Are Landlords Ever Required To Pay National Insurance?

by Mark Alexander

9:31 AM, 31st May 2017
About 2 years ago

Are Landlords Ever Required To Pay National Insurance?

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Are Landlords Ever Required To Pay National Insurance?

Some accountants have been telling their clients that if they want to claim they run the “business” as a “partnership” then they will automatically have to pay National Insurance.

“That can’t be right”, I hear you cry!

Well it’s not quite clear cut, so I decided to do some more research on the subject and came across a very helpful article published by the ICAEW, to which I credit the remainder of this page:-

“HMRC has updated its National Insurance Manual at NIM23800 – Special cases – property letting: business for Class 2 NIC to confirm that Class 2 NICs are only payable by individuals who are liable to income tax on property letting and the activities amount to a business rather than just an investment.
This clarity has been achieved by the National Insurance Contributions Act 2015 (NICA 2015), through the reform of Class 2 NIC from 6 April 2015.
Class 2 NICs may be due from self-employed earners.
A self-employed earner is defined at s2(1)(b), Social Security Contributions and Benefits Act 1992 (SSCBA 1992), as ‘a person who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment)’. ‘Employment’ has been defined by s 122, SSCBA 1992, for many years as including any trade, business, profession, office or vocation, ie, not just self-employment, but working for a living generally.
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.
HMRC explains that property letting requires some activity to maintain the investment, but that activity alone is not enough to make it a business. For example, being a landlord normally involves:

·        undertaking or arranging for external and internal repairs,

·        preparing the property between lets,

·        advertising for tenants and arranging tenancy agreements,

·        generally maintaining common areas in multi-occupancy properties, or

·        collecting rents.

In order for a property owner to be a self-employed earner, the property management activities must extend beyond those listed above.
For example, ownership of multiple properties, actively looking to acquire further properties to let, and where letting property is the property owner’s main occupation, could be pointers towards there being a business for NIC purposes.
Before the NICA 2015 changes, having a business of letting property would make a person self-employed for NIC purposes and there would have been a Class 2 NIC liability as a result, subject to a claim for small earnings exception (SEE).
NICA 2015 has changed the basis of Class 2 – compulsory Class 2 contributions (new SSCBA 1992, s 11(2)) will now only apply if the income of the self-employed earner is within Class 4, ie, income from a trade, profession or vocation taxable under ITTOIA, Part 2, Chapter 2 and above the ‘small profits threshold’ (the SPT, which has replaced the SEE).
Those landlords who are in business, but who are now self-employed earners without a Class 4 income are eligible to pay Class 2 contributions under the new s 11(6), SSCBA 1992, but they are not obliged to pay.
On the other hand, a landlord who is liable to income tax and Class 4 NIC on the profits of a trade, profession, or vocation in the UK because he or she offers more than just let property (see below), will automatically be a self-employed earner for NIC purposes (and so liable to Class 2 and Class 4 NICs if profits exceed the SPT and lower annual limit respectively).
A landlord is a self-employed earner, potentially liable to both Class 2 and Class 4 NICs if the activities amount to a trade for income tax purposes. This could include, for example, receiving income from other services such as providing a bank of washing machines in a multi-occupancy block that is rented to tenants, or providing an ironing service to tenants. Running a guest house or hotel will also usually amount to a trade for income tax purposes, so an individual proprietor will be a self-employed earner. This did not change at 6 April 2015.
If a property owner has an agent who manages the property/ies, things that the agent does should be attributed to the owner. ‘Agent’ includes a friend or family member, as well as a professional managing agent. However, a property owner will only be a self-employed earner on this basis if the things that the agent does for the property owner are enough to count as a trade.
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.”

Was this the biggest landlord tax planning event ever?



Comments

Mark Alexander

9:55 AM, 31st May 2017
About 2 years ago

This raises another question;

Should all portfolio landlords, especially those claiming to be a business or a partnership which de-facto has to be a business, be paying £2.85 a week Class 2 National Insurance Contributions?

I think the answer is yes, but then again I have always has other self-employed professions so i have always done so anyway.

My interpretation of the ICEAW's interpretation is that unless your business also a trade you will not have to pay Class 4 NI. I hope that's right!

Anybody care to comment further and post links to articles at least as official as the ICEAW article, and dated after 2015?
.

John Frith

15:38 PM, 31st May 2017
About 2 years ago

It begs the question if paying NI contributions would in any way help "prove" that there is a business (which I understand is necessary if one is planning to transfer let properties into an LLP)?

Mark Alexander

16:12 PM, 31st May 2017
About 2 years ago

Reply to the comment left by "John Frith" at "31/05/2017 - 15:38":

Seriously?

I can't imagine many landlords being too happy about having to pay Class 2 NI at £2.85 a week, never mind class 4 NI on their rental profits.
.

John Frith

16:24 PM, 31st May 2017
About 2 years ago

Well, it cuts both ways. Could HMIT say that if you want to transfer a letting business into an LLP, then why aren't you paying Class 4 NI?

Mark Alexander

16:31 PM, 31st May 2017
About 2 years ago

Reply to the comment left by "John Frith" at "31/05/2017 - 16:24":

Hi John

I'm not sure I follow.

What is the relevance of your point about transferring to an LLP?

Are you suggesting that an LLP must have a trade but that a Limited company does not?

Why would a landlord want to transfer to an LLP these days anyway? The partnership SDLT exemptions at incorporation clearly apply to any form of "business" partnership.

The only additional benefit I am aware of for LLP's is that the transfer in value creates a new base cost value if the LLP is subsequently liquidated. That's an entirely different story for another day though, and isn't clear cut either due to GAAR provisions, i.e. if the LLP was entered into for that purpose only.

Perhaps I am missing the point you are making completely? I'm happy to debate it if so.
.

John Frith

15:54 PM, 1st June 2017
About 2 years ago

Thanks for responding Mark. Retirement planning is on my agenda, but I haven't got to grips with it yet, and I'm in danger of showing my ignorance.

Yes, an option I am considering (informed mainly by your posts) is to transfer my letting concerns to an LLP so that that I might be able to "wash out" my CGT liability. But my understanding is that I would have to establish that it is a business and not an investment. On reading your original post here, I wondered if not paying NI would give HMIT an excuse to say that it was NOT a business.

As I said I haven't invested the time to understand this yet, so please forgive me if I have any basic misunderstandings.

Mark Alexander

16:08 PM, 1st June 2017
About 2 years ago

Reply to the comment left by "John Frith" at "01/06/2017 - 15:54":

It's time to take our discussion offline John, please book a Consultation via our main Tax page
.

Nick P

12:55 PM, 3rd June 2017
About 2 years ago

Reply to the comment left by "Mark Alexander" at "31/05/2017 - 16:12":

If NI is not being paid via other channels, surely 2.85 a week is reasonable...assuming one doesn't have private health insurance and needs to access the NHS?

Simon Lever

14:01 PM, 3rd June 2017
About 2 years ago

If you are following the LLP route to eventually putting your property into a limited company then you are looking to create a business to transfer and therefore Class 2 NI is due to be paid. https://www.gov.uk/renting-out-a-property/paying-tax. (not sure why a LLP is the route when a simple partnership works just as well and you do not have to publish the information! Subject of a different thread I think).

Class 2 NI is now paid annually with your normal tax bills. If you are employed as well there is a limit on the total NI payable in the year so check this out. If you are not employed and your only income is from property then it could be a good idea to pay the Class 2 NI in any case to make sure you have your entitlement to a full state pension.

The government is looking to phase out Class 2 NI. In the 2015 budget they announced a consultation on this and in December 2016 they issued a policy paper. https://www.gov.uk/government/publications/abolition-of-class-2-national-insurance-contributions/abolition-of-class-2-national-insurance-contributions

If the Conservatives get back in next week then it is likely that Class 2 NI contributions will be gone within 2-3 years in any case.

When they go in order to keep your pension contributions up to date then you will have to pay Class 3 NI which are currently £14.10 per week. Class 2 seems to be a good alternative to me at the moment.

Old Mrs Landlord

14:44 PM, 3rd June 2017
About 2 years ago

This doesn't affect me as I shall not be incorporating but, out of interest, is there an age limit for Class 2 NI contributions?

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