Locum GP and Ltd: advice on looking for a mortgage
Welcome back Ben Parry from Barr Financial Services writing on mortgages for Ltd locum GPs
Sometimes locums come to me to arrange a Locum GP mortgage without thinking about the consequences of their previous actions. For all the benefits of going Ltd for a locum GP, there really needs to be some joined up thinking between the accountants, clients and mortgage brokers. Importantly, consideration of how such a change could affect getting a mortgage is needed.
To help us all better plan our financial futures I thought I should share some key points to consider when changing from a sole trader to a Ltd company and how such a change could have far bigger knock on affects than you might have thought.
In any aspect of life what you do now usually has an impact on what happens in the future. If you exercise regularly now, in the future you will eventually be fitter (you would hope, but I'm still working on that one!).
This very same thought process should be applied to all of your financial decisions, the problem is no one is telling you! Usually when someone becomes a locum GP they start as a sole trader, they start to earn some reasonable money and then their accountant suggest some good tax planning which might involve the decision to go Ltd. There are of course many benefits to going Ltd for a locum GP, one of which is the ability to reduce your tax liability once your earnings reach a particular threshold.
However a good accountant and a good mortgage advisor should make you aware of any risks of any such change when it comes to getting a locum mortgage (or any other mortgage as a self employed person). If you have a working relationship with a broker, just pick their brains before you do anything. Our brokers will always get in touch with our clients once a year to have an annual review and these reviews are great to discuss such matters.
Equally when meeting with your accountant every year, they should be asking you what your plans are in the near future (buying a house/buying into a business etc). I know that I am lucky with my accountant being proactive and asking such questions of me.
Historically (and still) most accountants are focused on offsetting as much as possible to legally reduce your tax burden. However in this day and age where lending (be it commercial or residential) is based on factual evidence, then holistic tax planning is important.
Of course you can't make profits out of thin air, however the decision to draw more of a dividend or leave it as retained profit are decisions you will have to make whether you are wanting to borrow money or not.
So below are a few pointers to consider and they might be things you haven't really thought about or considered so I hope it helps.
What are the risks and how do I get a mortgage as a locum GP if I go Ltd?
Let me just start by pointing out that every lender has their own lending criteria which means one lender will have different rules to another and importantly these rules can and do change. So what might be applicable now, might not be in the future, which illustrates the necessity to speak to a specialist before you do anything.
1. Change of entity
To put this in some kind of context, changing from a sole trader to a Ltd company is creating a completely different legal entity. Even though you are still a locum GP and you may be doing the same job as before a lender may require you to have a track record as a Ltd company for 1,2 or 3 years. So someone who has been a sole trader locum GP for 2 years, then decides to go Ltd and then thinks about buying a house may not be able to at this point in time.They may be forced to wait until they have two years or at least one full year of Ltd company accounts (depending on lenders rules).
2. Does your accountant understand
...and do they care?
It might sounds strange but lots of accountants don't necessarily understand the mortgage market (and that's not their fault). The problem is many don't think about the clients future plans and some don't care!
As I mentioned earlier my accountant keeps me on my toes and we have a very good mutual working relationship. I know this first hand from speaking to clients who have experienced this but also from speaking to the accountants. And I am not talking about smaller accountancy practices either.
I had a meeting with the partners of a large nationwide practice and I was asking whether they ask their clients if they have any future borrowing needs when they are reviewing the accounts for the year. Amazingly they hadn't even thought about it! Thankfully they saw its relevance and the importance of planning accounts for a mortgage but unbelievably didn't seem to think it was important enough to do it!
Strangely they then went on to talk about the frustration of having to deal with banks or financial advisors when their clients mortgage application collapsed. This lack of cohesion, thought and care really puzzled me, particularly as it was affecting their clients!
There is an easy solution to this frustration for the accountants (and lets not forget the most important person, the clients) and that is to quite simply for them to ask their clients what their future plans are and whether they are going to need finance. Its not a hard question! Clients should not be expected to know whether there could be serious consequence for the decisions they make with their accountant when it comes to getting finance (which at the time might seem completely unrelated).
It should be the responsibility for all of us in the 'money industry' to help and think outside the box. Ideally the accountants should start working with a firm of advisors they can trust and work well with.Its not complicated but a wider perspective and thought process is required rather than everyone just working in their own little bubbles. Joined up thinking springs to mind, or maybe an in-house accountancy practice!
3. Year end issues?
You have just met your accountant and are having your personal tax return planned. You haven't spoken to a financial advisor or mortgage broker yet but you think you might be able to get a mortgage with one year accounts so you think that come 5th April (the end of the tax year) you'll be good to go.You are keen and excited to start looking at property and have several viewings lined up.
There is just one problem! You have not completed a full financial tax year for the Ltd company.
What does this mean?
If someone starts their Ltd company in June for example then they will have to wait until June the following year before they have completed a full year trading as a Ltd company.
Is that it?
Wouldn't life be easy if it was! You have now waited for your full year Ltd company accounts to be done, you popped ito the bank to get an idea how much you could borrow, you have had an offer agreed and you apply for the mortgage. Problem: your year end is in June for the business and the bank needs to evidence your income by way of an SA302 (this is a bit like a P60 but for the self employed - oh and before i hear you say I am employed now by my Ltd company, if you own more than 20% of the business lenders classify you as self employed).
So why is this a problem?
The SA302 will evidence your income for the financial year (April - April), and if your Ltd company year end dates are not in sync with the financial year end, then you can not evidence the total income you earned for that year.
In other words if the year end for the business is June- June, then an SA302 will only evidence your income from June - April (and misses off those other months of earnings).
Little details like this can have huge consequences and can be the difference between you buying or not. The key is to speak to someone who understands your situation and can find the best solution to take all factors into consideration.
Like I said earlier every lender not only has different rules but also will accept different forms of documentation to evidence the facts, so it is important the two are matched.
4. Salary, dividends, retained profit, gross, net - what does it all mean and why does it matter?
Without boring you to death and explaining in detail the differences of each, the key thing to take away is some lenders will consider some of these and won't consider others.
For example most lenders will look at your salary (which is usually low for tax purposes) and the dividends you draw. However some some people would rather leave some or all of the profits/money in the business rather than taking it out as a dividend. This is known as retained profit and it makes complete financial sense to not necessarily draw down all of this as a dividend.
However for lots of lenders the fact that you have retained profits will not necessarily help you if the lender is only looking at your salary and dividends.Salary - usually set at a low level for tax benefits
- Salary - usually set at a low level for tax planning.
- Dividends - the "after tax" profit that you are to withdraw from the business.
- Retained profit - the profits in the business that you have not drawn as a dividend.
- Turnover - the total income that the business has generated.
- Gross profit - total income minus the direct costs to get this.
- Net profit - your accounting taxable profit subject to capital allowances/add backs.
That is not to say all lenders work this way as some do consider retained profits, however it is important to be aware the majority at this moment in time don't. Of course this could change at any point.
Its all to much it!
Don't worry if it all sounds a bit complicated, although I know you are far more intelligent than I will ever be! The only thing you need to remember is to plan ahead and think about the consequences of your actions before it is too late.
You don't have to get in touch, but just make sure you speak to someone who is independent like us.
The key is to get help from someone who understands the market and they will guide and tell you what to do and when. I have clients who I have been helping for months in preparation to getting a mortgage and have a good network of professionals that can help you. We don't expect you to know all the answers or necessarily understand, that's our job. All we need to know is your situation and what you are hoping to achieve.
Now it’s time to say goodbye but before I do, I would love to hear you thoughts, maybe even share some experiences with other readers in the comments section, but most importantly I hope this blog has helped (even a little). If you have a question just get in touch.
Good luck from everyone at Barr.
Original article published at Barr Financial Services blog