Mark McLaughlin looks at the potential liability to National Insurance contributions for individual landlords on rental income profits.
Individuals who are landlords are not normally liable to National Insurance contributions (NICs) on rental profits, unlike self-employed individuals carrying on a trade.
However, in some cases HMRC may seek to impose NICs charges on landlords.
Not trading income
Self-employed individuals living and working in the UK are generally liable to Class 4 (and Class 2) NICs. Self-employed individuals whose net profits or gains are chargeable to income tax (as trading income) are generally liable to Class 4 NICs, provided those activities are not carried on wholly outside the UK. This general rule is subject to certain exceptions (e.g., those under the age of 16 or over state pension age at the beginning of the tax year).
The Class 4 NICs legislation (SSCBA 1992, s 15(1)) refers to profits immediately derived from carrying on a trade, profession, or vocation. An individual’s rental income (e.g., from a buy-to-let property business) is not trading income, so no Class 4 NICs liability should arise on the landlord’s profits, even if the properties are furnished holiday lettings (see HMRC’s Property Income manual at PIM4115).
‘Self-employed earner’
However, the Class 2 NICs position for individual landlords is less clear. Class 2 contributions potentially apply if a self-employed earner is a person who is gainfully employed in the UK, other than in employed earner’s employment (SSCBA 1992, s 11). A self-employed earner is ‘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)).
Importantly, for these purposes ‘employment’ includes ‘any trade, business, profession, office and vocation…’ (SSCBA 1992, s 122(1)). This effectively brings within the scope of the term ‘self-employed earner’ anyone carrying on a business activity and broadens the scope of Class 2 NICs compared to Class 4 NICs.
Buy-to-let landlords
However, will the activities of a buy-to-let landlord necessarily amount to a business, such that landlords become liable to Class 2 NICs? HMRC’s 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 [and hence liable to Class 2 NICs] if the level of activities carried out amounts to running a business.’
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.
Property letting agents
What if the landlord engages an agent to manage the properties? HMRC generally attributes what the agent does to the landlord. However, the landlord should only be treated as a self-employed earner if the tasks the agent performs for them are sufficient to constitute a business.
For example, suppose a landlord purchases properties using buy-to-let mortgages. They engage a property letting agent, who acts as landlord on their behalf. If the only duties undertaken for the landlord by the letting agent are those normally associated with being a landlord, this should not constitute a business.
Practical tip
HMRC considers that possible pointers to there being a business for Class 2 NICs purposes include the ownership of multiple properties, actively looking to acquire further properties to let, and the letting of property being the individual landlord’s main occupation.
