Feature

posted 8 Dec 2004 in Volume 10 Issue 1

ECA course: part nine
Protecting the interests of older people

DAVID COLDRICK continues the ECA series with an in-depth examination of the supporting theory and basic rules for the valuation of assessable capital.

Section 21(1) of the National Assistance Act 1948 (NAA) (as amended by the NHS and Community Care Act 1990) provides that it is the duty of a local authority to its citizens to arrange residential accommodation for those “who by reason of age, illness, disability or any other circumstances, are in need of care or attention which is not otherwise available to them”. But, assuming the possible liability of the NHS to pay for that resident by way of continuing NHS health care has been properly discounted, it must also charge them for that care.

If the resident's properly assessable income does not meet the cost of their care, and their own properly assessed capital is less than the 'lower capital limit' (which is £12,250 in England and Northern Ireland and £13,500 in Wales 2004-5), the local authority will have to meet the full fee up to the 'standard rate' or 'contract rate' applicable in its area. Between that figure and the 'capital limit' (£20,000 in England and Northern Ireland and £20,500 in Wales 2004-5), the local authority and resident contribute on a sliding scale. If the resident's properly assessed capital is over the capital limit, then the local authority usually has no liability to pay care fees. That is, unless special circumstances apply such as when aftercare is being provided under Section 117 of the Mental Health Act 1983. The accommodation, provided for those discharged for aftercare after 'sectioning' under the Mental Health Act, is provided free of charge.

The contents of the list of 'types of capital' contained within Paragraph 6.002 of the mandatory guidance Charging for Residential Accommodation Guide (CRAG), published by the Department of Health (currently as LAC 2004(25)) for the benefit of local authority revenue assessors, contains some examples of types of capital which may constitute properly assessable capital. If those basic types of assessable capital fulfil the additional essential test of 'availability' to the resident, and have a real value against which an assessment might usually be made, then the resident will have something to pay in accordance with the comments made above. Thus, from the perspective of asset protection, some practical knowledge as to whether or not an apparent value is also an actual value for the purposes of the relevant charging regulations (the National Assistance (Assessment of Resources) Regulations 1992 (as amended) the NA(AR)Regs)) to which CRAG refers, is part of the adviser's essential pool of knowledge.

Value in use versus value in exchange

'Value' and hence valuation is a difficult subject. Value is usually defined as 'the worth of something to its owner', but that can be highly subjective with arbitrary results dependent, in part, upon mere sentiment. To use such a definition in the context of valuing a resident's capital would be unworkable. The resident who genuinely placed no personal value on their wealth would find they had little to pay, whilst the materialist would feel distinctly oppressed. It would also give too much power to the revenue assessor who would have to make up valuations on an individualistic basis. Hence, not surprisingly, the subjective 'value in use' or the pleasure/benefit which the assessed capital might give to the resident is irrelevant.

The NA(AR) Regs adopt an objective test for valuations. The regulations apply methods to calculate the 'value in exchange'. That value in exchange refers to the money or goods and services for which the resident's capital can be traded. The utility of the assessed capital to the resident is ignored. The external demand for that capital is the paramount determinant of its value. Essentially, it is a market-based cash valuation. In principle, the value is determined where demand for the assessable capital meets supply, and the resident is treated as a supplier of the capital to be assessed. In most cases, they are not an exclusive supplier and there will be demand from more than one source.

These points are rooted in economic theory, but this is not irrelevant philosophising. The law, in the form of the NA(AR) Regs and the CRAG, seeks to use the theory for its own practical ends. It is not alone in doing this. The same theory is used in much of the law where a market valuation is required.

In the context of the NA(AR) Regs, it is particularly important to have a clear understanding of why the demand for capital is so important in determining the value of a resident's capital. It has a direct legal impact as will be observed in later discourse. Alfred Marshall and the other late nineteenth century classical economists who originally developed pricing models, might be surprised at some of the uses to which they have been put, but until another suitable method emerges the link will remain. It is, however, also worth reminding ourselves that theory and reality can diverge.

Some basic rules for the valuation of a resident's capital: NA(AR) Regulation 23

General principles of valuation can be gleaned from the combination of Regulation 23, relevant passages in the CRAG, and mainstream income-related benefits cases.

There is a specific methodology with different practical applications in the context of different asset types. As noted in the preceding sub-section, methodology owes much to classical economic theory. That involves the rational determination of price by parties seeking the junction of the curves of supply and demand. But in the case of the NA(AR) Regs, the parties are assumed to be both rational and in a hurry.

Regulation 23 of the NA(AR) Regs under the heading 'Calculation of Capital in the United Kingdom' (words in square brackets are the authors) states:

“Except in a case to which paragraph (2) applies and subject to Regulation 27(2) [which deals with capital jointly held] capital which a resident possesses in the United Kingdom shall be calculated at its current market value or surrender value (whichever is higher), less –

(a) Where there would be expenses attributable to sale, 10%; and
(b) The amount of any incumbrance secured on it.

1. Capital in the form of a National Savings Certificate –

(a) except in the case of a prospective resident [which means a person for whom accommodation is proposed to be provided under part 3 of the National Assistance Act] if it was purchased from an issue the sale of which ceased before 1 July immediately preceding the date on which the resident's accommodation was provided, shall be calculated at the price which it would have realised on that 1 July had it been purchased on the last day of that issue;
(b) in any other case, it shall be calculated at is purchase price.”

This is perhaps a rather strange juxtaposition of subject matter, but it is virtually the same as Regulation 49 of the IS(G) Regs. That related IS(G) Regulation does not contain the phrase “(whichever is higher)”. In most cases this will not make any difference to the relevant valuation as most assets do not have a 'surrender value', and those which do tend to be policies of life assurance which are disregarded assets for the purposes of capital assessment under NA(AR) Regs Schedule 4 Paragraph 13.

It might have been expected that the matter of valuation would be dealt with as a separate issue from secured debts and the special case of national savings certificates. Nevertheless, it is supposed that Regulation 23 at least has the virtue of being concise.

The CRAG Paragraph 6.011 adds a helpful explanatory gloss to Regulation 23. It indicates: “For the purposes of valuation only the value of a capital asset (for example property) other than National Saving certificates… is the current market or surrender value, whichever is higher, less:

10% of that value if there would be any expenses involved in selling the assets only where there will be actual expenses. The expenses must be connected with the actual sale and not simply the realization of an asset, eg, the cost of fares to withdraw money from a bank are not expenses of sales. The deduction is always 10% even if it is known from the outset that the actual expenses will be more or less than 10% and
Any outstanding debts secured on the asset eg a mortgage.”

In this same context, Paragraph 6.012 of the CRAG states: “A capital asset may have a current value (eg stocks or shares) or a surrender (eg premium bonds) value. The current market value will be the price a willing buyer would pay to a willing seller. The way the market value is obtained will depend on the type of asset held, eg the value of stocks and shares or unit trusts are quoted in newspapers.”

Further, the CRAG Paragraph 6.014 states: “In the case of land, buildings or a house where it is necessary to obtain a precise valuation because of a dispute, a professional valuer should be asked to provide a current market valuation.”

The valuation of capital: Explaining the basic rules

Having noted the general principles, some specific valuation-related points can be listed:

The NA(AR) Regs valuation may not be the valuation for other purposes. The NA(AR) Regs may sometimes give a different valuation from that which might be expected in other situations where valuations are required. It is related to more familiar valuation methodologies such as those for probate, tax purposes or accounting purposes but is not identical to any of them.
Pounds sterling values. Legal tender in cash form in pounds sterling has an easily assessable value in the UK, which is simply its face value.
Other realisable market and surrender values. Other capital has a market value or surrender value. Those values are the amount of money which can be realised from the sale of that capital or the obtaining of a bank loan against that capital. (Note: loans are not expected to be taken from lenders of ill repute – or rather, of less ill repute than the average bank).
Willing buyers and sellers. Following R(SB) 57/83 and R(SB) 6/84 the market or surrender value is that place where a willing buyer (not a forced purchaser) and a willing seller (not a forced seller) would strike a deal on a particular date. This relies on the reality of a willing buyer and a willing seller and it does not impute an artificial theoretical situation. It must be grounded in the economic realities of a capitalistic environment.
Evidence for a value. The suggested deal price must be supported by evidence. If capital cannot be sold because there are actually no buyers for it – if, for example, the bottom has recently dropped out of a particular market or the capital is hedged about with restrictions or uncertainties – then the market value may be low or nil.
The importance of a quick sale. The valuation should be based on that price attainable under a quick sale. The reason for this is that the “current market value” is not the same as the maximum possible value which may be achieved after intensive marketing over a longer period of time. See R(SB) 6/84. This is why it is suggested that the parties to the transaction should be assumed to be in a hurry.
Current value implies a currently realisable value. The current value is influenced by whether or not the capital in question is currently realisable. This is submitted to be similar to the fundamental issue of availability but it runs more directly to the issue of valuation. The case of R(IS) 4/96 involved the value of a charge owned by the claimant upon his former residence, which he obtained in the course of his divorce. Its current value was reduced to a nominal £3,000 as it was only realisable if the (young and healthy) 'ex' cohabited, remarried or died. It might not be realised for decades and the claimant might even be outlived. It is not unknown for a local authority engaged in a valuation exercise to fail to address one or more of these key points. The reader will therefore wish to double-check the application of the appropriate principles.

The valuation of capital: Examples of the operation of the rules

The valuation treatment of certain specific types of asset can be explained by reference to the general principles. These points are sometimes just legal niceties because whatever the value may be, it is clearly one which takes the resident over the capital limit. In this situation, the CRAG Paragraph 6.013 adds a practical point that: “If the resident and the assessing officer both agree that, after deducting the amounts in paragraph 6.011 (a) and (b) (where appropriate), the total value of the resident's capital will be: (a) More than £20,000; or (b) £12,250 or less, it is not necessary to obtain a precise valuation. If there is any dispute, obtain a precise valuation.”

However, local authorities can adopt an unrealistic attitude, especially in more complex and borderline cases, by failing to apply the appropriate principles of valuation. What may appear to be a substantial asset, may only hold the illusion of value.

Some examples of how the principles of valuation operate in practice are given below:

Family companies. The case of R(SB) 18/83 addressed valuation in the context of a minority shareholder in a family company and also examined the use of loans as a means of capital realization. The valuation of family-company shareholdings can be particularly complex. What are the effects of rights of pre-emption? What would or could the resident be expected to obtain? It may, on the basis that it is a current valuation which is required, be rather less than even the Articles of Association might suggest the resident should achieve. The number of potential buyers is limited, their resources may be equally limited, a minority shareholding will not be worth as much as a majority holding and, above all, time is limited for the purposes of the valuation snapshot. The facts of the case will need to carefully examined and ordinary probate, tax and accounting valuation techniques are likely to be inappropriate. The need for a valuation based upon a quick sale will need to be taken into account as a key variable.
Stock exchange-quoted holdings in individual equities. Many older people own stocks and shares, particularly small holdings in privatisation shares such as BT, British Gas, Centrica and in the former building societies such as Abbey National and HBOS. The value of quoted stocks and shares are determined at their current market value less the ten per cent discount referred to in NA(AR) Regulation 23(1)a. The method of valuing quoted companies, that is those quoted on an official UK exchange such as the London Stock Exchange or the AIM market, is akin to that used for capital gains tax purposes by the Inland Revenue. The lowest trading price of the day plus 25 per cent of the gap between this and the highest trading price of the day (sometimes known as a 'one quarter up' valuation) is standard. However, in most cases, where such accuracy is not at a premium, the price quoted in the pages of a reputable financial section of a newspaper such as the Financial Times is adequate, although that takes the mean between the lowest (bid) and highest (offer) prices. See R(IS) 18/95. Once the holding is sold, the actual net value received will be the value of assessable capital. It should be noted that even shares which are suspended upon the stock exchange may still have some value to certain purchasers on the 'grey market'. It may or may not be realistic to tap into that market.
Unit trusts, OEICS and other savings plans. As part of the enthusiasm for stock exchange investments in the 1980s and 1990s many people invested in unit trusts and open-ended investment contracts (OEICS). They provide a more diversified and arguably less risky stock exchange-linked investment than individual shares. As equally large numbers of people discontinued their stock exchange-linked savings plans after the 2000-2003 share-price debacle, many older people now have relatively small holdings which require valuing upon entry into care. These are valued at the lower bid price stated in the financial press. There is no ten per cent deduction in such cases as the bid price is net of sale costs. Similar investments were made in the form of tax-efficient personal equity plans (PEPs), which need to be valued by the financial institution concerned.These stock exchange-linked investments should not be confused with tax-efficient, cash-based savings in tax-exempt special savings accounts (TESSA's), some of which are still running, and with cash investments which have a value linked to the stock market but which are not actually stock-exchange investments themselves. Those cash-based investments are valued either in the usual way as cash, or upon the basis of a valuation given by the financial institution concerned. The current government-favoured vehicle is the individual savings account (ISA). Itmay constitute a cash investment or an investment in stocks and shares like a unit trust. The value will, in each case, be available from the financial institution concerned.
Term accounts. Many older people hold cash in term accounts such as two, three or five-year term accounts. If there is no provision for any withdrawal or encashment within the contract (other than death) between the resident and the deposit-taking institution, then the value should not be treated as available to the resident. It should not have a value as a result. However, most of these investments can be released, even within the first year, although no interest will be paid during that period. It is highly unusual for a contract to stipulate that money simply cannot be obtained in any circumstances apart from upon death. Many people would consider such an investment as too impractical or dangerous because nobody can be sure when they might need money. Furthermore, if an asset can be liquidated into a form which would be available to the person concerned by, for example, the sale of their interest in a timed investment or if borrowings could be set against the value of a, presently unrealisable, asset by way of security, then the value which can be realised is assessable capital. It should be noted that the CRAG Paragraph 6.027 may cause some unnecessary confusion. It states: “Capital which is not immediately realisable (eg National Savings investment accounts which require one month's notice or Premium Bonds which may take several weeks to realise) should be taken into account in the normal way at its face value.” The specific forms of capital mentioned are available to the resident albeit with a slight delay. The appropriate principles of valuation agree with the face value being the correct value for the purposes of the capital assessment. But, although the paragraph fits the specific cases stated and perhaps most fixed-term investment accounts, as suggested above, any attempt to extend it to situations where capital is not actually available to the resident should be resisted.
National savings certificates. Annex C to the CRAG contains a table of value for each issue of national savings certificates. The NA(AR) Regs treats such investments as a special case. The CRAG Paragraph 6.018 states: “The value of National Savings Certificates is: a)if sale of the issue ceased before the first day of July immediately before the resident entered residential care, the price they would have realised on that First July if they had been purchased on the last day of the issue; and b) in any other case, the purchase price.”
Personal chattels. Special mention should be made of a particular set of circumstances involving personal possessions. It should be noted that the logic of the authors position on this particular subject is arguably open to discussion but the alternative solution, which is not cited below, would reach the same practical result. Personal possessions are usually disregarded from assessment under NA(AR) Regs Schedule 4 Paragraph 8. But they can still be taken into account as assessable capital if they are, in the words of Paragraph 8, “acquired by the resident with the intention of reducing his capital…” When this can be proven, the value which is counted is the current market value and not the purchase price. The current market value of most modern personal possessions is akin to their fire-sale, flea-market or 'car-boot' value. Only marketable antiques, or certain desirable collections, are likely to retain their value after purchase. However, readers contemplating founding elaborate schemes geared to protect the assets of older people based upon this reduced value should note that whilst only the current market value is taken into account in the capital assessment, so is the loss involved in the purchase. The actual current market value of the possession purchased is taken into account as properly assessable capital because the disregard is not applicable to it. That valuation is carried out upon normal valuation principles. The value of the asset purchased is not the resident's notional capital as the asset purchased still belongs to the resident in an assessable form and is not just 'notionally' theirs, it is actually theirs. But the money 'lost' in the purchase of the possession is valued as notional capital. The capital loss (or 'deprivation') is treated as though the resident still owned it; that is as notional capital 'proper'. See the confusing case of CIS 494/1990 and later, the clearer case of R (IS)8/04.
Funds administered by the Court of Protection. Funds which are administered by the Court of Protection for a resident who is mentally incapable will be valued on ordinary principles. The current market value will be taken. The value may be disregarded if it arises as a result of a payment of compensation for a personal injury to the resident under NA(AR) Regs Schedule 4 Paragraph 19. But, even then, there is no assessment of that capital as a result of there being a disregard, not as a result of there being no current market value. In the case of R(IS) 9/04, it was argued that the interest of an incapacitated person is unmarketable and worth very little. However, the commissioner held that such capital remains the patient's own absolute property and the administrative arrangements involved do not render them valueless. The same principles will logically apply to funds administered under an enduring power of attorney.
Land and buildings. The valuation of land and buildings in the sole beneficial ownership of a resident is dealt with in the same way as other capital although special rules apply to the valuation of jointly owned land just as they do to other jointly owned capital. The CRAG Paragraph 7.014 suggests: “…If the local authority is unsure about the resident's share, or their valuation is disputed by the resident… a professional valuation should be obtained.”

The case of R(JSA) 1/02 indicated certain things which a local authority valuation should include. Those are details of: the valuer's experience and expertise; the details of the title to the property, e.g. freehold/short lease/long lease; special terms of ownership; location; size; condition; and comparable property prices. The cost of the local authority's own valuation must be borne by it as it cannot lawfully charge the resident for it.

The valuation of capital: The effect of imputed and actual expenses of sale

Expenses of sale are assumed to create a ten per cent discount at the time of an initial valuation “where there would be expenses attributable to sale” (NA(AR) Regulation 23(1)(a)) That applies equally to sales of personal property as to realty. In some cases, such as in the sale of land, there are obvious potential expenses (notably estate agents fees and legal fees) but in others there may be no cost of sale. An encashment of a national savings certificate or bank withdrawal may involve the placing of a stamp on an envelope, but that is not a “cost of sale”. There is no sale. No discount is allowed for that. In the case of a sale of a unit trust, no ten per cent discount is allowed because the cost of sale is included within the valuation process itself. The ten per cent discount is, therefore, not universally applicable. The CRAG Paragraph 6.011 correctly notes that the discount is: “10% of that value if there would be any expenses involved in selling the assets only where there will be actual expenses. The expenses must be connected with the actual sale and not simply the realization of an asset eg the cost of fares to withdraw money from a bank are not expenses of sales. The deduction is always 10% even if it is known from the outset that the actual expenses will be more or less than 10%.”

When a sale is made, the theoretical (and indeed arbitrary) assessment of the costs of sale at ten per cent must give way to an assessment of the actual net sale proceeds.

The CRAG Paragraph 6.015 under the heading 'Expenses of Sale' notes that: “Once the asset has been sold (eg a property) the capital to be taken into account is the actual amount realised from the sale less the actual expenses of the sale.”

There may, therefore, be seen to be a divergence between theoretical and real expenses.

The valuation of capital: The effect of incumbrances

Because a resident is an older person, this does not mean that they will have no liabilities. Increasingly, they do have liabilities, which are often secured upon their house or other land. The reason may be to secure loans for double glazing, central heating, roof repairs, a new conservatory or simply to fund equity release which might have paid for a long-awaited post retirement cruise some years before. Anecdotal evidence suggests there is a general trend towards older people 'spending the children's inheritance' or at least some of it. The issue of the effect of incumbrances on the process of valuing a resident's assets is therefore likely to become an increasingly relevant complication. Following the case of R(SB)2/83 only incumbrances which are secured on capital are to be deducted from capital to create an accurate valuation. This is now enshrined in the regulations.

The expression contained within NA(AR) Regulation 23 granting allowance against a capital value of: “the amount of any incumbrance secured on it” is explained in Paragraph 6.017 of the CRAG as meaning that: “A legal charge or mortgage must have been made on the capital asset.”

This is sometimes read to imply that only mortgages or other similar charges upon land can be set against the value of an asset. There is a natural contextual assumption in the use of legal English that 'incumbrances' equals 'incumbrances upon land'. In fact, neither the NA(AR) Regs nor the CRAG refer to incumbrances on land. The CRAG correctly states that it applies to incumbrances “made on the capital asset”; that is, any capital asset.

By way of a reminder, it should be noted that when money is loaned on condition that it used on such and such a project or for such and such a purpose, the money loaned is not the properly assessable capital of the borrower/ resident. That is because it is not available to the resident to use as they see fit. Usually, only general loans may be treated as available capital which can be properly assessable capital. Simply because a loan is unsecured does not mean that it is a general loan, which is therefore a resident's assessable capital.

It is important to make this point in the present context because there may be two related issues of valuation, namely, the valuation of the cash loaned if some of it is still unspent and the impact of any security taken by the lender in support of that loan.

Apart from cases involving land, loans can, quite lawfully, be secured upon business assets, personal possessions, stocks, shares and other securities. They can even be secured upon a nominated cash account. This is achieved by way of a contractual arrangement, which will usually be effected in writing in the manner of a formal, fixed or floating charge, but it can also be effected orally in accordance with ordinary contract law. See R(SB) 18/83. The result of an incumbrance is to prevent the asset which has been charged from being sold or otherwise disposed of without the lender's consent. If there is no formal charge agreement, then there will usually be doubt over whether or not the liability is actually secured, and therefore whether or not it is a deductible incumbrance for the purposes of NA(AR) Regulation 23.

Local authorities are, perhaps not unreasonably, suspicious of family-based 'loans' which may appear to them to be an attempt to reduce the resident's available capital.

If, for example, a resident constructed a conservatory from their own resources, it may not be too difficult for them to assert later that it was actually paid for by a relative in cash and/or kind who is therefore owed some money from the sale proceeds of their residence. It is not unreasonable for a local authority to want evidence that there was a genuine financial arrangement and to require evidence of the existence of a formal charge. It is neither difficult nor expensive for the lender to register such a charge where it is genuine. This essential reasonableness is enshrined within the regulatory requirement for 'security' ('secured on') which in practice requires a charge for the amount of the loan to be registered against the land belonging to the resident. If such an arrangement is not the object of a formal charge, then it is questionable whether or not it is sufficiently 'secured' so as to count as an incumbrance for the purposes of NA(AR) Regulation 23. The lender would be wise to register a charge promptly and back this up with written evidence of the agreement reached with the resident, preferably with the benefit of independent legal advice.

There are a number of other potentially relevant incumbrances apart from mortgages and other secured loans. One example is the cost of litigation to recover an asset. See the fascinating case of Ellis v Chief Adjudication Officer [1998] 1FLR 184. That cost involved an incumbrance secured by court order. If money is recovered as compensation for a personal injury to the resident and there are negotiations with the Legal Services Commission until the amount of the statutory charge on the award has been calculated, none of that capital can be said to be available to the resident. Until the charge is quantified, the solicitor cannot release funds to the client. When the charge is quantified and paid only the net amount of the award after that and all costs will be available capital. This follows CIS/984/2002.(Note: If such compensation is paid into a personal injury trust it becomes disregarded capital). The example on the subject of incumbrances given in the CRAG Paragraph 6.017 is as follows:

“A resident owns a house and garden (his home) plus an extra piece of land which, although attached to the garden, is not part of it. It has been decided to disregard the value of the resident's former home, but to take into account the value of the extra land because it does not form part of the resident's 'home' and could be sold separately. The resident has a mortgage secured on the whole of the property.

The value of the land to be taken into account is the market value of that piece of land, less 10% of that value for expenses of sale and the whole of the mortgage secured on the home and the extra land.”

Whilst the example fails to give a rounded picture of the scope of possible incumbrances, it does make another valuable point. If the mortgage in the example given was to be apportioned rateably against the plot of land in accordance with the overall value, then its net assessable value might be significantly higher than if the whole value of the mortgage were to be set against the value of the land as it should be. The example in the CRAG follows the case of R(SB)27/84.

The valuation of capital: The order of deductions

Expenses of sale, which are assumed to create a ten per cent discount at the time of an initial valuation, “where there would be expenses attributable to sale” under (NA(AR) Regulation 23(1)(a), are deducted from the value of a capital asset first. Then, “the amount of any incumbrance secured on it” is deducted under NA(AR) Regulation 23(1)(b). This order reduces the value in the capital in the resident's favour as follows:

Incorrect order: £10,000 (asset value) less £5,000 (secured loan) = £5,000 less 10% (imputed expenses of sale) of £500 leaves £4,500 assessable capital.
Correct order: £10,000 (asset value) less 10% (imputed expenses of sale) of £1,000 = £9,000 less £5,000 (secured loan) leaves £4,000 assessable capital.

The valuation of capital: Capital jointly held (excluding land and buildings)

The issue of valuation of capital in a resident's sole name has been addressed above but the resident may co-own capital with their spouse, partner, child or

otherwise. This is a further complication to the valuation process. NA(AR) Regulation 27(1) states:

“1. Where a resident and one or more other persons are beneficially entitled in possession to any capital asset except any interest in land –

a. They shall be treated as if each of them were entitled in possession to an equal share of the whole beneficial interest in that asset; and

b. That asset shall be treated as if it were actual capital.”

The author considers that the expression 'beneficially entitled' means that the resident has an interest in an asset which is their own cash or may be used by them as cash or is something they can sell or otherwise convert to realise a cash value. The expression 'in possession' means that the beneficial interest must be a present and not a future beneficial interest. The valuation required for jointly owned capital is not expressly stated to be the 'current market value' as it is for capital in the resident's sole name.

This may have more impact upon valuations of jointly owned land and buildings where extensive marketing and an unhurried sale is likely to give a higher valuation than one for a quick sale, which is implied by a requirement for a current market value.

NA(AR) Regulation 27(1) is very similar to IS(G) Regulation 52. There has been criticism of its effects, and debate as to exactly when that section applies. Its NA(AR) Regs sister is, it is submitted, also open to such scrutiny.

The CRAG Paragraph 6.010 states: “‘Where a resident has joint beneficial ownership of capital, unless it is an interest in land…, divide the total value equally between the joint owners, and treat the resident as owning an equal share. This method avoids administrative difficulties. Once the resident is in sole possession of his actual share, treat him as owning that actual amount.”

The CRAG provides an example as follows: “A resident and her daughter have £21,000 in a joint building society account. The resident contributed £8,500 and the resident's daughter, £12,500.

Treat them as owning £10,500. The joint account is then closed and the resident and her daughter open separate accounts. The resident has £8,500 in her account. Treat her as owning £8,500.”

The first result in the example is clearly unfair. This administrative easement imputes to the resident the value of capital which they have never owned. It bears no relation to the legal realities of the ownership of the money.

CIS 7097/1995 indicated that IS(G) Regulation 52 only applied where several people “are beneficially entitled in possession” to the whole of the capital asset in question. If, as a matter of fact, they are not, then Regulation 52 (which deems equal ownership of capital) could not apply. Even if there was a joint bank account, it could not be assumed that the entire value was equally available to each account holder. There may be genuine co-ownership of some of the money but not all of the money.

In the case of Hourigan v Secretary of State of Work and Pensions [2002] EWCA Civ 1890 (R(IS) 4/03), a care-home resident's income support was found to have been unlawfully stopped. IS(G) Regulation 52 (which unlike NA(AR) Regulation 27 applies to land as well as other capital) had been wrongly applied. In that case, a son owned over 80 per cent of a property with his mother as tenants in common. The resident mother was assessed as owning 50 per cent of the value of the property when her share was only around 20 per cent. That took her well over the capital limit for income support. But, IS(G) Regulation 52 was held not apply. From this case it may be gleaned that where a person has an ascertainable share of their own in a capital asset (equivalent to a tenancy in common in land where each owner has a specified proportion of the value of the land), it should not be pretended that they own an equal share of the capital value. They have separate shares in the capital asset which is co-owned as a whole but not as to all its parts with another person. If, however, there is a genuine joint ownership situation (equivalent to a joint tenancy in land where each owner owns all of the land), the capital value of the asset should be divided equally between the co-owners.

The author submits that there is no reason why similar situations to those described in respect of IS(G) Regulation 52 should not be dealt with in the same way under NA(AR) Regulation 27(1).

The problem, however, is likely to be one of evidence. In the case of the example given in the CRAG, a declaration of relative shares in the account – by way of a note signed by the parties when the account was opened or as payments were being made into it – should be sufficient to show that the capital was not freely available to both account holders equally. In practice, few families are aware of the implications of joint accounts and will not do this. An after-the-event declaration as to the intended beneficial interests may not have the same evidential impact.

If the parties in the CRAG example withdrew their own funds and opened separate accounts, the CRAG correctly notes that the resident's actual share in her own account is her relevant assessable capital. From the point of view of asset-protection planning, if the non-resident in the CRAG example withdrew her share of the money but left the joint account open, NA(AR) Regulation 27(1) might work in favour of the resident. If the non-resident's £12,500 was withdrawn and put in a separate account, then the assessment of the joint account might only be one half of the remaining value of £8,500 (£4,250) and not the full £8,500. But if the non-resident has withdrawn all her money, that would mean that there is nothing more than a 'technical' joint account. By the very act of withdrawal, the value of the resident's share had been ascertained as had the non-resident's, now taken to zero. But should the resident be agreeable, it would be hard to stop her confirming the account was still a genuine joint account to which Regulation 27(1) should apply. It would be difficult to argue that she had effected a deprivation of capital leading to the imputation of notional capital under NA(AR) Regulation 25(1). The withdrawal was not by her of her funds and she would still have access to the entirety of the money reserved in the joint account should she need it. It is not her problem that the valuation rules are worded as they are.

It should be noted that the same problems relating to the valuation of joint interests translate into situations involving trusts where a beneficiary has an absolute right to capital.

ECA course: Part 10

In the next issue of ECA, the author will examine the valuation of jointly held capital (land and buildings), matters arising upon sale, the impact of 'behind title' third-party interests in property, resulting and constructive trusts, as well as proprietary estoppel.

David Coldrick is partner in charge of Wrigleys Solicitors' Sheffield office. He can be contacted on telephone: 0114 2675588 or via e-mail: david.coldrick@wrigleys.co.uk