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  • The Big Squeeze

    5 May 2022

    Clive Haworth

    Can HMRC squeeze the pips out of property landlords by demanding national insurance on rental income profits?

    Property landlords have been hit by a series of tax increases over recent years:

    • 3% SDLT surcharge on property purchases;
    • Restriction of loan interest relief to basic rate only
    • “wear and tear” allowance abolished

    In addition, any property disposal now has to be reported to HMRC within 60 days of completion and any capital gains tax due paid (thus accelerating the payment due to HMRC).

    So, is national insurance payable on rental income profits, and is this the final straw for many property landlords?

    If you ask HMRC this question, the answer would be; “Yes, rental income profits can be subject to national insurance.”This is on the basis of HMRC’s guidance in its National Insurance Manual at NIM23800 which 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. For example, ownership of multiple properties, actively looking to acquire further properties to let, and the letting of property being the property owner’s main occupation could be pointers towards there being a business for NICs purposes.”

    Before making their way onto the window ledge, landlords should note that HMRC manuals are guidance, not legislation. If we take the trouble to read the legislation we find, not for the first time, that HMRC’s view is not what the law says.

    The legislation regarding NIC contributions is contained in the Social Security Contributions and Benefits Act 1992. Section 15 of that act states:

    Section 15: Class 4 contributions recoverable under the Income Tax Acts

    Class 4 contributions shall be payable for any tax year in respect of all profits which:

    1. are immediately derived from the carrying on or exercise of one or more trades, professions or vocations
    2. are profits chargeable to income tax under Chapter 2 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 for the year of assessment corresponding to that tax year; and
    3. are not profits of a trade, profession or vocation carried on wholly outside the United Kingdom.

    Enjoying this article, but need more advice on any of the topics covered?

    To discuss how ETC can help with your tax questions call the team on 0161 711 1320 or email enquiries@etctax.co.uk

    These three legs are not mutually exclusive and, clearly, profits from a property rental business are not from a trade, profession or vocation. Class 4 contributions are not therefore due.

    Class 2 contributions are less of an issue as the amount payable is only £3.15 per week. Nevertheless to be liable to pay Class 2 you have to be “gainfully employed”. Again, receiving rental income is not an employment, so Class 2 is not due.

    This is also borne out by the 2002 case of Mr Rashid, who let out several properties and spent considerable time and effort in maintaining and managing them. This case was considered by the by the Special Commissioners. Ironically, Mr Rashid was arguing that his rental income was liable to national insurance contributions – as he wanted to pay them to build up his rights to state benefits – while HMRC argued the opposite.

    The commissioners ruled in favour of HMRC and said that the number of properties let (four in this case) and the amount of work put in by the landlord was not enough to categorise the income as gainful employment.

    In our view it would not have mattered how many properties were being let out; a property rental business cannot be categorised as gainful employment!

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