Feature

posted 15 Dec 2005 in Volume 11 Issue 1

Part 15: Protecting the interests of older clients

David Coldrick, partner at Wrigleys Solicitors, continues this ECA course, with a detailed examination of the disregard relating to the resident’s business interests.

Apart from the family home, the family business is likely to be one of the most sensitive areas of great concern to the resident. It may be a business that they or other relatives founded and its future might have a great impact upon other family members working within it or otherwise reliant upon it.

Disregard of the resident’s business for such period as may be reasonable in the circumstances: NA(AR) Regs1 Schedule 4 paragraph 5 NA(AR) Regs Schedule 4 paragraph 5 states that the following capital is disregarded: “Any assets which would

be disregarded under paragraph 6 of Schedule 10 to the Income Support Regulations (business assets) but as if in sub-paragraph (2) of that paragraph for the words from ‘the claim for income support’ to the end of that sub-paragraph there was substituted:

a) In the case of a resident other than a prospective resident the words ‘the accommodation was initially provided’;

b) In the case of a prospective resident, the words ‘the local authority began to assess his ability to pay for his accommodation under these regulations’.”

The IS(G) Regs2 Schedule 10 paragraph 6 (as amended to form part of the NA(AR) Regulations) states the detail of the disregard. It applies to:

1. “The assets of any business owned in whole or in part by the claimant and for the purposes of which he is engaged as a self-employed earner or, if he has ceased to be so engaged, for such period as may be reasonable in the circumstances to allow for disposal of any such assets.

2. “The assets of any business owned in whole or in part by the claimant where:

a) He is not engaged as a self employed earner in that business by reason of some disease or bodily or mental disablement;

b) He intends to become engaged (or, as the case may be, re-engaged) as a self-employed earner in that business as soon as he recovers or is able to become engaged, or re-engaged, in that business.

For a period of 26 weeks from the date on which… [The IS(G) Regulation continues: ‘the claim for income support is made, or is treated as made, or if it is unreasonable to expect him to become engaged or re-engaged in that business within that period for such longer period as is reasonable in the circumstances to enable him to become so engaged or re-engaged.’ The amended NA(AR) Regs version continues…]

a) In the case of a resident other than a prospective resident ‘the accommodation was initially provided’;

b) In the case of a prospective resident, ‘the local authority began to assess his ability to pay for his accommodation under these regulations’.

3. “[The rest of the IS(G) Regs version is deleted for NA(AR) Regs purposes.]”

A number of observations may be made as detailed below.

Only sole traders and unincorporated partnerships are covered by the disregard

The expression ‘the assets of any business’ suggests that shares in a company that own the assets of a business but are not themselves ‘the assets of any business’ are not covered by the disregard. On this reading the disregard appears to relate strictly to assets belonging to an unincorporated business. This appears to be reinforced by the use of the words ‘owned in whole or in part by the claimant and for the purposes of which he is engaged as a self-employed earner’.

A company director-shareholder or other shareholder may indirectly be a holder of certain business assets but that appears insufficient to trigger the disregard. The director or worker who owns shares will be an employee of the company and not self-employed. The disregard therefore only seems to apply to unincorporated sole traders and equity partners in such businesses. The apparent exclusion of incorporated business interests appears a rather arbitrary differentiation. Practically identical family businesses may be treated in quite different ways depending upon whether or not they are incorporated. Perhaps it is wrongly assumed that unincorporated businesses are smaller enterprises and more meritorious? In any event this situation might incline advisers to suggest that shares in a private company, as opposed to partnership interests, should be disposed within the family or to other co-owners in good time as part of appropriate long-term care planning. That is subject to tax issues and any other limitations imposed by the company’s articles of association and the nature of family relationships.

What are ‘assets of [a] business’?

Following R(SB) 4/85 business assets are those that are ‘part of the fund employed and risked in the business’ They can take any form be that land, buildings or other capital employed but they do not include cash, chattels or land available to the resident in their personal capacity. It only covers assets subject to business obligations.

What nature of ‘business’ amounts to being engaged as a self-employed earner?

Tax law differentiates between trading businesses and businesses that are primarily in the nature of an investment. It appears that a similar distinction exists in the application of the NA(AR) Regs. However, it is not so much the type of business involved but the nature of the work involved that is important. Is the resident self-employed as a result of the work or not? The case of R(FC) 2/92 indicated that unless a portfolio of properties was involved where the ‘business’ of rent collection, maintenance and other associated trading-type activities predominated the renting out a house or other property by a claimant would not trigger the disregard in respect of such property. A landlord is just that, a reaper of the rewards of property ownership as an investment rather than one who is self-employed in business. The logic for the disregard is perhaps partially revealed within this reasoning. The rules recognise it is positive for a person to be able to work and if they have a means to work they should not be deprived of it as a result of means-testing. But investment does not carry the same social positivity and therefore investments are not sacrosanct.

Period of the disregard

The disregard in sub-paragraph (1) is completely separate to, and wider than, the disregard in sub-paragraph (2).

The sub-paragraph (2) disregard is time limited to 26 weeks but the sub-paragraph (1) disregard is unlimited so long as the resident owns the assets of the business ‘for the purposes of which he is engaged as a self-employed earner’. This makes it far more potentially valuable than the Charging for Residential Accommodation Guide (CRAG) paragraph 6.029 would imply. Sub-paragraph (2) is arguably rather more prominently referred to than its more important sister regulation which is dealt with under the CRAG paragraph 6.031. The CRAG Paragraph 6.029 is listed under ‘Disregarded for 26 weeks or longer’ and refers to temporary residents looking to go back home and back to work. It states the disregard as covering: “Assets of any business owned (or part-owned) by the resident in which he was a self-employed worker, where he has stopped work due to some disease or disablement, but intends to take up work again when he is fit to do so (26 weeks from the date he took up residence in the residential accommodation, or longer where appropriate).”

The CRAG paragraph 6.031 under the heading ‘Disregarded for other periods’ states the sub-section (1) disregard as being applicable to: “Assets of a business owned (or part owned) by the resident in which he has ceased to be a self-employed worker, for a reasonable period to enable him to dispose of the business assets.”

For reasons that will be apparent, this is not an accurate reflection of the disregard. It ignores the possibility that a person in a care home might still be engaged in the business as a self-employed earner. It also appears to rather dismiss the potential complications that might delay a sale after a disengagement from it.

Engagement and disengagement of a resident as a self-employed earner

The above discussion might, at first, appear academic. Surely no resident in a care home, who might have substantial mental and physical disabilities, can be classified as ‘engaged as a self-employed earner’? There has been significant case law on the subject. In R(IS) 14/98 (later Chief Adjudication Officer v Kathleen Knight reported under R(IS) 14/98) the fact of a ‘sleeping partnership’, which left the resident entitled to a profit share or a share in the losses of the business, was agreed by the Commissioner to be sufficient to trigger the disregard. The logic appears to have been that a direct capital contribution with associated risks should be rewarded with the benefit of the disregard. The case was appealed and the Court of Appeal rejected the claim that a sleeping partnership was sufficient. Some practical engagement in the business was required.

The Decision Makers Guide for Income Support paragraph 29375 suggests that even half an hour a week is sufficient. Therefore, it seems that if a mentally capable business owner or co-owner can do something, perhaps even within the confines of the care home, towards the running of the enterprise, that business interest will be disregarded. This might be as simple as acting as a chair for certain regular minuted business-review meetings held on a Saturday morning or, for the more able, poring over the accounts, stock schedules and tax returns. The restrictive wording of the CRAG paragraph 6.031 is unhelpful as it makes assumptions about the mental or physical capacity of a resident in respect of their business interests when none should be made.

The CRAG paragraph 6.032 is equally unhelpful. Under the sub-heading ‘Meaning of reasonable period of disregard’ it states: “It is not necessary for a person to have taken steps to realise his share of a business in order to qualify for a disregard. But he should be required to show that it is his clear intention to realise the asset as soon as practicable.”

The CRAG paragraphs 6.034 and 6.035 also follow the same pattern: “If the person has taken steps to realise the capital value of the business, the value of the assets should be disregarded for the period considered to be reasonable, starting from the time the person ceased to be engaged in the business.”

“If the resident has no immediate intention of attempting to realise the business assets, the capital value of the assets should be taken into account.”

It is accepted that in most cases residents will have become disengaged from their businesses and they may therefore only have a relatively limited time before their business assets become assessable. The NA(AR) Regs Schedule 4 paragraph 5 disregard does not however suggest that for it to apply, a resident, who is still engaged in their business, should show any intention to realise that business as is required in the CRAG 6.032 and 6.035. So long as they are engaged in the business the disregard applies automatically. At best paragraphs 6.032 and 6.035 can be said to be unclear. At worst they are very misleading. They pre-suppose disengagement from the business and go some way to actively requiring it. They may be so seriously out of step with the underlying regulations as to be considered to be ultra vires and void.

Matters arising after a disengagement from the business

If the former self-employed business owner or part owner ceases to be engaged in the business, then the sub-section (1) disregard applies “for such period as may be reasonable in the circumstances to allow for disposal of any such assets”. The case of CIS 5481/1997 indicates that cessation of trading, which is usual when a sole trader enters care, is quite different to the dissolution of a trading business or a partnership when ‘engagement’ ends. Recovery of assets, ascertaining final liabilities and so forth may naturally be a lengthy process especially if the resident’s records were not in good order. As they may have been in decline for some time prior to entry into care this is not unusual. Without the return of some sort of administrative order a sale may not be practicable. The circumstances will dictate what a reasonable time would be.

The case of CIS 5481/1997 also suggested that a financially qualified person should sit on any tribunal related to disputes in a business context. This will be so they can see what steps have been taken and assess when actual disengagement from business took place. It might be quite different to the time when trading ceased. A person without a certain level of understanding of business law and practice might not appreciate this and hence they might assume that ‘it has all taken too long so the disregard must now be disapplied’. A local authority should bear this in mind in applying its own procedures.

In practice the application of CRAG Paragraph 6.033 should be limited to situations where the resident has, as a matter of fact, ceased trading with a view to becoming disengaged from the business. It states that: “The local authority should request:

Information which describes the nature of the business asset;
The resident’s estimate of the length of time necessary to realise the asset, or the resident’s share of the assets;
A statement of what, if any, steps have been taken to realise the assets, what these steps were and what is intended in the near future;
Any other relevant evidence, for example, the person’s health, receivership, liquidation, estate-agents confirmation of placing any property on the market.”

None of this is surprising or particularly objectionable assuming that the context of the requests is appropriate. It does show some recognition that the local authority must address the matter in detail and that a superficial assessment will not be adequate. Costs of sale, real and imputed, incumbrances and other deductions must be taken into account to enable a valuation to be arrived at.

This may amount to the end of the valuation process in cases where a business was operated by a sole trader. However, assets held in a partnership are jointly owned with the attendant complexities of the valuation of co-owned assets. This may work to the advantage of a resident especially in the situation where land and buildings are owned by them as part of their partnership share.

Treatment of joint business assets – excluding land and buildings

The NA(AR) Regulation 27 (with the author’s words in square brackets) states: “Where a resident and one or more other persons are beneficially entitled in possession to any capital asset [which includes, inter alia, business assets] except any interest in land:

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

A partner will be ‘beneficially entitled’ to a present share in the cash value of the business. 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 an impact upon valuations of jointly owned business assets (and associated land and buildings) where extensive marketing and an unhurried sale might give a higher valuation than one for a quick sale, which is implied by a requirement for a current market value. The allowance for a reasonable time implies that it would be appropriate to disregard the business assets for a period of intensive and extensive marketing. Much plant and machinery will have little value and ‘goodwill’ is less highly regarded than it once was given high levels of competition and the general disloyalty of customers. A valuation of general business assets is as much a specialist matter as the valuation of any premises and it will need to be effected professionally.

NA(AR) Regulation 27 is very similar to the widely criticised IS(G) Regulation

52. The CRAG paragraph which relates to this is 6.010. It 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.”

Many partnerships are not equal partnerships and this rule could have bizarre and unfair results in respect of shares in general business assets other than land. 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. Many partnership agreements will specify an unequal partnership share and it is submitted that this should neutralise the arbitrary impact of NA(AR) Regulation 27. From the case of Hourigan v Secretary of State of Work and Pensions [2002] EWCA Civ 1890 (R(IS) 4/03), it may also 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 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. It is submitted that there is no reason why similar situations to those described in respect of the application of IS(G) Regulation 52, particularly well-documented business relationships, should not be dealt with in the same way under NA(AR) Regulation 27.

The usual evidential issues will apply. Regrettably not all family businesses, particularly those with the added stress of an older partner in poor health, take paperwork too seriously. This should provide another encouragement for them to change their ways.

Treatment of joint business assets – land and buildings

Turning to partnership assets involving land NA(AR) Regulation 27(2) states: “Where a resident and one or more other persons are beneficially entitled in possession to any interest in land:

1. The resident’s share shall be valued at an amount equal to the price which his interest in possession would realise if it were sold to a willing buyer (taking into account the likely effect on that price of any incumbrance secured on the whole beneficial interest) less ten per cent and the amount of any incumbrance secured solely on the resident’s share of the whole beneficial interest;

2. The value of his interest so calculated shall be treated as if it were actual capital.”

The regulations attempt to secure a realistic market valuation for joint land and buildings as opposed to a theoretical one.

The CRAG paragraph 7.012 states: “Where a resident is a joint beneficial owner of property, that is, he has the right to receive some of the proceeds of sale, it is the resident’s interest in the property which is to be valued as capital, and not the property itself. The value of this interest is governed by:

1. The resident’s ability to re-assign the beneficial interest to somebody else;

2. There being a market, that is, the interest being such as to attract a willing buyer for the interest.”

The CRAG paragraph 7.013 states: “In most cases there is unlikely to be any legal impediment preventing a joint beneficial interest in a property being re-assigned. But the likelihood of there being a willing buyer will depend on the conditions in which the joint beneficial interest has arisen.”

The value required for jointly owned land and buildings is not expressly stated to be the ‘current market value’ as it is for capital held in the resident’s sole name. As the seller and purchaser are not assumed to be in the same hurry that they are assumed to be in when the current market value is in issue, this might, in situations not involving co-ownership, increase the capital value above a quick-sale value. But in co-ownership situations the fact of that co-ownership may kill off much of the likelihood of finding any willing buyer. If one is found they will usually only be prepared to buy the resident’s entitlement at a quick-sale price less a substantial discount. A formal valuation in line with the guidance issued in the ‘Adjudication Officer’s Guide’ for the Benefits Agency (AOG JSA/IS/35) should be obtained. The CRAG paragraph 7.014 reflects the guidance. It states: “Where an interest in a property is beneficially shared between relatives, the value of the resident’s interest will be heavily influenced by the possibility of a market among his fellow beneficiaries. If no other relative is willing to buy the resident’s interest, it is highly unlikely that any ‘outsider’ would be willing to buy into the property unless the financial advantages far outweighed the risks and limitations involved. The value of the interest, even to a willing buyer, could in such circumstances effectively be nil.

If the local authority is unsure about the resident’s share, or their valuation is disputed by the resident, again a professional valuation should be obtained.”

For ‘relatives’ and ‘beneficiaries’ perhaps also read ‘business partners’. There may be a small market not only for ‘family type’ reasons but as a result of rights of pre-emption and other restrictions upon transfer in the partnership deed. This will naturally limit the value of the resident’s share in business premises. The cases of Chief Adjudication Officer v Palfrey (1995) 139 SJLB and Wilkinson v Chief Adjudication Officer [2000] 2 FCR 82 C.A lead the author to believe that the purpose of the co-ownership will be important to the value given to the premises. In a trading business situation, sale will not usually be readily contemplated but similarly if a partner resigns the partnership deed may make it clear that there will be a division in some manner. So while the value may be reduced by the terms of the partnership agreement and the reluctance of the parties involved, they may be unwise to refuse to offer anything at all to the resident in the way of a ‘buy out proposal’. A sale might be forced by the resident, their carers or their creditors such as the local authority. Rarely will any valuation of a jointly owned interest in land or buildings be closed off to reasonable disputation. It is to be hoped that local authorities take account of the difficulties that family members may face upon a key business partner entering care.

Account should be taken of their need for a sustainable livelihood, as well as the resident’s obligation to meet the cost of care. Should the local authority prove difficult they should be requested to consider using the disregard of any premises occupied in whole or in part by a third party where the local authority consider it would be reasonable to disregard the value of those premises. See NA(AR) Regs Schedule 4 paragraph 18, which states that a local authority may disregard: “The value of any premises occupied in whole or in part by a third party where the local authority consider it would be reasonable to disregard the value of those premises.”

This disregard does not appear restricted to a dwelling and might be particularly useful in business situations. The local authority would need to exercise the power reasonably. If the result of failure to exercise it was the unemployment of a resident’s former business partners could that ever be considered to be ‘reasonable’?

Summary of the disregard of the resident’s business

This disregard has a potentially wider application than the CRAG would indicate. That is especially in the case of residents who have a reasonable degree of physical and mental health who are simply unable to look after themselves as they would like due to frailty. If they can still be reasonably engaged in the former family business then its value may be disregarded. If it cannot be then time spent upon the sale process should extend the disregard and where jointly owned assets, particularly land and buildings, are involved the usual principles of valuation may significantly reduce the value for assessment purposes.

References:

National Assistance (Assessment of Resources) Regulations 1992 (as amended);
Income Support (general) Regulations 1987 (as amended)

David Coldrick is partner in charge of the Sheffield office of Wrigleys Solicitors. He can be contacted at david.coldrick@wrigleys.co.uk