Is Class 4 NIC due on a UK property tax return?

Neil Barlow of Pacific Limited Chartered Accountants advised:-

The National Insurance rules changed following the National Insurance Contributions Act 2015 (NICA 2015).

Firstly, the position prior to 2015/16 was detailed in Paragraphs 43 to 46 and Paragraph 57 of the Ramsay appeal and reference to Rashid v Garcia (SpC 00348; 11 December 2002). The National Insurance legislation definition of a business has no relevance for s162 TCGA, as mentioned in my email of 1 June. In Rashid v Garcia, the courts concluded that the National Insurance legislation was aligned with the relevant legislation which defines a business as a trade, profession or vocation and although Mr Rashid had been paying Class 2 NIC, his property letting did not qualify as a trade, profession or vocation and therefore he was not entitled to claim state benefits. There is no statutory definition of “business” for the purposes of s162 TCGA and the term “business” is not aligned with the concept of trades or professions. Considering the Rashid v Garcia case further, if Class 2 NIC had been payable because the property letting constituted a trade, profession or vocation then presumably Class 4 NIC would also be an issue which could potentially be a huge liability which every landlord wishes to avoid.

Secondly, from 2015/16 if a landlord qualifies as a business under the NICA 2015 definition, then although the landlord can pay Class 2 NIC he is not obliged to pay Class 2. It is also interesting to see HMRC’s examples of what constitutes a business for Class 2 NIC purposes which are shown at the end of HMRC’s National Insurance Manual 23800 and seem to indicate that to be treated as a business the landlord must also be looking to increase the number of properties owned.

Therefore, we don’t believe Class 2 NIC has any bearing on whether s162 TCGA is claimable.

Mark Smith of Cotswold Barristers responded

I agree with the advice that Neil Barlow has given. There is a right but not a duty to pay Class 2, unless the landlord is also obliged to pay Class 4. Not paying does not affect the ability to assert you are a rental business, as the payment is optional. I do not consider paying or non-paying of Class 2 as decisive or even relevant to the question of being a property rental business.

In regards to the ICAEW blog I think there is a confusion between ‘eligible’ which means they can pay if they want to (to preserve the right to certain benefits) and ‘liable’ which means they MUST pay.

“The key word here is ‘business’. A person who is liable to income tax on the profits arising from the receipt of property rental income, will be a self-employed earner for NIC purposes if the activities carried out amount to running a business. This much has not changed. Those in business letting property before 6 April 2015 had a liability to Class 2. Now they can opt to pay voluntarily”

“In summary:

Letting property may amount to being in business, but if it does not, there is not (and never has been) a liability or entitlement to pay Class 2 NIC.
If letting property does amount to a business, but not a trade, it makes the landlord a self-employed earner eligible to pay Class 2 NIC (he or she would have been liable to pay Class 2 before 6 April 2015).
Where the letting business is also a trade because it includes more than property letting, the profits are liable to compulsory Class 2 and Class 4 if the trading profits exceed the relevant thresholds”

>> https://www.property118.com/landlords-class-2-national-insurance/

Short answer from what you have said above as long as it is only an investment activity and not a trade then you will not be required to pay class 4.

Reply to the comment left by Neil Patterson at 15/01/2019 - 11:33
I concur

And I am completely bamboozled.

Reply to the comment left by AA at 15/01/2019 - 18:26Join the club. This is why I have to employ an accountant and totally rely on him to produce accounts and tax returns.

The short, three line, answer would have sufficed. I got a headache trying to follow that ramble.

Reply to the comment left by AA at 15/01/2019 - 18:26
I'm not at all surprised that you're completely bamboozled, I was too when I first looked into this and I've been in the business of property, finance, tax and law for three decades!

The article that Mark Smith (Cotswold Barristers) and Neil Barlow (Pacific Limited Chartered Accountants) were referring to in the comments Neil Patterson has quoted first appeared on the Tax Faculty website of the Institute of Chartered Accountants England and Wales. A link to that article can be found below.

https://ion.icaew.com/taxfaculty/b/weblog/posts/propertylettingandnationalinsurance

''If it is not due, how can this be amended as it is generating this NIC total automatically?''
Does anyone have an answer to this very credible question, please? How to amend the self assessment form to avoid the automatic reduction of the 9% ?

My wife does not work and is not self employed either but she completes a self-assessment tax return for property income as we are joint owners of 3 buy-to-let properties.
She would like to voluntarily pay Class 2 contributions (much lower rate than Class 3) to count towards her future state pension entitlement.
As she takes no part in the lettings or management of the properties (they are managed by letting agents) am I correct in saying she would not be classed as running a "business" and as such she does not have the option of paying Class 2 contributions?

From HMRC >> https://www.gov.uk/pay-class-2-national-insurance

Pay Class 2 National Insurance if you don't pay through Self Assessment

Overview: You make Class 2 National Insurance contributions if you’re self-employed to qualify for benefits like the State Pension. Most people pay the contributions as part of their Self Assessment tax bill. >> https://www.gov.uk/pay-self-assessment-tax-bill

If you don’t pay through Self Assessment

You don’t pay through Self Assessment if you’re any of the following:

an examiner, moderator, invigilator or person who set exam questions
running a businesses involving land or property
a minister of religion who doesn’t receive a salary or stipend
living abroad and paying voluntary Class 2 contributions
a person who makes investments - but not as a business and without getting a fee or commission
a non-UK resident who’s self-employed in the UK
working abroad

HM Revenue and Customs (HMRC) will send you a bill by the end of October - call the newly self-employed helpline if you don’t get one.

Make sure your payment reaches HMRC by the deadline. The time you need to allow depends on how you pay.

Reply to the comment left by Mark Alexander at 16/01/2019 - 09:56
Thank you so much for the comprehensive replies. Having read these replies I think I now understand. I can also confirm an update for others reading this thread. I'm still completing the tax return online with only the UK Property Page - self assessment form (which is a challenge in itself) once all the information is in it is now generating a Tax Calculation Summary page which shows near the end of the ViewTaxReturn.pdf
Self Assessment Tax Summary
Box 1 = Total Tax due
Box 4 = Class 4 NICs due = 0.00
Box 4.1 = Class 2 NICs due = 0.00

Therefore, the Class 2 and Class 4 are showing as 0.00 due. This is also a relief as I wondered if the adjustments to profit with the mortgage interest relief reduction of 25% if this would affect the profit and therefore increase the NIC as well, apparently it has not.

I will re-register for voluntary Class 2 NIC for state pension benefits in future years

Thank you all and I hope this thread helped others