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Class 2 NIC On Property Rentals

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Julie Butler - Expert Author

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Published originally 2 September 2014

It’s official “there appears to be an ongoing campaign by HMRC to impose Class 2 National Insurance on let property”.

Before everyone collapses in a state of wanting to pull together an attack on HMRC, there are advantages. Firstly, if the individual has no other income which results in NIC payments, they will join the “national insurance club” which could be beneficial. At first glance this would also make the income trading and help for Capital Gains Tax (CGT) and Inheritance Tax (IHT). However, we need to ensure that HMRC are “on the same page” in this regard.

The questions asked by HMRC are as follows:

1)         How many properties do you have in your portfolio, and for what purpose are they used?

2)         If your properties are within the UK and let as furnished holiday accommodation to the public, how many days a year are they let for?

3)         How much of your time (hours per month) is actively spent on looking after the properties?

4)         Do you advertise your properties? If yes, please give details of how you advertise and as what?

5)         What happens to the service you provide to your tenant(s), if you are unavailable for any reason?

6)         Who collects the rent(s)?

7)         Who looks after the letting process, for example, draws up tenancy agreements and inventories?

8)         Who looks after the physical aspects (decorating and repairs) of the properties?

9)         Do you have any other source(s) of income, for example employment or self-employment? If yes, please give details below (if you are self-employed, please tell us what you do and if you are currently registered as self-employed).

Let’s go back to why the taxpayer would want to pay Class 2 NIC as shown by Rashid (Rashid v Garcia [2003] SSCD 36). There, the point of contention was whether the taxpayer was a self-employed earner within the meaning of SSCBA 1992, s 2(1)(b) for Class 2 National Insurance purposes. Unusually, the taxpayer was arguing that there was a liability while HMRC were arguing that there was not.

In Rashid, the taxpayer had income from four letting properties on which he carried out quite a bit of work. This included drawing up tenancy agreements, collecting rents, making arrangements for repairs, drafting advertisements, making credit checks and cleaning and maintaining common gardens. He stated that he spent between two and four hours each week on this work, with family members contributing between 16 and 24 hours on his behalf due to his ill health. The Special Commissioners found that the taxpayer was not a self-employed earner and his property rental activities did not entitle him to pay Class 2 National Insurance contributions.

At first glance the Class 2 on rental property can be just a simple case of why some property owners are keen to pay Class 2 NIC on rental income; on the other hand you could be dragged into the issue of why HMRC should not have powers to take monies from client bank accounts.

John Mirrow, on the ICAEW Tax Faculty website, said:

“We have just had the perfect example of why HMRC should not have these powers.

“Our client received a letter from HMRC debt management and banking demanding unpaid tax and interest of more than £21,000, referring to previous attempts to get the client to pay (although no previous demands had been received). After investigation, with help from the HMRC Agent helpline, we determined that the liability arose from an assessment raised for 2008/09 which had been paid in November 2012.”

On AccountingWeb, “ashbury” gave details of his experiences under the French version of the same power (HMRC are keen to stress that similar powers work well in other countries):

“I recently had the experience of the French tax man dipping into my bank account without consultation or warning of any kind after he said that I’d failed to respond to previous demands – demands that he’d sent to an address that I’ve had no connection with for over two years. Resolved, but only after he’d grabbed the cash that he thought he was entitled to, to my personal detriment and inconvenience.”

It is essential to look at the basics here:

•                There appears an ongoing campaign by HMRC to impose Class 2 National Insurance Contributions (NIC) on let properties.

•                All those owning let properties and all those advising clients with let properties must consider Class 2 NIC for better and for worse. There are not just disadvantages as many promote. This is a subject around which clarity is sought. That clarity can lead to maximising the advantages and minimising the disadvantages.

IHT and CGT Position

For those who are looking at the more long-term advantages, eg the potential Capital Gains Tax (CGT) and Inheritance Tax (IHT) benefits of Business Property Relief (BPR). There are many who argue that serviced let property should achieve the CGT reliefs of property with services, eg Ramsay and Rollover Relief for CGT. Likewise, let property with services should achieve BPR for IHT relief.

Need for Clarity by HMRC

The lack of clarity on the Class 2 position is replicated in the IHT position of let property. The importance of meeting the IHT BPR criteria has been emphasised in the recent case of Trustees of David Zetland Settlement v HMRC [2013] UKFTT 284 (TC). One of the planning points that has to be considered is the whole structure and operation of services provided by the taxpayer.

The question raised was: how ‘actively managed’ was the office block at the core of the business? This ties into many trades operating in the UK. There is a need for detailed guidance from HMRC on the definition of active management when the investment business activities have become a large part of the overall operation.

Investment v Trading

But were the services enough to tip the balance from investment business to trading business?

The First-tier Tribunal (FTT) referred to the remark of Carnwarth LJ, quoted in Pawson, that in the case of a business letting a building, the provision of such services is ‘unlikely to be material’ because it will not be enough to prevent the business remaining ‘mainly’ one of property investments.

The FTT argued that the non-investment side was incidental to the core letting business and the services were insufficient to make the business of a mainly non-investment nature.

Erroneous Assumption – the starting point

One very useful point was made in Zetland with regard to eligibility for BPR and the ‘starting point’ for consideration of relief. HMRC stated that, in its view, there should be an assumption that a property business will not qualify for BPR, and the taxpayer must show that sufficient additional services and facilities are provided in order to rebut this assumption. The FTT dismissed that stance, confirming that HMRC should keep an open mind and not start from any assumption that property-based businesses will not qualify for IHT relief.

If HMRC have to make an assumption for BPR that the property-based business will qualify for relief, is it therefore correct to say that any property business requires Class 2 NIC to be paid?

Blurred Boundaries – Clarity by HMRC

It is clear with regard to Class 2 NIC and BPR that HMRC must give greater clarity. Many property owning clients would be happy to pay Class 2 NIC and qualify for a number of benefits associated therewith. If such action works towards a qualification for BPR then all the Class 2 hysteria will have purpose. If, however, Class 2 NIC is being taken from property owners whilst still intending to deny them BPR then there is much to scream and shout about.


About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email; j.butler@butler-co.co.uk, Website; www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).



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Article Published/Sorted/Amended on Scopulus 2015-03-31 12:19:56 in Tax Articles

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