NIM23800 - Special cases: property and investment income for Class 2 National Insurance contributions

Sections 2(1)(b), 11(1) and 15 of the Social Security Contributions and Benefits Act (SSCBA) 1992

Chapter 2 of Part 2 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005

This guidance explains how to establish the Class 2 NICs position for property and investment income up to 5 April 2015. For guidance on the Class 2 NICs position from 6 April 2015 onwards, see NIM74250.

A self-employed earner is defined at section 2(1)(b) of SSCBA 1992 as “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)”.

The nature of property letting requires some activity to maintain the investment, but that is not enough to make it gainful employment for self-employed NICs purposes. 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 gainfully employed for self-employed NICs purposes, their property management activities had to 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 gainful employment for self-employed NICs purposes.

If a property owner had an agent who managed their property for them, the activities the agent undertook could be attributed to the owner. ‘Agent’ includes a friend or family member, as well as a professional managing agent. However, a property owner would only be gainfully employed for self-employed NICs purposes if the activities the agent undertook for them (ignoring any other clients they might have) were enough to meet the definition of gainful employment for self-employed NICs purposes.

The position up to 5 April 2015, when Class 2 NICs was reformed, was that there were 3 tiers of activity in relation to Class 2 NICs for those undertaking property or investment related activities:

Tier 1

A person whose activities in managing the property are those generally associated with being a landlord (see above) with little additional activity would not meet the definition of gainful employment for self-employed NICs purposes in section 2(1)(b) of SSCBA 1992 (although they may have been taxed on their property or investment income under Self Assessment (SA)). Such individuals were not liable to pay Class 2 NICs and also were not entitled to pay Class 2 NICs voluntarily, but they may have been able to pay Class 3 NICs. The majority of landlords will fall under tier 1.

Examples

Samantha let out a property that she inherited following the death of her great aunt. This would not be gainful employment for self-employed NICs purposes. Samantha would have fallen under tier 1; she was neither liable nor entitled to pay Class 2 NICs.

Claire owned multiple properties that she rented out. She spent around half her working time carrying out duties as a landlord and was not looking to increase the number of properties she owned. If the only duties that Claire undertook were those normally associated with being a landlord, then this would not be gainful employment for self-employed NICs purposes. Claire would have fallen under tier 1; she was neither liable nor entitled to pay Class 2 NICs.

Hasan purchased properties using “buy to let” mortgages. He placed all letting duties in the hands of a property letting agent who acted as landlord on his behalf. If the only duties that the property letting agent undertook for Hasan were those normally associated with being a landlord, then this would not be gainful employment for self-employed NICs purposes. Hasan would have fallen under tier 1; he was neither liable nor entitled to pay Class 2 NICs.

Tier 2

A person with a substantial undertaking in property or investment related activities would meet the definition for gainful employment for self-employed NICs purposes in section 2(1)(b) of SSCBA 1992. Such individuals were liable to pay Class 2 NICs. If they had low earnings and were granted a Small Earnings Exception (SEE) they were entitled to pay Class 2 NICs voluntarily (see NIM21000.

Example

Bob owned 10 properties which were let out to students. He worked full time as a landlord and was continually seeking to increase the number of properties he owned for letting. Bob’s activities met the definition for gainful employment for self-employed NICs purposes so he would have fallen under tier 2, and he was liable to pay Class 2 NICs. If he had low earnings and had been granted a SEE, he would have been entitled to pay Class 2 NICs voluntarily.

Tier 3

A person who had a specific trade, for example running a hotel or guest house, would meet the definition of gainful employment for self-employed NICs purposes and would have been liable to pay Class 2 NICs. If they had low earnings and were granted a SEE, they were entitled to pay Class 2 NICs voluntarily (see NIM21000). A person in this tier would also pass the trade, profession or vocation test for an Income Tax charge to arise under Chapter 2 of Part 2 of ITTOIA 2005 set out in section 15 SSCBA 1992 and be liable to pay Class 4 NICs if their earnings exceeded the Class 4 Lower Profits Limit (LPL).

Examples

Amy owned and ran a bed and breakfast and therefore she was considered to be carrying out a trade. Amy was liable to pay Class 2 NICs (unless she had SEE which meant she could pay Class 2 voluntarily), and Class 4 NICs if her earnings exceeded the Class 4 LPL.

Nadiya owned and ran a hotel and therefore she was considered to be carrying out a trade. Nadiya was liable to pay Class 2 NICs (unless she had SEE which meant she could pay Class 2 voluntarily), and Class 4 NICs if her earnings exceeded the Class 4 LPL.

Activities that amount to a trade for Income Tax purposes could also include for example a landlord who operates a shop and self-service launderette in a retirement village or caravan park.

For further information on the Class 4 LPL see NIM24001.

For further information on what can be considered a trade see PIM4300.