Julie Butler highlights HMRC’s campaign to seek Class 2 National Insurance contributions on rental business profits.
It’s official - there appears to be an ongoing campaign by HMRC to impose Class 2 National Insurance contributions (NIC) on let property.
Before everyone collapses in a state of wanting to pull together for 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) purposes. However, we need to ensure that HMRC are ‘on the same page’ in this regard.
The questions asked of individual landlords by HMRC are as follows:
- How many properties do you have in your portfolio, and for what purpose are they used?
- 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?
- How much of your time (hours per month) is actively spent on looking after the properties?
- Do you advertise your properties? If yes, please give details of how you advertise and as what?
- What happens to the service you provide to your tenant(s), if you are unavailable for any reason?
- Who collects the rent(s)?
- Who looks after the letting process, for example, draws up tenancy agreements and inventories?
- Who looks after the physical aspects (decorating and repairs) of the properties?
- 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 in the case 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 NIC purposes. Unusually, the taxpayer was arguing that there was an NIC 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 work 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 NICs.
It is essential to look at the basics on the Class 2 NIC issue:
- there appears an ongoing campaign by HMRC to impose Class 2 NIC on let properties; and
- 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
Some taxpayers may be looking at potentially more long-term advantages, e.g. the potential CGT reliefs, and the 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, and such as incorporation relief and rollover relief for CGT purposes. Likewise, let property with services should achieve BPR for IHT purposes.
Need for clarity by HMRC
The lack of clarity on the Class 2 NIC position is replicated in the IHT position of let property. The importance of meeting the BPR criteria for IHT purposes was 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 question could apply to 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 another case (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.
Is HMRC starting at the wrong 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 purposes 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?
Practical Tip:
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.
