Individual owners of buy-to-let rental properties generally assume there are no National Insurance contributions (NICs) to pay on their rental profits (as there is for self-employed individuals carrying on a trade).
Class 4 NICs
Self-employed individuals are generally liable to Class 4 NICs on net profits chargeable to income tax as trading income (and which are not from a trade, profession or vocation carried on wholly outside the UK).
Rental income from a conventional buy-to-let property business is not trading income, so no Class 4 NICs liability should arise on the landlord’s profits.
Class 2 NICs
However, the position of individual buy-to-let landlords for Class 2 NICs purposes is rather less clear-cut.
The legislation states that the section concerning Class 2 NICs ‘…applies if an earner is in employment as a self-employed earner in a tax year’ (SSCBA 1992, s 11(1)).
A ‘self-employed earner’ is defined 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) (s 2(1)(b)).
Note that the definition does not require a self-employed person to be carrying on a trade; it simply requires a self-employed person to be ‘gainfully employed’ otherwise than in an employment. This potentially broadens the scope of Class 2 NICs, compared to Class 4 NICs.
The activities of a buy-to-let landlord will not normally amount to a trade. However, such activities may amount to a ‘business’; so are landlords liable to Class 2 NICs? The answer would seem to be ‘it depends’, at least as far as HM Revenue and Customs (HMRC) is concerned.
Is there a ‘business’?
HMRC guidance in its National Insurance manual (at NIM23800) states: ‘…a person who is liable to Income Tax on the profits arising from the receipt of property rental income will only be a self-employed earner for NICs purposes if the level of activities carried out amounts to running a business.’
Whether an individual buy-to-let landlord’s activities amount to a ‘business’ can be a difficult question to answer. HMRC’s view is that for a property owner to be a ‘self-employed earner’ their property management activities must extend beyond those generally associated with being a landlord. The example given by HMRC is of a landlord with multiple properties, actively looking to acquire further properties to let, and the letting of property being the landlord’s main occupation; HMRC considers that these could be pointers towards there being a ‘business’ for NICs purposes.
If a landlord has an agent (e.g. a professional managing agent, or even a friend or family member) who manages property for them, HMRC will attribute what the agent does to the landlord. However, the landlord will only be treated as a self-employed earner on this basis if the tasks the agent performs for them are enough to count as a business.
HMRC’s guidance at NIM23800 includes several examples of property lettings which would, and would not, constitute a ‘business’ for Class 2 NICs purposes. However, in practice each case should be considered on its own specific circumstances.
The above article was first published in Property Tax Insider (November 2019) (www.taxinsider.co.uk).