Own under 20% of your company? Don’t fall between the gaps

Here is a situation that catches good people out. You are a director or a senior employee. You own a slice of the company you work for. And you are paid a salary plus dividends, often as part of sensible tax planning your accountant has set up.

But there is a quirk in mortgage underwriting that lands squarely on people in this position.

Many lenders decide how to treat you based on how much of the company you own. The usual line is 20%, though some use 25%. Own more than that and you are treated as self employed and assessed as such. Own less, and something odd happens.

A lot of lenders will either ignore your dividends completely or treat them as investment income rather than earned income, and count only a portion of them. In some cases only around two thirds.

So a real, regular, sustainable income, the dividends you actually live on gets discounted or dropped, purely because of the size of your shareholding. You fall in a gap. Too few shares to be assessed on company profit. Too many dividends for them to be quietly set aside without it hurting your borrowing.

This catches out two groups in particular. Senior employees who have been given a minority stake in the business they helped build. And families using alphabet share structures, where dividends are shared across a spouse or family members as part of tax planning. Once again, how that is structured is a matter for you and your accountant.

Here is the part worth knowing. Not every lender does this. Some will use 100% of your salary and dividends, taken from your last two years of personal tax records regardless of how low your shareholding is, down to 1% even. For someone in this position, that single difference can transform the mortgage available.

We recently helped the managing director of a mid sized logistics business who owned under 8% of the company. Another broker had come back with a figure that badly undercounted his dividends. By placing the case with a lender that used his full salary and dividends across two years, the offer he secured was roughly double the original. He changed nothing about how he was paid.

So if you own a minority share of the company you work for, and a lender or a broker has told you your dividends do not really count, it may simply be the wrong lender for your situation. Send me a message and we can take a proper look.

YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED UPON IT.