recent case, clearly in my client’s favour, the lender suggested that as my client had a 25% shareholding stake in the business the income it could consider was 25% of the net profits of that business. This was regardless of the fact that they had total income summaries which clearly showed only part of those profits had been distributed as dividends.
The same lender suggested the shareholding percentage should be applied to the directors’ remuneration figure disclosed in the accounts, even though the tax summaries had indicated the real figures.
The inflexibilities of the system can have a huge impact on business owners, prompting many to think twice about commercially-motivated actions within their business. For example, some individuals may decide against receiving dividends instead of a salary, which would result in an increase in personal tax liabilities, or they might opt to delay important changes – for example when the shareholding structure of the business needs to change as part of family tax planning initiatives.
Admittedly, moves are being made to streamline the mortgage application process – many lenders are now starting to accept tax summaries from commercial software as appropriate substitutes for SA302s, for example. However, more must be done to ensure that lenders adopt a common sense approach. While no-one would argue against the fact that lenders need to be responsible and carry out the necessary checks, today’s business owners – and their tax advisers – would certainly benefit from a little joined-up thinking.