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Feature

posted 12 Jun 2002 in Volume 7 Issue 4

The treatment of capital: notional capital

In the third of a series of articles considering the capital rules as they affect benefit claimants, Alan Robinson, a solicitor from Legal and Welfare Rights Training, examines the notional capital rule and the similar rules that apply to income support and to funding of residential care by the local authority. Alan also considers the legal position where one spouse lives in residential care and the home is sold, with all or part of the proceeds being used to purchase another house for the spouse.

The classic position is that of an elderly person who owns a house. At some point before they go into residential care, they give the house to a relative (commonly a child or grandchild). Different rules will apply depending on whether the resident is claiming income support, or is to be funded by the local authority under the National Assistance (Assessment of Resources) Regulations.

The notional capital rule is to be found in Regulation 51 of the Income Support (General)Regulations 1987[1]. There are similar regulations in place for other income based benefits. The key to the rule is the opening part of paragraph (1) :-

“A claimant is to be treated as possessing capital of which he has deprived himself for the purpose of securing entitlement to income support or increasing the amount of that benefit …”

The decision maker in a benefits case will need to address the following questions:-

(a)        Was the claimant the beneficial owner of the capital asset?

(b)        Has deprivation occurred?

(c)        What was the purpose of the deprivation; was it to obtain income support?

(d)        Can the notional capital be disregarded?

The onus of proof is on the decision maker and not on the claimant. There are two main things to be proved; firstly, did the claimant possess the capital, and secondly, did he or she deprive him or herself of it for the purposes listed. There is no discretion. Under the supplementary benefit scheme, there was discretion whether to apply the test or not; supplementary benefit thus more closely reflected the present rule in national assistance cases. Despite this major change in the shift from supplementary benefit to income support, the principles laid down in decisions by the Social Security Commissioner in supplementary benefit cases have been held nevertheless to be applicable to income support cases, and so the decision maker has the benefit of a number of closely reasoned decisions to which to refer.

The rule as to the onus of proof is not entirely straightforward, because of the relationship with the claimant’s actual capital. Thus the onus is clearly on the decision maker to show that the claimant did possess an asset. Once that has been established, however, it is for the claimant to show that it has ceased to be a part of his or her actual capital. If the claimant cannot show that the asset was properly disposed of, then it remains part of his or her capital.

Deprivation is not defined in the Regulations and is given its ordinary English meaning. A person deprives him or herself of an asset by ceasing to possess it, whatever the reasons for parting with possession, and regardless of whether some other asset is received in return[2]. The emphasis in the rule is thus not on the deprivation, but on its purpose. If the claimant has an item of disregarded capital, and disposes of it in order to acquire another item of disregarded capital, there is a deprivation, but Regulation 51 does not apply because there is no effect on benefit entitlement.

It is worth noting that, where there is an attorney acting under an Enduring Power of Attorney, the repayment of a loan or the making of gifts from the claimant’s capital may amount to deprivation by the claimant, since the attorney is the claimant’s agent[3].

The analysis of the purpose of the deprivation is complex. Most of what follows comes from income support law, and the local authority regulations and guidance follow this closely. If there is no direct evidence (and there rarely will be), the assessor must find facts from which to draw an inference. If the evidence shows that the claimant has the requisite knowledge, and has exercised some level of choice in depriving him or herself of an asset with at least a significant purpose of securing entitlement to income support, the decision maker is likely to take the deprivation into account.

The decision maker must prove knowledge on the claimant’s part; it is not enough that the claimant ought to have known of the relevant rule. It will have to be shown that the claimant knew of the capital rule, otherwise no intention can be inferred. It is not necessary for the claimant to know of it in detail – knowledge of some limit is enough. It is for the decision maker to show that the claimant did have the requisite knowledge, and though in some cases an assertion by the claimant that he or she did not know of the rule will not be credible, it is nevertheless necessary in deciding whether the decision maker has met the burden of proof to consider the claimant’s background, and the information to which he or she might have had access.

For example, in CIS 124/1990, the claimant was illiterate and spoke only Gujerati. The Commissioner was careful to point out that this must not privilege her, but it did give rise to a situation in which misunderstandings might arise. The Commissioners have suggested[4] that the existence of some capital limit is a matter of common knowledge, but it is clear that actual knowledge will have to be demonstrated or at least inferred. Again the individual’s whole background has to be taken into account; there is research evidence that there are considerable misconceptions about the capital limits.

Securing entitlement to income support need not be the predominant purpose of a deprivation, but must be a significant operative purpose[5]. If the obtaining of benefit was a foreseeable consequence, then in the absence of other evidence it would be possible to conclude that this was the claimant’s purpose. The test seems to be whether the person would have carried out the transaction at the time that he or she did if it had no effect on their benefit.

However, each case turns on its own facts. Relevant factors include, for example, whether the disposal was a gift or was in return for some service; the personal circumstances of the claimant; and a creditor pressing for repayment of a loan.

A positive intention to obtain benefit must be shown. The fact that the obtaining of benefit is a natural consequence of the transaction is not enough[6].

Capital which would become available to the claimant on his or her applying for it is treated as his or her capital; this might include, for example, a prize in the national lottery. Payments made to third parties for the claimant are also treated as belonging to the claimant; this would cover, for example, a capital sum paid to the owner of a residential care home. Such payments (which should be distinguished from top-ups from income) may have the effect of taking the claimant’s capital above the cut-off point, or increasing the amount of their tariff income.

Regulation 51A lays down the diminishing notional capital rule. This is a formula to determine when a claimant who is disqualified for benefit as a result of the notional capital rule will again be entitled to benefit, by calculating the rate at which, if the claimant were living on their capital, it would be reduced to below the qualifying level. It is linked to the income support that the person would have been receiving, and their notional capital is reduced by this amount until they requalify. It is thus possible to calculate when the notional capital rule will cease to apply.

Local authority funding

Regulation 51 is replicated in almost identical terms by Regulation 25 of the National Assistance (Assessment of Resources) Regulations. However, Regulation 25 begins “a resident may be treated”, not “a resident shall be treated” (emphasis added). In other words, it is a power, not a duty, and reflects the supplementary benefit rule which was the forerunner of Regulation 51.

One reason which justifies the use of a power in this instance is that the local authority, unlike the Department of Work and Pensions, is under additional duties towards those who are in need of community care services, and the fact that the authority exercises its discretion against the resident does not mean that they are under no further duty to meet that person’s needs.

This power is separate from the duty to charge for accommodation.

In general, apart from this exception, the NA(AR) Regulations and the guidance contained in the Charging for Residential Accommodation Guide (CRAG) follow the income support approach. For example, Paragraph 6.062 of CRAG says that avoiding a charge for accommodation “need not be the resident’s main motive but it must be a significant one”, mirroring the “significant operative purpose” approach found in income support.

The other area in which the approach in local authority funding differs from that within income support is the question of where the burden of proof lies. This is largely attributable to the two Scottish cases of Yule v South Lanarkshire [7] and Robertson v Fife Council [8], and the English courts have recently considered the same issue in Beeson v Dorset County Council[9]. The decisions in these cases have received plentiful analysis in the pages of ECA[10] and it is not proposed to rehearse the arguments here. Suffice it to say that the effect of Yule (confirmed in Robertson) is that the onus is on the resident to provide information to the local authority, and if the resident does not provide information justifying their disposal, the authority is entitled to apply the notional capital rule. This effectively reverses the burden of proof by ignoring decisions of the Social Security Commissioners dealing with similar issues in income support, and Yule and Robertson are, in Margaret Richards’ view, “quite simply, wrong”[11]. The judge in Beeson, while accepting that Yule sets a subjective test, says that he cannot see how it is possible to infer purpose unless the resident is aware of the possibility that he might need accommodation for which he would need to pay, and the decision is thus closer to the income support decisions referred to above, although it confirms the need for a subjective test.

No time limits are specified for the operation of the notional capital rule in either case. The closer to the claim the deprivation is, the more likely it is that the assessor will be able to show a link; but it does not follow. A regular question on training courses is, “how long does my client have to stay out of residential care for the gift to her granddaughter not to affect her entitlement to benefit?” Unfortunately the answer is that there is no set period. Each case is dealt with on its merits. There is no “seven year rule” as in other areas of law. In effect, the test seems to be, would the person have carried out the transaction at the same time if it had had no effect on their eligibility for benefit? There needs to be a positive intention to obtain benefit, rather than its just being a natural consequence of the transaction.

Sale of the property and purchase of another

One outstanding issue from the last article is the position where one member of a couple has gone into residential care, and the other wishes to move into another (usually smaller) property. So long as the spouse who has not gone into residential care remains in the (former) matrimonial home, its value is anyway disregarded. What if it is to be sold and its proceeds used to buy another house?

In the case of local authority funding, once the house is sold, the disregard is lost, but it resumes if another property is bought within six months. In the case of a joint purchase, therefore, this causes no problems. If the purchase is to be in the name of the remaining spouse only, then the share of the resident partner in the proceeds of sale ceases to be disregarded, and that partner’s entitlement is reassessed accordingly.

The third option is that the new property is to be taken in the name of the remaining partner, but the resident partner is to make available part of the proceeds of sale from his or her share to the other partner. Could this be regarded as a deprivation? The answer is to be found in Paragraph 6.063 of CRAG, which sets out this precise example, and says that “in the Department’s view, it would not be reasonable to treat the resident as having deprived himself of capital in order to reduce his accommodation charge.” In other words, the notional capital rule will not apply to such an arrangement between spouses.

If the question is concerned not with local authority funding but with income support, the same effect is achieved but by a slightly different route. Here the proceeds of sale of a property are disregarded for a period of six months if they are to be used to purchase another property. Since the remaining partner is to reside in the house, its value will continue to be disregarded when the new house is bought, whether this is in joint names or one name only. However, in both cases, where there is an excess on the proceeds of sale, this falls to be assessed for each partner and may affect benefit entitlement.