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17
Nov

Rental Income and Class 2 National Insurance

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Class 2 National Insurance is a class of charge levied on self employed individuals who are normally carrying out a trade and who are between the age of 16 and 65. There are 4 categories of National Insurance that an individual needs to be concerned with and they are classes 1, 2, 3 & 4. The liability is determined by reference to trade, profession, vocation, office and business.

Rental income profits are determined by reference to those principles used to determine trade profits and are referred to by H M Revenue & Customs and business income principles. H M Revenue & Customs have now linked the idea of rental income as being derived from a business and as business is chargeable to Class 2 National Insurance, if they believe the individual is carrying on a “business” of earning rental profit they are seeking to levy Class 2 National Insurance on the individual!

Thus it is necessary to identify what is a business and what is not as regards a “rental business”.

Quite clearly a single rental property would not be regarded as a business. Indeed a Special Commissioners case (Rashid –v- Garcia) held in the circumstances of the case that 4 properties did not amount to a business but as in all cases whether or not a business is being carried on is a matter of degree. It should be noted that H M Revenue & Customs are not bound by any Special Commissioners decisions and 4 or less properties should be regarded as being in the clear on this point.

It could be argued that a property portfolio in circumstances where a managing agent is employed to look after the properties could be regarded as an investment because the role of the property owner is passive. Thus dealing with the management of the properties on your own could give rise to an argument that you are running a business particularly if you derive a living from the property.

Perhaps what is absurd is that whilst H M Revenue & Customs have only just embarked on this approach, the NIC Bill 2014 currently before parliament is set to determine that rental income derived from a rental business is NOT subject to Class 2 National Insurance. H M Revenue & Customs seem to be making a last ditch attempt to try to increase revenues with this charge despite the fact it will only yield (based on this year’s rate of Class 2) £143 per annum per person although they can go back 6 years if they have a mind to.  One wonders if the cost of tracing and dealing with this matter is justified compared to the expected yield. Furthermore, based on this level of charge taking any such matter to appeal would probably not be seen to be cost effective for any taxpayer although we would always advocate making an initial reply with a view to suggesting the rental portfolio is not run as a business but as an investment depending on the circumstances of the operation.

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