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Dorkins

Are Hmrc Planning To Charge Btl Landlords Class 2 Nics?

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An interesting reply I received on the Daily Telegraph comments section:

ukeng Dorkins 9 hours ago

Investors do not have expenditures, BTL has been a grey area but it is a business, a simple test is that if it is a business when incorporated then it should be a sole trader when its an individual...

Actually HMRC are looking to charge landlords NICS in the HMRC Agents Update 47 page 3 it states:

NICS rules explain that self-employed earners must pay the tax if their property letting activities amount to running a business.

To run a business, a landlord must carry out more work than is involved in maintaining an investment

This will apply to landlords that have multiple properties as they clarify...

Acting as a landlord typically involves sorting out property maintenance and repairs, advertising for tenants and issuing tenancy agreements, maintaining common areas in multi-let homes and collecting rents.

HMRC argues that this is not enough to make a landlord a self-employed earner, so they do not have to pay Class 2 NICS.

Samantha lets out a property inherited following the death of relative or a single buy to let – she is not a self-employed earner and does not have to pay Class 2 NICS because her landlord activities are maintaining her investment and not running a business

Bob has a portfolio of 10 buy to let properties, works full time looking after them and is seeking to increase his portfolio – Bob must pay Class 2 NICS on his rental profits as he is running a business under NICs rules

The challenge is where do you draw the line, and how do you define the line, is it number of properties or amount of time spent, but the point is HMRC is looking to make people with a portfolio of properties pay class 2 NICs, this shows they do believe an individual who gets rent from a portfolio of properties is a business...

Does anybody know if it's true that HMRC are planning to charge unincorporated BTL landlords Class 2 National Insurance? My understanding is that they are currently exempt:

https://www.gov.uk/self-employed-national-insurance-rates

Special rules for specific jobs

Some self-employed people don’t pay National Insurance through Self Assessment, but may want to pay voluntary contributions. These are:

  • examiners, moderators, invigilators and people who set exam questions
  • people who run businesses involving land or property

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This seems to be the relevant section from the HMRC website: http://www.hmrc.gov.uk/manuals/nimmanual/NIM23800.htm

In their examples it looks like "Bob" who has a portfolio of 10 properties will have to start paying Class 2 NICs!

NIM23800 - Special cases - property letting: business for Class 2 National Insurance Contributions Section 2(1)( B) SSCBA 1992

A self-employed earner is defined at section 2(1)( B) of the Social Security Contributions and Benefits Act 1992 as: ““self-employed earner” means a person who is gainfully employed in Great Britain otherwise than in employed earners employment (whether or not he is also employed in such employment).”

A person who is liable to Income Tax on the profits of a trade, profession, or vocation will generally also be a self-employed earner for National Insurance Contributions (NICs) purposes. As a self-employed earner, they will be liable to pay Class 2 NICs.

However, 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.

The nature of property letting requires some activity to maintain the investment, but that is not enough to make it a business. For example, being a landlord normally involves:

  • undertaking or arranging for external and internal repairs
  • preparing the property between lets
  • advertising for tenants and arranging tenancy agreements
  • generally maintaining common areas in multi-occupancy properties; or
  • collecting rents.

In order for a property owner to be a self-employed earner, their property management activities must extend beyond those generally associated with being a landlord (which include, but are not limited to, the above).

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.

A landlord will also be a self-employed earner if any of their activities amount to a trade for Income Tax purposes. This could include, for example, receiving income from other services such as providing a bank of washing machines in a multi-occupancy block that is rented to tenants, or providing an ironing service to tenants. Running a guest house or hotel will also usually amount to a trade for Income Tax purposes, so an individual proprietor will be a self-employed earner for NICs purposes.

If a property owner has an agent who manages their property for them, things that the agent does should be attributed to the owner. ‘Agent’ includes a friend or family member, as well as a professional managing agent. However, a property owner will only be a self-employed earner on this basis if the things that the agent does for them (ignoring any other clients they might have) are enough to count as a business or trade.

Examples

Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.

Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.

Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.

Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.

Edited by Dorkins

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Taxy taxy. Landlords are sitting ducks and offer easy pickings. I still can't believe HMRC hasn't trawled the land registry for people who own multiple properties asking how they got the money etc.... I'm sure a lot of undeclared income from builders/plumbers etc... have been used as deposits for BTL and creating undeclared rental income. The squealing of the BTL brigade is only just starting.

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when a person says "its my pension, init" defines the BTL as an investment.

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My understanding is that it's effectively up to the landlord to choose whether or not they consider themselves to be working full time and therefore whether or not they are running a property business, as opposed to holding an investment portfolio. They have, as far as I know, always had this option to choose to classify themselves as running a business by making NICs payments on their rental income. If they have been doing so to date then they are unlikely to have any problems claiming incorporation relief and moving into a limited structure, assuming they can procure corporate BTL finance at their current LTVs and ICRs (and if they can't that should be a clear sign to them that they need to cut down their leverage). The vast majority have actively elected to be classed as investors and not as sole traders by failing to make any NICs payments.

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An interesting reply I received on the Daily Telegraph comments section:

Does anybody know if it's true that HMRC are planning to charge unincorporated BTL landlords Class 2 National Insurance? My understanding is that they are currently exempt:

https://www.gov.uk/self-employed-national-insurance-rates

interesting if correct.

definitely cash cow for the milking there.

also does raise the grey area about "self employed" and fraudulent tax evasion, if not declaring occupation status/income/HMO rules etc does it not?

Edited by oracle

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Don't follow the detail of this at all, but strikes me that the tax legislation should at least be conguent around this point i.e you are either a business or an investment - if a business you pay the NI etc on your profits after interest costs (at whatever relief is allowed) - if an investment you don't pay NI and so forth but cannot claim tax relief on leverage costs (as per shares, bonds etc).

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This NICs position has been my thoughts on another thread. The BTL'ers are fighting the Clause 24 decision and seeking a legal view. Their position is that they are being treated differently to other businesses. (Discrimination...blah, blah). ?

But if they are a business then that comes with a whole load of baggage which they may find themselves facing into. NICs is one of them but how they treated generally around CGT, tax rates, accountancy rules, VAT, how they can borrow and even whether an employer restricts outside business interests....can of worms.

But they don't think beyond the current clause 24....they have no idea what they could be asking for. Being an investment is more beneficial that a business for tax purposes....but hey, let's give them some rope and see where they end up.

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