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Dentists Who Invest

Podcast Episode

Dr James: 

Fans of the Dentists who Invest podcast. If you feel like there was one particular episode in the back catalog in the anthology of Dentists who Invest podcast episodes that really, really really was massively valuable to you, feel free to share that with a fellow dental colleague who’s in a similar position, so their understanding of finance can be elevated and they can hit the next level of financial success in their life. Also, as well as that, if you could take two seconds to rate and review this podcast, it would mean the world. To me, what that would mean is that it drives this podcast further in terms of reach so that more dentists across the world can be able to benefit from the knowledge contained therein. Welcome to the Dentists who Invest podcast. What’s up everybody? Welcome back to the Dentists who Invest podcast, episode number 71 and a little bit of an unprecedented podcast today, because this is not a one-on-one podcast. This is a fatal three-way podcast that anybody used to watch WWE back in the day. I’m getting connotations of that spring into mind, especially considering the physique of the two men sat here in front of me. One is Vina Rathod and one is Balala. How are you guys today?

Vinay: 

Amazing James. How are you doing?

Dr James: 

Oh mate, I’m 10 out of 10. Balala.

Bilal: 

I’m good man, I’m good. I’m in the twilight, out for my fast outings, but I’m good.

Dr James: 

Awesome. Oh yeah, fair play to you, mate. Yeah, hats off. It’s not easy to fast. Certainly it’s not something I’ve ever done and I think it’s something I struggle with. So fair play to you, mate. So today’s podcast is a little bit of a unique one, because we are combining the unbelievable knowledge of these two gentlemen in one unique podcast today and we’re playing off the ramifications of mortgages versus limited companies, versus taxation all of those things under one roof, under one podcast, and for dentists as well, because we’ve done everything. We’ve done those two topics to death. We’ve obviously had Balala on quite a few times, we’ve had Vinae on as a returning guest as well, and now we’re combining the two to find out how they interact with each other, because actually there is some super important considerations that don’t get talked about enough and those will be revealed as the podcast goes on. But the very first one that we were talking a little bit off camera, weren’t we, balala and you were saying about? The very first one, is obviously dentists. One of the things they aspire to, or they move towards very early in their career is creating a limited company, but this, of course, has implications for their mortgage. So maybe you might like to explain a little bit more on that. Balala and then Vinae. Of course, that is your area of expertise, so feel free to interject whenever you feel appropriate.

Bilal: 

Cool, so I’ll kick off. Thanks for having us today. So where this really comes about is where, on the previous podcast we’ve spoken about why would one go limited company. What are the considerations one has to make? Today is really more about timing, so we’re not going to go over stuff we’ve already covered off. But I mean shout out to the podcast we’ve done previously and the ones that already exist on the dentist, to the best part if I, or the podcast out there at the moment, because this is very much in line with what we’ve discussed previously and the journey sort of continues. This is almost a landing that says, well, I’m at the point where I want to think about it. I need to think about the wider factors and that’s all the way we work. It isn’t so much. You should go limited. You’ll save money because it can jeopardize other things, and I think the analogy I use is if you’re going to go limited and you need all the money, then you’re going to save about three, three and a half grand. Are you going to care about that three, three and a half grand saving if it means you lose out on a house? Now, in the grand scheme of things, if you’re not going to care once you get the keys to the house. You’re not going to care that you sort of lost out of three grand savings. What you’re going to care about is you’ve managed to get into the house. With the way property prices are moving, it gets swallowed out anyway. So where this all comes about is when we look at the wider strategy. One of the things that I do with part of the consultation is understanding you. What are you trying to achieve? What are you trying to do? And then that really ring fences some of the things why we wouldn’t and wouldn’t do them. That’s why we always give the explanation when this conversation sorry, you’re going to say James.

Dr James: 

So I just wanted to jump in. You know that three grand saving. Is that the saving that occurs? The second, that you hit above the basic tax rate. Is that what you mean? Is that what you’re referring to, or did I get the wrong end of the stick there?

Bilal: 

No, no. So if you were earning anywhere 50, 60, 70 grand a year after expenses, and if you chose to go limited in that year, in that first year of going limited, you would save about three, three and a half grand if you tally the money out Now, one of the things we’ve spoken about in a lot of detail, and certainly on the course as well, is you don’t take all the money out. But the argument being, if you’re getting on the property ladder is massively on the horizon. The argument being you’re going to need all the cash to pay for the deposit, to pay for the legals, to pay for the stability, to pay for the moving, to pay for the furnishing. You’re going to need the cash to be shorter. So you know, these 10, 15, 20,000 pound savings we see by going limited aren’t generally accessible if you need all the cash.

Dr James: 

Totally with you? Yeah, absolutely. And then, of course, that brings us into what another thing that we were going to talk about off camera which, vinay, I’d love to hear your input in is how we structure taking that money out of the company, because, by and large, you draw a salary or you draw your dividends, but of course that has a few. Well, it can have an impact I don’t know how big of an impact just yet, because I’m listening to Vinay with intent and with interest as well. That can have an impact on your mortgage, isn’t that right, vinay?

Vinay: 

Very much so. Yeah, I often speak to dentists who have recently changed to a limited company. They’re very excited about how much money they’re going to save in tax and that excitement disappears somewhat when they realise it’s going to cause a problem buying that dream home that they’ve just had an offer accepted on. Please ring us before you make offers on properties, guys, not afterwards. It’s much easier for everyone. You’ve touched on salary and dividends and Bilal touched on retained profits. Those are the three different types of money that you have in a limited company scenario. When you’re self-employed, be it a sole trader or a partnership, your tax return shows how much profit you’ve made. Money you’ve taken into your bank, minus any expenses that Bilal says you’re allowed to deduct, gives you a profit value, a net profit. That value is what your tax bill is calculated on Before tax. Profit is your income. You’ve paid tax on the whole lot and the money is in your name. James Martin has had a net profit of this much. Therefore, for mortgage purposes, that’s your annual income. I’m not going to go into great detail about self-employed underwriting, but typically two years of your average net profit, unless the profit is less in the most recent year than it’s the most recent, but I’ll add, we can get mortgages based on projections in certain scenarios, but that’s not what this podcast is about. You go to a limited company structure. All of your money isn’t legally yours anymore, not necessarily Now. It may be that you own 100% shares in the company and in all intents and purposes. that money is yours because if you want it, you can just take as big a dividend as you want. No one can stop you. But the problem is it’s not actually legally yours until you’ve taken said dividend, and that’s where a lot of people have a bit of a problem. So there’s two sides of this. Some people think it’s far too much in one direction and other people don’t realise there’s an impact at all. So Bilal will ask you or tell you that I recommend you take a salary that keeps you just below the National Insurance Threshold. What is that this year, and as per Rishi Bai’s budget, what’s it going to be going forward?

Bilal: 

So that nine-and-a-half grand at the moment is probably where I’d like it to be, but going forward from July onwards it’s half an half grand.

Vinay: 

Alright, so that’s how much salary your accountant will usually tell you to take, so you don’t have to pay any National Insurance. Employers National Insurance, Then anything else that you need to live, depending on how lavish your lifestyle or humble, will dictate how large a dividend you take. Your salary and dividend combined is usually what most banks will look at to get you a mortgage. So if you’ve got 100 grand of profit I know this isn’t technically accurate, bilal, but it makes the point you take a 10 grand salary and you’re left with 90 grand in the business. You take a 40 grand dividend because you need to spend 50 grand a year. Then you’ve got 50 grand retained in the business right After tax a corporation tax. The motivation is corporation tax is considerably less than higher-rate income or extra-rate income tax. Some people think you need to take a massive dividend in order to get that massive mortgage. So if you’re earning 100 grand in the business but you must take all of that 100 grand out in salary and dividends, can I?

Bilal: 

just jump in one second, vinay, sorry. Let’s set the scene slightly here. When you operate as a sole trader. So the main consideration is when one operates as a sole trader, you make 100 grand a year after expenses. That’s the number that you would use to then base their affordability on for a mortgage. So that’s what the multiplies them based on. When you operate via a limited company, that same 100 grand after expenses is then diluted a little bit further, because from that 100 grand you then knock off the 10 grand salary. It leaves you with 90 grand. Once that 90 grand you then have to allow for tax. So what Vinay was saying before is pre-tax income is what it is. That’s what we base your income on. Vinay is right. So from a limited company perspective, vinay is limited. There’s a separate legal entity to Vinay, the person. That money is not Vinay’s until a dividend’s been declared, which is absolutely right. That dividend can only be declared once corporation tax is allowed for. So that same 100 grand in that same scenario actually looks very different on your self-assessment. Should you take the income Now? That’s where some of the saving is, because company pays corporation tax first and then you’re left with a difference. You take all the dividend out Now. So the first thing that I always say to clients is what are you trying to do? What are you trying to achieve? Because right now, your self-assessment again bear in mind you’ve taken all the dividends available from the company. Your self-assessment might now show 83 grand, whereas your sole trader statement would have shown 100 grand. Now it’s the same 100,000 pounds that you’ve earned. You’ve not earned any less money, but now, technically, your 100 grand has less buying power. So that’s the first red herring. So the first is if you’re trying to do that, how beyond your limit are you getting? How closely fine to the side? The second bit, then, is I don’t really advocate limited companies unless you really have a purpose for them.

Dr James: 

Real quick guys. I put together a special report for Dentist entitled the Seven Costs and Potentially Disasters Mistakes that Dentist make whenever it comes to their finances. Most of the time, dentist are going through these issues and they don’t even necessarily realize that they’re happening until they have their eyes opened, and that is the purpose of this report. You can go ahead and receive your free report by heading on over to wwwdenisoonvestcom forward slash podcast report or, alternatively, you can download it using the link in the description. This report details the seven most common issues. However, most importantly, it also shows you how to fix them Really. Looking forwards to hearing your thoughts.

Vinay: 

Can I quickly interject? Yeah, sure, there are a couple of lenders who will lend based on salary and company profits before corporation tax. Okay, yeah, so it isn’t always the case that limited company will give you a smaller multiplier.

Bilal: 

But we’re diminishing the pool slightly because I think the way I like to do it is to give balance, because I don’t like to talk about things that I am not O’Fey on, which is why I always say look, from what I know, as a sole trader, you’ve got access to all these 10 lenders. For instance, when you go limited and you’ve not got enough accounts, so you theoretically need two years worth of accounts, so that now, because you’ve not got two years worth of accounts, the panel shrinks. Then if we want these specialist lenders that give us this, then the panel shrinks even further. And that’s not still a bad thing, because I think so. How this whole thing came about was the house that I live in. Now I’ve got equity in it, I want to roll it into another house. I don’t want to take out any more money out of my company than I absolutely have to. My mortgage advisor, who’s not a specialist, said my self-assessment wife’s self-assessment needed to show XML. Now that was excess money that we didn’t need, that we were going to get whacked on tax on, because once you start taking over 50K in company, you’re then paying tax at 32.5%, which is going to rise to 33.75% in the coming year. So I was on the phone to Vinay. He said what are my options? And he said look that, providing we’ve got the deposit, which we do, we’ve got cash savings, put the equity in the house. We want to roll that into another house. You don’t need to take that out, because I wholly own my own company. My wife wholly owns her limited company. We can take the taxable income or the profit after tax on the profit figure, the profit value, from that position. So that puts us in a significantly better position. But we are far further down the road where I’ve got three, four, five years worth of accounts. Now where this conversation really comes from and where I say to my clients go speak to Vinay. Is when they’re at that juncture where they say I really want to go limited. I’m making the kind of money where I’ll make a good income. I want to start being more tax efficient, but I haven’t bought my house yet. So this is where we then say go speak to Vinay for these reasons. Now, the way you explained to me was fantastic. I don’t know if you want to mention any lenders or anything but who my mortgage was with. They wanted two years worth of accounts. There’s another high street lender. When we say that the pool diminishes. It’s not your back street mortgage lender that’s going to get a 15 points.

Vinay: 

There are still some reputable lenders. There’s just a lot less of them. Yeah, sorry, I’ll let you finish.

Bilal: 

No, I was going to hand back to you at that point, because that’s why I found really useful, because, using someone like yourself that deals with professionals, we’re all bunched, in the sense that you’re like you’re Dr Dentist, you’re Pharmacy, you’re Lawyers, but also treated somewhat the same.

Vinay: 

Exactly that there are. For the elite professions I like to say if your Asian mum and dad would be proud that you did it at uni, then that’s probably what the banks are calling the professionals Dr, dentist, accountant, solicit, veterinary Surgeon the typical prestigious occupations. You go to a normal mortgage broker and again I use this example with my clients and I say to them how many patients do you think sit in your chair in an average month that are high earning self-employed professionals? That’s the same proportion an average mortgage broker gets of high earning self-employed professionals. I only speak to dentists and their spouses and some referrals from them. I’ve got a few medical clients as well, but primarily we are a dental specialist broker. Almost all of our clients are self-employed in one form or the other and they’re all professionals. Hence I know which banks offer the professional flexibility. Some banks will advertise for professional products. There are other banks that and it took me a while to learn this banks don’t necessarily decline mortgages only because they don’t believe you’re safe to lend to. Banks have a finite amount of money that they want to lend. They have a maximum volume of applications they can process in any given time before they start creating backlogs, which is counterproductive. They want to underwrite the easiest business that they can get through the door quick, quick, quick. They can cherry pick because there’s more people wanting to borrow money than they have available to lend. I spent early part of my career fighting the underwriter saying look, this is why these clients are sound, they’re dentists, they’re going to get this money. Why can’t you believe that? It’s not that they don’t believe it. The powers that we have just decided these are less desirable clients. There are lenders out there, though, that don’t want to open the floodgates to every Tom Dick and Harry ringing them trying to convince them to give a mortgage to a doctor or dentist, because that, again, is counterproductive. Their service levels are, especially during the pandemic, have been extremely sensitive to business volumes, so they tend to speak to lenders, brokers, who are experts in certain fields, people who do a lot of business with professional clients or certain types of clients, and we do a lot of business with dentist after dentist after dentist. Underwriter starts noticing this dude just keeps sending us dentists. What’s going on? Someone rings you up and says, oh, you do a lot of business with dentists. I mean, we’re piloting a couple of schemes with mortgage lenders that only we will have access to and effectively we’re helping them to decide whether they want to launch a product to the public, to do professional lending or lending to dentists in a higher income, multiple or without accounts. So we know which underwriter is to ring. So I have a word with and say look, I’ve got a very favorable scenario here. And this applicant is X, y and Z are the benefits. A, b and C are why they don’t meet normal lending policy. But please consider it. We have a list of lenders who can go and will go outside of lending policy and we will speak to all of them in order of the ones with the cheapest products first. Okay, but that is a list of lenders outside out of a very large pool of lenders. Now, if you’re self employed, sole trader and you’ve got two years of accounts, you can get a mortgage with any lender. You will go on, compare the marketcom and those high, those really low interest rates that you see, the headline grabbing rates, and what you’ll be entitled to get. You then change to a limited company and, as Bilal said, anything over 50 grand you pay higher tax rate on. So you, you cap your salary and dividend at 50 grand, most of those lenders I’ve just told you that you could get a mortgage with will now only lend based on your salary and dividend, so whatever that is, times their income multiple, so, all of a sudden, your 100 grand has become 50 grand. Yeah, there are lenders who will work on salary and company profits Most of them company profit after corporation tax. Very small number will look at profits before corporation tax. The problem that you have, though, is most dentists are quite aspirational when they buy homes because income is very secure and on an upward trajectory. Despite what the people moan about on the forums, dentistry is a very secure income. It’s why I chose to go to dental school when I was 30, if I was going to change career, I didn’t want to be nearly 40 fighting 25 year olds for a job you know needs to be a, and I didn’t want to start on 20 grand a year at that age. Very secure income, and you know that there’s an upward trajectory, with the odd dip here or there through your career path, and for that reason you don’t get dentists who think, all right, I earn 100 grand, so I’m going to buy a 200 grand house, with the exception of people who live in areas where you do get a phenomenal amount for your money. But if you live in the south of England or an area that is high in demand, especially with prices like they are now, you’re probably going to need a high income multiple. And that’s where it becomes a problem, because before I used to have a pool of all of these banks and I could go to the ones with the highest income multiple, but you’ve changed the limited. So even though I’ve got lenders who work off the profits of the business, I’ve only got a small selection of those lenders and they’re not going to have the widest range and highest income multiples.

Bilal: 

So just on that then is when we look at that, we sort of take a step back at that point and say, well, which do you want? Because the temptation is to rate shop is to say, well, they’ve got the best rate, fine, they’ve got the best rate, but the actual pound value per month different might be 100 pound, 200 pound different, but you have to get that. To access that rate you’ve now got to pay 18 run more in tax. Now you’ve sort of got to ask yourself so when you’re doing that comparison over the life of the mortgage that says, you know, is it two year fix, three year fix, four year fix, whatever you’re going for, how much are you going to be paying over the life of that fixed period? Versus how much have you saved by going limited? Because this is sort of the side of the fence that I sit on that says, as an accountant, I’m not incentivized for you to go limited or sole trader, but for me it makes no difference Because as a very much relationship based, which is why we say go speak to Vinay before you do anything. Now the temptation is jump into it, let’s do it. And I think we had a through a through a call with a mutual client recently where we had to almost talk him out of it and say, based on what you’re trying to achieve, you’re going to have to delay your plans by 18 months Because the way it was structured and the type of mortgage you needed, it would have been not, not, not too difficult, because I’m sure you could have placed it, but it would have been less advantageous if he needed to move quickly, which he did. Because this is where this is where the emotional side of things comes into it, that says we have to sort of manage expectations, that says, you know, neither of us is doing anything wrong. I can still save you money, but you’re jeopardizing the longer term goal here. So and I think you know, james, I made a massive point about this on the, on the, the finance course is don’t get wrapped up in the tax side of things is. You know, there’s more important things that you’re you’re going to factor into your decision making. And I think, james, you put it fantastically when you said when you, when you ever faced with these kind of things, is just zoom out, but don’t get caught into the sort of the microcosm of what you’re dealing with now is zoom out and look at the wider picture. That says a do the math, you know, sit down with Vinay and you know, if you want to jump on a call with the three of us and you’re a mutual client and you give us the permission to talk to each other, we will have those conversations and then we will give you our recommendation. That says, look, this is probably not the right thing for you now, but it will be. You know, once you’re in the position where you can then make the change, we then need to make the change because we then we need to sort of factor in is this house the stopping gap? Is this your house that you’re going to be for the next five, 10 years? Or if you’re going to get this house just to get out of the ladder, refurb it, get your money out, do it all again, then it’s almost as well. Do we now wait again another two years? Or do we have enough of a window to then go to limited, to got two years worth of the clean accounts, to then go back to the lender and then there’s no issue? So I think very much, the purpose of this today for me was to show that there’s two sides to the same coin. So you know, vinay, you put this fantastically is. You know we look at finance for the dentist from very, two, very different perspectives. And as and you know I’m not here to, which is why I don’t apply on what Vinay does, because I can’t and the you know it’s an ever moving thing. You know, with base rate changes, everything like that, the whole product portfolio changes again. You know, things like pandemic and stuff, appetite from lenders changes, all of that then moves, but that those sort of events don’t affect accounting rules. So, which is why I don’t apply them, because it’s go speak to Vinay. You know we’ll work at the best option for you because within, within all of that is, we have a mutually mutual goal here is just to get the best outcome for you guys. Is is is to ensure that you guys know, and I think one of the one of my biggest passions, in order this is making sure people know their options and understand why you would do one thing over the other. I think I make a big point about. So back to you, vinay.

Vinay: 

All the very good and correct points. All I’ll add to that on top is the times clients know to ask. The question is when they’re planning to buy very soon. Sometimes we get clients come to us after they’ve already made the decision to change to a limited company and they want to buy a house. So there’s two issues here. The first is being limited. How will they work our income? I think we’ve covered that well. The salary plus dividend is one option. The majority of banks apply by salary, and company profit is another option which is more limited but can still be utilised.

Dr James: 

Yeah, here’s what I’d like to ask on that. Yeah, this is in, very intently. Okay Now, dividends tax right Over 50,000, right it’s. You’ll know the numbers off the top of your head, but it’s either 32% or 37%. Once your total, your cumulative dividends and income hit over 50,000 to 170. Right now, right in this moment, the 5th of April, oh, and it’s going to change tomorrow, isn’t it? Just tomorrow? Yes, we just got our nose in there, isn’t it? But as of today, for those who are listening to this podcast today, it’s going to be released next week anyway. So let’s, okay, forget that. What is the new rate from tomorrow? What is the new rate from tomorrow?

Bilal: 

33.7% by the 70%.

Dr James: 

Okay, so that’s the dividends tax. So that’s the. There’s the lower higher intermediate, or sorry? The lower intermediate higher dividends tax right.

Bilal: 

So lower is going up to 8.75. Intermediate is going to 33.75. And the top line number of of lost it it’s a 38, something that’s over 150K of dividends of total income for the year.

Dr James: 

Right, Brilliant. And then what is the basic tax rate from tomorrow? Is that the same the, the div oh?

Bilal: 

so the actual business tax law.

Dr James: 

Sorry, it’s what I meant to say, yeah.

Bilal: 

So that’s 12 and a half grand. So that’s saying as it is so 12 and a half grand to the first 12 and a half grand, you and its tax free then up to 50 K is 8.75%.

Dr James: 

Oh yeah, so sorry. What I meant was to see that 50 K, see the. It’s more like 50,000, 270 right today, but tomorrow what would it be?

Bilal: 

It’s staying about the same, it’s not.

Dr James: 

Oh, it’s standing the same, right, okay, right, so actually do you know what? There is a podcast in itself tax changes From next year. We should probably do that sometimes, but okay.

Vinay: 

So those are noting. Sorry, buddy, you carry on, you finish.

Dr James: 

Well, no, feel free. If you felt like there was something relevant there to say, feel free to jump in.

Vinay: 

A lot of the people who are going to limited would otherwise lose their tax free allowance and I’ll allow Bilal to expand on that People who would have had a net profit of over 100,000. There’s an extra motivation there to change the limited and this is Bilal’s area.

Bilal: 

Yeah, correct. So a couple of things, and this is where we drop in a bit of a jam for you, because we’ve always got to add value. I’m James is, so Richie Sunak is changing the national insurance threshold. So the reason why we pay ourselves a salary of about 790 pounds a month is because anything more than that starts attracting national insurance employers and employees national insurance. So, as an employer, when you pay someone a salary, you’ve got to pay 13.8% on their behalf, which is monstrous and ludicrous, but it is what it is Now. From tomorrow onwards, from the 2022-23 tax year, that rate is increasing to 15.05%. So when you employ someone, you’ve got to pay 15.05% national insurance, but the rate at which you pay is increasing. So from July onwards, that amount is increasing to 12.5 grand. So the employer’s national insurance and the employee’s national insurance is jumping up to 12.5 grand, which means, if you’re an employee of a limited company, now increase your salary to that 12.5 grand a year for a right from July onwards, and you’ll save about 500 pounds in tax per person, per employee that you’ve got, per shareholder director that you’ve got on your company. So if you’re a husband and wife team and you up your salary, you’ll save about a grand in tax. So there’s a free perler for you. The other bit being, none of that has a bearing on what we’re discussing today, because the salary all it means is you take a slightly higher salary, slightly lower dividend, keep you up 50K regardless. So that’s the bit on. That is one of the reasons why we obviously keep ourselves as that is. If you don’t need any more than 50K to live off, you leave the rest of the money in the limited company to invest. And I think one of the most popular things that we get asked on a regular basis is why would I go limited? And one of the benefits is you get to control the amount of money you take out. So if you’re a high earner and you’re earning 150, 160, 170 grand a year, for every £2 you earn over 100K after expenses. You lose one time to your personal allowance. So when you get to 125K worth of taxable profit, you’ve lost your entire personal allowance. So that first 12.5 grand tax rate now disappears and you pay 20% on that Now and again. Within all of this is again another fact inside that says well, with all the numbers, everything told, you can make it work by taking 99,000 or 99,000 worth of income and dividends that you live to company. You can make the whole thing work and you forego that extra two and a half grand, saving two and a half grand tax bill once you start, once you get to 125K. The idea and I think I stress this point more than anything else about limited companies is, if you don’t have a plan to invest with the money you leave behind, I don’t think it’s the right option because of the wider factors. Now, if you’ve considered all of that and said that the most popular thing we get is we want to invest in property, fantastic, it’s a great idea. I don’t give financial advice. I don’t say you should invest in property. You shouldn’t. It’s a good idea. But I think the first thing is as a passive income screen, I don’t think it’s passive things very active. I don’t know anyone that invests in property and doesn’t have sort of a hairline mind. The other thing being then is that and again you see this loads on the forum, james is don’t get a mortgage through an empty company because you’ll pay more interest, you pay a higher rate of interest. But just from before I saw pass the baton to Vinay on that point is from the counter. Perspective A you can claim the interest as an expense through an empty company for a buy to their property. You can’t do that as a sole trader. B you’ve increased your amount of liquidity by not taking the taxes in. Can then putting it back in, because if you needed 50 grand worth of deposit money, you would have had to have earned 50 K to then pay all the associated sorry, 100 K to pay all the associated taxes to be left with the deposit in the first place, whereas if you’ve got one limited company, the money left behind you, you pay 19% corporation tax. You’ve got more liquidity, so don’t get hung up on. Interest rates is again. I think I love the phrase that you say zoom out, because zoom out, see it all in the graph. You’ll see your graph do that over the life of what you’re planning on doing. So, with that being said, the money finds its way from a limited company into your SPV, which is a special purpose vehicle, which is a lender will want to see that. They’ll want to see your property in a separate limited company. Money can find its way through their tax efficient I think we’ve discussed that on the previous podcast Holding company, holding company, yep. So money filters its way through all legally all above board. But from this point on was now Vinay. What does the mortgage look like through a limited company for buy to let?

Vinay: 

Okay, very quickly, before we get to that, the last thing I just wanted to add is I’ve explained how changing to a limited company restricts lenders and some will look at salary and dividend and etc. The why I forgot, why I hadn’t added yet was that assumes you’ve got two years of accounts as a limited company, right, so that assumes you’ve changed some time ago. You filed two years of full trading accounts as a limited company. What happens if you’ve only recently changed to a limited company Because this is a situation I come across very often is I changed six months ago to a limited company or I’ve only got one year of accounts as a limited company. That will further reduce the pool of lenders we can get your mortgage with. Again, there are lenders that will say okay, that’s cool, let’s look at your last couple of years of self-employed tax returns. We’ll get a reference off your accountant to sign to say that you own 100% of the business. You’re doing the same job as you always did. It was just a change of tax purposes. That’s fine. So if you’ve already done this and you’re watching this part or listening to this part of it, think you know crap. Don’t worry, it will make things more difficult. Just understand, when you do get in touch, that because you may go on AIP on one day, you’re going to have to wait about a week to get a decision. Because we have to go upfront with all of your financial evidence to a bank and show them and put an argument forward, say, please support this. Their underwriter manually reviews it, which means it goes in their queue and will be looked at when its place comes. No matter how many times you ask nicely that I push them, they won’t. And then we’ll get an agreement that they will support this. And then when we submit the application to get you your agreement in principle, the underwriter has to approve it, not the computer, which is what would happen if you had two years of tax returns. So then we have to wait another three to five days before you get your AIP, your agreement in principle, a mortgage in principle, depending on what your agent might have referred to it as. So then all this time you’ve got someone who has already told you that they’ll sell you their house two weeks down the line in saying you’ve not even submitted your agreement in principle yet and you’re getting nervous and you’re asking us to see. You know, can you get this quicker. We can’t. All of these things need to be kept in mind, which is why I write at the beginning, said call us before you make an offer, not after, because we can then get those things agreed. In the time spent while you’re shopping for a house, while you’re looking at properties, you know, and then you haven’t got anyone breathing down your neck. So, moving on to the limited company buy to let scenario, the same situation there applies. You’ll need two years of limited company accounts showing an annual income totaling 25 grand or more. That’s a combination of salary and dividends. Again, some will look at salary and profit. I don’t think that’s going to be so much of an issue below, because everyone’s going to have 25 grand plus in drawings. The issue being is you might not have two years. There are some lenders that have no minimum income requirements for buy to let, so they’ll give them mortgage to someone with a zero income. We’ll have to go to one of them. It means that a massively reduced choice of lenders. You might not get the most favorable rate and you might not get as much as you wanted to borrow if that lender doesn’t have the most favorable calculation. So every one of these complications put on adds another layer of challenges and usually I can overcome one or two things. Three becomes almost impossible and what I can offer you becomes narrower and narrower, which is more likely that it won’t be within the scope of what you needed to move forward. So speak with your accountant and make sure you proactively mention because not all accountants are like Bilal the amount of times the clients say to me my accountant never told me any of this, never said this would be any problem. Well, I can’t fault them for that, because that’s not their job. They’re accountants. Bilal used to be a mortgage advisor. I don’t know if people know this.

Bilal: 

No way, way back in the day, the first job I ever did. So I got quantified as a mortgage advisor when I was 18 and I had a head of hair. I’m not bitter about losing my hair. Yeah, 18. I qualified as a mortgage advisor. It wasn’t for me, it was probably not the area of finance I wanted to be in, but yeah, so I sort of understand. This was 18 years ago.

Vinay: 

So you know what’s the spot. You’re still going to remember things that cause problems. So Bilal always refers to clients. Say look, he’ll ask them are you looking to buy a property in the near future? Which is why he then says speak to Vin.

Bilal: 

A lot of the accounts don’t have that. I do that on the consultation whilst I’m on the phone to them. So whilst we’re having our consultation, because of the way we do the accounts, so we do the accounts throughout the year. So we’ve got as long as my client tells me, vin, hit the nail on the head, tell us before you do it. Because right now, as the tax years ended, we’re prioritising all our self-assessments. Now, if I know you’re trying to buy a house, you go right to the top of the tree that says I need to get you done, dusted, so you can get your SA 302, so you can go back to Vinay. Would you number so Vinay can go do the work. That says last two years. This is what you were, regardless of the limited company software, but we’ve dealt with that bit. Now it’s the sort of the mechanics management expectations that says as long as you’re proactive and you’re letting us know what you need to do, we can then get you the documentation in readiness for you to make those steps, to jump on those houses as and when they happen. So it’s so. It’s so, again, the way we do it is. The majority of the work has already been done. So the rest of it now is making sure you’ve now. You’re proactive with getting everything we need so we can finalise those accounts Now. Even if you do your accounts tomorrow, the 6th of April, the start of the next tax year, we can submit that it’s all on HMRT’s gateway. That all, then, is sufficient proof of Vinay. You still don’t have to pay that until 30% of Jan next year. That’s another point.

Vinay: 

I saw that on one of the doctors forums Someone was talking about getting a mortgage and filing their tax return early, but didn’t have enough money to pay their tax bill earlier and you don’t need to get that and the caption pointed out no, you file it early doesn’t mean you pay your tax early, that’s deadline is still the same.

Bilal: 

Yeah, and I think that’s a massive misconception is why everyone leaves it around December as well. I’d have to pay it till the other Jan. No, let’s do it early. So you know what the number is, you can plan for it, you can meet the expectation, know exactly what it is, and you’ll make my life easier. That’s more a cry for help than anything else.

Vinay: 

The other thing is, when you speak to an accountant to inquire about changing to limited, don’t just answer their questions. You tell them I am saving up to buy a house I would like to buy at around about this time. Will this cause a problem? And that may I mean. When I spoke to my accountant a few years ago about changing to limited. This was the time where we lived in East London and I was still a dental student. The objective was always to buy a larger property when we could afford to in the next two to three years. My accountant said so for two or three years you’ll save some money on tax and then you’ll take one big, sodding dividend to pay for a deposit, and I always wanted to buy a house that would need a bit of money spending on, rather than polished as high a value as it’s going to be type of place. So I knew not only would I need the money for the deposit to buy the place, but then I’d need to, for the next three or four years, take a lot of money to renovate, restore, whatever. And he said, okay, so really you’re going to need to spend practically all the money for the next three or four years when you buy this house. Yeah, okay, buy the house, get the big expenses out of the way, then we can change to limited. There were two considerations there. I wouldn’t have saved a huge amount of money in tax for the extra work it would have been involved in me changing over to limited and it might have caused me a problem getting a mortgage because sadly I’m not qualified professional under these qualification criteria. I didn’t finish my dental degree, so they wouldn’t have worked on any projected earnings or anything like that for anything but my wife’s part of the income, which wouldn’t have been enough for the move that we wanted to make. So we’re in the process now of transitioning to a limited company and all this time I’ve been paying tax on every penny because we’ve been spending on the house, we spent on the deposit. So if you tell your accountant I want to buy a house in a year, your accountant’s going to say to you okay, so are you going to need to take all of this money out when you do buy this house? That may then change the opinion of the accountant, unless Bill Elton corrects me here. In certain scenarios that may lead the accountant, who would have otherwise advised to go limited, to say well, in that case, let’s do this after you bought the house.

Bilal: 

Exactly. So part of our consultation we will ask are you getting married? Are you planning to have a family? Do you foresee any large expenditures in the coming years? Are you planning on taking time off? Are you planning, even if your income right now is 50, 60, 70 grand? Are you going to be spending 20, 30 of that on courses? Are you planning on doing a masters? So there’s more questions than these are sets of numbers. Pick one you like, and I think the biggest one within that is the house purchase, because it is, you know, detrimentally. Everything else, you know, we can sort of make it fit, but as long as we manage your expectation, the house is the one that’s outside of our local control and because of the way you know, appetite change, markets change, everything like that we know. As a sole trader, you are window dressed to be in the best position to get the mortgage. Once you’ve got it, we can reevaluate and then even things with, like you, people want to do the hybrid position with us. So well, I keep my NHS income as self employed. I’ll put my private income through a limited company. That’s almost the worst situation to then go then get a mortgage for, because who’s is the money Because you can’t take it out. And if you do that and then take it out, you’ve actually ended up paying more tax, because you’re paying 19% corporation tax and then you’re paying 33.75%, whereas you would have just paid 42% the other side. So we’ve got to factor all that in.

Vinay: 

I will interject that if you do have a recently arranged split arrangement, we can still get you a mortgage in many scenarios. Because, again, a lot of clients who come to us are very surprised to hear I could have gotten a mortgage two years earlier. But whoever they spoke to back then said no, you need two years of accounts. You pointed out earlier, bilal, you might get a higher interest rate, but if you buy a house two years sooner, you’ve saved two. What would that house have cost two years from now? How much equity have you gained in property increasing in that two years? So there’s a number of different things. Before you decide to sign up for that £15,000 implant course in Brazil, if they’re still doing them, learn about the pandemic which will knock your profit right down in one big swoop. Maybe consider that that 15 grand less profit multiplied by 5 is how much less of a mortgage I’m going to be able to get you as a result. So what’s that 75 grand less mortgage you’re going to be able to secure? And, as I was saying earlier, dentists are aspirational people. They want to push it, they want to buy the most expensive they can. The most common question I get asked what’s the maximum mortgage I can get? No one says to me I’ve been looking online and I reckon of 300 grand I could get the house that will be alright, big enough for me and my needs. They say to me what’s the biggest mortgage I can get and then I’ll start looking for a house and I don’t tell them a million and they come back with a 500 grand house. I tell them a million. And they come back with a 1.1 million pound house with the comment that oh, I really tried, but houses are so expensive in this area.

Dr James: 

And they say oh, my God okay tearing my hair out again.

Vinay: 

So why am I getting less of it? My hairline is becoming like yours. It’s all about planning. Should I say this Densists are some of your worst enemies and I often laugh that you guys are the victim of behaving in the way that some of your patients do with you. But professionally, you see the frustrations because you know everything about dentistry and patients will have expectations, you know, and just not realistic. They’ll expect that what worked for someone should work for them, and that’s just how it is. And the reality is everyone is entirely different. Just because one person who had a 100 grand a year private job saved loads of money, going limited doesn’t mean that you will, because that person could have entirely different activity that year and for the years ahead. They massively changed that. The dentists do look to each other for some sort of reassurance of what do you guys think I should do. So be upfront, plan ahead, don’t wait till the last minute, and then you’ll be well prepared. You’ll not worry about losing that house because the agent’s saying you’ve not got me a mortgage quick enough, because you’ll have done all the research and be ready to go, and your accountant will be on point waiting as well.

Dr James: 

I love what you said just then, vinay, about how, if you have that conversation before you booked that 15 grand resilient implant course what’s 15 grand? To some dentists? That’s maybe a couple of months turnover. You can quickly get it back, but it puts your mortgage, it delays your mortgage by quite some time and the massive cap Sorry how much you can possibly borrow. So another caveat to that conversation, rather than just going ahead and taking the plunge, is, if you’re looking for a house, speak to your mortgage advisor about the implications on that, which is something that we never really thought about. So that is interesting. I love that Also, balal. I’m just gonna go back to one thing that you’ve said, and you know what. This podcast is really interesting. I actually sense we could probably have a part two in this, but I like to keep these to around 40, 50 minutes. So one thing I just wanted to ask and this might be obvious to some people listening and to you, balal but my understanding of having your NHS wages drawn out, your hybrid solution that you talked about a minute ago NHS wages drawn out, whatever they add up to be, let’s say, they’re like 30K, something like that right? So then you put the rest of your private income into your limited company. Now, first question super short and sweet, snappy answer. That does mean that you can still have the NHS pension. Right, it does? Yeah, okay, and that doesn’t affect that in any way if the private income goes into a limited company, brilliant, okay. So why is it? Did I get the right end of the stick there when you said that you have to? Can you not pay 7.5% dividend tax on the remainder between that 30K and that 50,270? You can, oh, so sorry. I just thought I got the wrong end of the stick there because I thought that you said that you’d have to pay the intermediate rate of dividend tax. Perhaps I got the wrong end of the stick.

Bilal: 

No, no, I think it might, because I had a very specific case in my head when I was talking about that. So theirs was their only chest income was 50K and the rest of their income was all. So it was right on the button anyway. That said, it left no room to take any more out of that, but you’re absolutely right. So if your hybrid solution keeps you under that 50K, take the rest of it out up to 50K and then you benefit from the dividends.

Dr James: 

Ah, brilliant, yeah, because, yeah, I thought that you said that and then I wasn’t sure. So that’s actually a nice thing to put in the podcast there, because there’ll be people out there who don’t know that. Guys, I think that there’s gonna be a Bilalvin A&Gm’s Pensions not pensions, sorry, mortgages and a content, yeah, or a show, or maybe even a feature there you go, because there’s so much ins and outs in this and you know what, vinay, you put it in terms dentists can understand. Okay, you go to if you go to five different dentists, you get seven different opinions. Do you know what I mean? Depends on the day of the week, depends on the weather, depends on their mood, depends on what they’ve had for breakfast. Honestly, that’s how it is. It’s more of an art form. And then the last patients yeah, yeah, and it depends. And do you know what? Here’s the thing how often do you tailor your treatment because of the patient’s manner and how they are and what their expectations are? Totally, and it’s just like everything else, it’s an art form. So you made a really interesting point. You put it in dentist terms, and that is to say that logic is extrapolated onto everything else that we do in life as well, and I think that that’s a really nice way to round off this podcast, because there is more to mortgages, there is more to accountancy than meets the eye, and it’s not always limited company, non-limited company, black and white. There’s a gray area in between, especially when houses come into play. Guys, thank you so much for your time. Let’s do this again.

Vinay: 

Let’s do this again.

Dr James: 

There’s more to talk about. Yeah, there’s more to talk about. There is, there is.

Vinay: 

Guys, the company might have let would potentially be its own episode. Oh, brilliant.

Dr James: 

You’ve got to break my fast, so Okay, in that case, then we’ll draw a line on everything today. We’ll draw a line on the proceedings. Anybody who’s listening, who likes what they heard, interested to learn more, feel free to reach out to Balal. They’re both on the group and, guys, we will catch up again super soon. I’ll see you both later. Good to see you, dude.

Vinay: 

Take care, I’ll see you.

Dr James: 

Bye, bye. If you enjoyed this podcast, please hit, follow or subscribe so you can stay up to date with information on new podcasts which are released weekly. Please also feel free to leave a positive review so others can learn about this podcast and benefit from it. I would also encourage any fans of the podcast to sign up to the free Facebook community from which the podcast originated. Please search Dentalists who Invest on Facebook and hit join to become part of a community of thousands of other dentists interested in improving their finances, well-being and investing knowledge. Looking forward to seeing you on there.