Feature

posted 4 Apr 2006 in Volume 11 Issue 3

ECA Course: Part 17
Protecting the interests of older people

The battle to help elderly clients, who have paid taxes and built up modest wealth, in protecting their assets was not made easier by the March 22 Budget. ECA will revisit the methodologies and the way ahead later in the year, but in the meantime the ECA course continues its in-depth coverage of disregards. DAVID COLDRICK, partner at Wrigleys Solicitors, this month examines disregards relating to property, interests in property and land, and personal possessions.

Assets that are disregarded are not taken into account in the local authority means-test. As such, they enable resources to be retained that may otherwise need to be expended upon the cost of care.

The disregard for the value of the right to receive any outstanding capital instalments: NA(AR) Regs Schedule 4 paragraph 13

This disregard is potentially relevant to, but not exclusively linked with the disregard relating to the surrender value of a policy of life insurance. The IS(G)Regs¹ Schedule 10 paragraph 16 is incorporated by reference and states the disregard as follows: “Where any payment of capital falls to be made by instalments, the value of the right to receive any outstanding instalments.”

The present value of the total amount owing to the resident is ignored. The detailed application of NA(AR)2 Regulation 16 is explained in the Charging for Residential Accommodation Guide (CRAG) paragraph 6.036. It reveals that an unexpectedly complex situation operates in practice (author’s words in square brackets):

“If the resident is entitled to capital which is payable by instalments, add together:

a) The total of the instalments at the time the resident first becomes liable to pay for his accommodation or, in the case of a temporary resident whom the local authority have decided not to charge, the first day on which the local authority decide to charge for the accommodation; and

b) The amount of other capital held by the resident.

If the total of a and b is over £20,000 [that is, the capital limit] treat the instalments as income. If it is £20,000 [that is, the capital limit] or less, treat each instalment as capital.”

This has an important potential application to the way in which investment bonds, or rather withdrawals from them, are treated.

This was examined briefly in the subsection of this series dealing with the application of NA(AR) Schedule 4 paragraph 13 disregard to policies of life insurance (part 16). The bonds are disregarded capital as is the value, if any, of the right to receive payments by way of return of capital by instalments. However, actual partial surrenders from such a bond, which are often received by residents and considered by them to be part of their ‘income’, may be treated as either capital or income for the purposes of the NA(AR) Regs means-test, depending upon the nature of the contract and the resident’s overall financial circumstances.

If a resident owns nothing other than an investment bond and that bond is worth £40,000, the capital value of the bond and any right to its repayment by instalment (if there is indeed such a right under the contract) are both disregarded, but if the amount of a and b (as per the CRAG example) exceeds £20,000, which it may if, for example, the whole bond will be cashed over a ten-year period, the individual partial surrender receipts of £333.33 per month will be treated as the resident’s income upon actual payment.

This will impact upon the income aspect of their financial assessment. However, most bonds only allow payments of up to five per cent per year for certain complex tax reasons.

Thus the timescale would be likely to be much longer and repayments much lower. At five per cent, the repayment on a £40,000 bond would be just £2,000 per year or £166.66 a month.

If a resident owns £8,000 in cash and a £10,000 investment bond, then the capital value of the bond and the right to its repayment by instalment (if there is indeed such a right under the contract) are both disregarded. Items a and b (as per the CRAG example) do not exceed the capital limit. A five per cent withdrawal of £500 per year or £41.66 per month will be treated as an addition to the resident’s capital and assessed accordingly. As the bond’s capital value is a disregarded asset and the £8,000 plus the repayment does not take the resident up to the lower capital limit of £12,250 their mean-test assessment should not be affected.

Capital disregards relating to future interests in any property including reversionary interests and the value of the right to receive any rent

The two disregards in NA(AR) Regs Schedule 4 paragraph 4 and Schedule 4 paragraph 15 do not at first appear to be linked together. However, a wide general interpretation is placed upon the former while there are also specific restrictions placed upon its scope. As a result, it is linked with the latter in the context of let property.

The disregard of the resident’s future interest in any property: Reversionary interests in any property and interests in land subjected to leases, tenancies and licences granted by third parties under NA(AR) Regs Schedule 4 paragraph 4

NA(AR) Regs Schedule 4 paragraph 4 states that the following is disregarded:

“Any future interest in property which would be disregarded under paragraph 5 of Schedule 10 to the Income Support Regulations (future interest in property other than in certain land or premises).”

IS(G)Regs Schedule 10 paragraph 5 states the detail of the disregard which covers: “Any future interest in property of any kind, other than land or premises in respect of which the claimant has granted a subsisting lease or tenancy, including sub-leases or sub tenancies.”

The CRAG paragraph 6.028 considers that this is a disregard of:

“Any capital resource which the resident has no rights to as yet, but which will come into his possession at a later date, for example, on reaching a certain age (reversionary interest).”

A disregard of capital in which a resident has a future interest might at first appear unnecessary. A capital receipt that lies in the future is not likely to be available to the resident. Capital that is not available to the resident is not properly assessable capital. For instance, if the will of a resident’s older brother would provide the resident with a large amount of money upon his death, this is not part of the resident’s assessable capital; it is the brother’s capital for as long as he lives. The resident’s interest lies in the future.

However, what if the brother is already dead? What if, apart from an intervening life interest given to the brother’s widow, the resident (or perhaps his estate if he is dead by then) will inherit the remaining capital? In that situation, the resident might well have something which, although it is a future interest, has a present value. The right to the eventual receipt of the capital sum, currently tied up in the will trust for the brother’s widow, might be sold to a third party. The importance of the disregard is in ignoring the present value of future interests in capital such as this.

Why should a future interest with a present value be disregarded? If the right to the future interest must be sold because it is part of a resident’s assessable capital it will probably have to be sold at a discount. That is to secure a reward for the risk taken by the purchaser. The risk might be that the widow in the above example lives to be aged 110, or even more. It will realise a smaller sum than the capital value would have when the resident finally obtains it. That future sum will not be disregarded when it is eventually received by the resident and will probably reduce the liability of a local authority to pay for care fees rather more than the smaller discounted sum. From the point of view of the local authority the disregard makes good financial sense although as ‘deferred gratification’ it has a negative impact upon its current cash flow.

From the point of view of the resident, depending upon the value involved, it might also significantly increase their future care choices and can be justified upon that basis.

The CRAG explanation of the NA(AR) Regs Schedule 4 paragraph 4 disregard is inadequate and misleading. The CRAG paragraph 6.028 only refers to ‘reversionary interests’. Previous to its amendment in 1995 the disregard referred to ‘any reversionary interest’ as opposed to ‘any future interest’. In the cases of Palfrey, CIS 85/1992 and CIS 615/1993 that expression was held to include a freehold or leasehold property subjected to a tenancy. This would allow a resident to obtain the benefit of the disregard just by the act of letting out their land or buildings. Following CIS 635/1994 the disregard might also be triggered by the resident creating an irrevocable licence.

Perhaps not surprisingly the wide interpretation given by the cases referred to was not considered to be within the spirit of the disregard by the authorities. As a result the subsequent alteration excluded the application of the disregard to reversionary interests, as defined in Palfrey et al, at least in the context of land or premises subjected to lettings by the resident. Regrettably the use of the expression ‘any future interest’ might also have created further confusion over exactly what the disregard now covers.

A disregarded reversionary interest within what might be thought of as the spirit of the original disregard was explained by the commissioners’ decision in R(SB) 3/86. A reversionary interest was, they thought, “something which does not afford any present enjoyment, but carries a vested or contingent right to enjoyment in the future”. But, while that definition might by its operation defeat avoidance by way of lettings (which generate a present enjoyment by way of rental), it is still rather ‘technical’. It does not clearly reflect the key to the disregard; that is, for the disregard to have any purpose there must be a future interest in capital that carries a present value. It is against that present value and not some esoteric future entitlement to which the disregard really applies. If this was not the case there would be no relevant available capital to assess and disregard. But readers should note the points made below relating to the creation by the resident of certain future interests under trusts.

It might be suggested that present wording of the disregard has created a means of engineering an asset so as to make it fall within the definition of a disregarded asset. Its exclusion of certain “subsisting lease[s] or tenanc[ies], including sub-leases or sub tenancies” implies that other such interests not so excluded are included within the disregard. The author submits that a natural reading of the expressions ‘reversionary interest’ or ‘any future interest’ would not include such things.

For example, is a freehold subjected to a lease really a future interest? The author thinks not. It is a present interest with a real present value, which happens to be subjected to a lease. It is still something that has a current value that can be disposed of possibly for a significant price. But the disregard, with its interpretation or misinterpretation, which has been condoned by amendment, turns it into something special without any rationale.

Arguably, the disregard remains ripe for the application of avoidance techniques. While often considered in the context of land and buildings, the disregard applies equally to ‘property of any kind’.

It is not restricted to land and buildings. It includes any future interest in any type of property. The expression ‘any capital resource’ in the reference to the disregard in the CRAG accurately reflects the scope of the disregard despite its defining it too narrowly to reversionary interests ‘proper’. But whatever the reader may feel about the state of the disregard, the CRAG should not provide such a narrow interpretation given the acceptance of the wider interpretation as a matter of law.

The disregard does not apply in cases involving ‘land or premises in respect of which the claimant has granted a subsisting lease or tenancy, including subleases or sub tenancies.’ But it may still apply if an irrevocable licence is granted instead. The exclusions are specific and do not include such arrangements.

If a third party subjects the property in question to a lease or tenancy, then the disregard will still apply. This opens up the possibility of a person transferring their freehold property to a third party who might even be their spouse or partner, who then subjects it to a long lease or tenancy at a peppercorn rent for another, such as their son or daughter, and then transfers it back to the original owner. There is no obvious reason why this should not create a neatly disregarded asset excepting the possible application of the notional capital rules contained within NA (AR) Regulation 25(1). This scenario might not work in the case of income support as the claimant unit includes both the husband and wife but might in the case of the NA(AR) Regs where the resident and their spouse are treated quite independently of each other.

Despite the reference in the CRAG paragraph 6.028 to the disregard applying to “any capital resource which the resident has no rights to as yet”, the regulation itself does not draw the resident into the equation. The future interest may, it seems, be anybody’s future interest. That is even if that was created by the resident. The disregard may possibly apply to the capital value of the future interest given by the resident to the remaindermen. Even if the foundation of the trust would normally lead to the imputation of notional capital, the disregard may help to neutralise that effect. But the contrary argument is that interests in capital with a mere future value for the resident or others do not fall within the disregard because such interests are not relevant. Thus, the disregard has no impact on a situation including a ‘self inflicted’ zero value situation. There is no precedent on this point.

The amended disregard remains an unhappy compromise with intrinsic scope for its use in care-fee planning strategies. It seems that only litigation will clarify its impact.

In summary, and by way of addition, the following points may be made:

Interests in capital with a mere future value and no present value for the residents may not be covered by the disregard. They do not need to be. They are not assessable capital simply because they are not capital that is available to the resident. Thus they do not need the benefit of a disregard;
The disregard protects the resident from the valuation of future interests in capital which might also have a present value for the resident such as the right to a reversionary interest in capital currently being held under a will trust for a third party or property subjected to a tenancy by a third party. It might also apply where irrevocable leases create a reversionary interest situation (as broadly defined) for the resident;
The disregard does not itself cover the present value of the right to receive any rent. This is sometimes disregarded under NA(AR) Regs Schedule 4 Paragraph 15. But if the resident owns the reversionary interest (as broadly defined) that other disregard does not disregard it either. That value may be large or small depending upon the rent payable;
The disregard does not cover the value of rentals in receipt. Rent that is paid to a resident is treated as capital for the purposes of the means-test and not income.

NA(AR) Regulation 22(4) states that, except in certain specified cases (words within the square brackets are the author’s): “Any income of a resident which is derived from capital [such as dividends, interest and rent] shall be treated as capital but only from the date on which it is normally due to be paid to him.” The reason is a practical one. It would be unfair to penalise a resident by imputing a steady stream of income from rental which, unlike a pension, for example, might be prone to uncertainty. The tenant may fail to pay or might delay payment. Thus it is more appropriate to take rent into account when it is received. In practice, it should be added that ‘due to be paid’ is synonymous with paid and cleared into the resident’s account. This methodology is also administratively simpler for local authorities.

The disregard of the value of the right to receive any rent except where the claimant has a reversionary interest in the property in respect of which rent is due: NA(AR) Regs Schedule 4 paragraph 15

The IS(G) Regs Schedule 10 paragraph 24 is incorporated by reference and disregards: “The value of the right to receive any rent except where the claimant has a reversionary interest in the property in respect of which rent is due.”

The capital value of the right to receive rentals is a disregarded asset if the resident does not have a reversionary interest in the let property.

If they do then it may be taken into account. The definition of ‘reversionary interest’ is complex and covered in more detail in the preceding sub-section covering NA(AR) Regs Schedule 4 paragraph 4.

Other disregarded capital

The disregard of arrears of specified payments of benefits and tax credits for up to 52 weeks: NA(AR) Regs Schedule 4 paragraph 6 and 6A

The cross referencing of regulations becomes a problem to the reader of this paragraph. It makes the disregard impossible to read through properly. It also appears to permit a few connective drafting errors and omissions, which are (fortunately) likely to be inconsequential in practice.

NA(AR) Regs Schedule 4 paragraph 6 states: “Any amount which would be disregarded under paragraph 7(1) in Schedule 10 to the Income Support Regulations (arrears of specified payments).”

The specified payments IN IS(G) Regs Schedule 10 paragraph 7 include those specified in NA(AR) Regs Schedule 3 paragraphs 4 to 6:

The mobility component of disability living allowance;
Any payments disregarded under the IS(G) Regs Schedule 9 paragraph 8 which covers “any mobility supplement or any payment intended to compensate for the non-payment of such a supplement”;
“If the resident is a temporary resident:

Any attendance allowance; or
The care component of any disability living allowance.”

They also appear to include those listed in IS(G)Regs 7(1)b but Schedule 4 paragraph 6(a) adds (and repeats) those further specified payments, namely:

“Any arrears of, or any concessionary payment to compensate for arrears, due to the non-payment of:

a) Working families’ tax credit under Section 128 of the Contributions and Benefits Act;

b) Disabled person’s tax credit under Section 129 of the Contributions and Benefits Act;

c) Child tax credit; or

d) Working tax credit.

Only for a period of 52 weeks from the date of the receipt of the arrears or of the concessionary payment.”

The 52-week limit of the disregard referred to in paragraph 6(a) in fact applies to the full list by virtue of the wording of IS(G) Regs Schedule 10 paragraph 7(1).

The disregard of insurance proceeds for loss or damage to home or contents for 26 weeks or for such period as is reasonable in the circumstances: NA(AR) Schedule 4 paragraph 7

The NA(AR) Schedule 4 paragraph 7 states the disregard applies to: “Any amount that would be disregarded under paragraph 8 or 9 of Schedule 10 to the Income Support Regulations (property repairs and amounts deposited with a housing association).”

IS(G) Regs Schedule 10 paragraph 8 states that the following is disregarded namely:

“Any sum:

a) Paid to the claimant in consequence of damage to, or loss of the home or any personal possession and intended for its repair or replacement; or

b) Acquired by the claimant (whether as a loan or otherwise) on the expressed condition that it is to be used for effecting essential repairs or improvements to the home;

c) And which is to be used for the intended purpose, for a period or 26 weeks from the date on which it was so paid or acquired, or such longer period as is reasonable in the circumstances, to enable the claimant to effect the repairs, replacement or improvements.”

The CRAG paragraph 6.029 refers to the disregard as relating to: “money acquired specifically for repairs to or replacement of the resident’s home or personal possessions, provided it is used for that purpose (26 weeks from the date the money was acquired, or longer where appropriate).”

Funded insured losses are not an exception to the general principal that all available cash counts as a resident’s assessable capital. But insurance monies from home and contents policies paying out in the event of fire, theft, accident or otherwise, are usually ignored for six months to a year in the case of mainstream income-related benefits. The length of time can depend upon the benefit paid and the claimant’s age. Thereafter, the amounts are treated as assessable capital.

A period of grace is granted to allow replacement items or repairs to be paid for with the insurance proceeds. While insurance money can usually be expended upon anything that a resident might need and is, as such, available to the resident from date of clearance of the cheque, that was not its purpose. Therefore, while no insurance company can ask for its money back if granted unconditionally it seems reasonable that if the item replaced by insurance is replaced, or is to be replaced, the insurance money should be ignored in the interim. But if it is not replaced within a reasonable time, the money retained is treated as available capital. Insurance paid out for items that are difficult to replace, but for which replacements are being actively sought, might reasonably be ignored for longer than the basic 26 weeks. If an older person is involved it might naturally take them or their agent longer to make purchase arrangements, which might also lead to the extension of the period of grace.

It should be noted that paragraph (b) may sometimes be superfluous because the money referred to within that subsection is not, by its nature, available to the resident to spend as they wish. It has to be used for the contracted purpose. If not, the insurance company or lender will require repayment. Simply because the 26-week time period might expire does not make it available to the resident to be spent as they see fit, thus making it properly assessable capital.

If the insurance money is paid out for the reconstruction of damaged premises then, if the resident was a sole occupier and does not live there, and is not likely to return there, it may be debateable as to whether or not such monies should be ignored for any period of time. The land may usually still be sold without reconstruction and the money may be kept. However, the six-month period is usually applied in practice and the issue of availability to the resident should still be addressed.

The case of R(IS) 6/95 may be relevant if a resident deliberately damages their home or chattels in such as way as to generate insurance proceeds. The disregard will not usually apply to such insurance monies. However, as that damage may have been as a result of mental illness, it is suggested that this exclusion may not always apply. Is a destructive act perpetrated by an older person as a result of a dementia-induced temper truly ‘deliberate’? It is doubtful.

In summary, it will be important that the individual circumstances of the insured resident and the contractual details of payments made are carefully considered in each case to assess whether or not the benefit of the disregard is required and whether or not it should be time limited.

The disregard of certain deposits with housing associations: NA(AR) Schedule 4 paragraph 7

IS(G) Regs Schedule 10 paragraph 9 to which NA(AR) Schedule 4 paragraph 7applies, states that the following is disregarded namely:

“Any sum:

a) Deposited with a housing association as defined in Section 189(1) of the Housing Act 1985 or Section 338(1) of the Housing (Scotland) Act 1987 as a condition of occupying the home;

b) Which was so deposited and which is to be used for the purchase of another home, for the period of 26 weeks or such longer period as is reasonable in the circumstances to complete the purchase.”

This disregard is most likely to apply to situations where a resident is in care pending re-entry into the community via a new dwelling provided by a housing association.

If the deposit made by the resident in advance of taking up occupation in their new home was not specifically disregarded, it might be treated as part of their available and properly assessable capital. This could defeat the government’s policy objective of ensuring that older people are, so far as possible, enabled to live independently within the community.

It is submitted, however, that the disregard is superfluous. The money held with the Housing Association is not available to the resident because it cannot be used by the resident, and it would not be appropriate to treat it as notional capital under NA(AR) Regulation 25(1) because the purpose of the deposit was to secure housing and not to reduce liability to pay care fees.

Possible application of the disregard in respect of other deposits

It is submitted that similar but non-disregarded deposits should be treated similarly because the entry into the relevant contractual commitment means.

That the amount deposited cannot be freely spent by the resident. It is therefore not available to them as properly assessable capital. It is also submitted that it would be unreasonable to apply the NA(AR)Regulation 25(1) rules on deprivation of capital to the making of such a deposit as argued above unless the deposit required was of an excessive amount with the intention of avoiding or reducing liability to pay current care fees.

The disregard for personal possessions: NA(AR) Schedule 4 Paragraph 8

NA(AR) Schedule 4 paragraph 8 states the disregard for: “Any personal possession except those that had or have been acquired by a resident with the intention of reducing his capital in order to satisfy a local authority that he was unable to pay for his accommodation at the standard rate or to reduce the rate at which he would otherwise be liable to pay for his accommodation.” ‘Personal possession’ is not defined.

The CRAG paragraph 6.028 refers to this disregard as one of: “Any personal possession such as paintings or antiques unless they were purchased with the intention of reducing capital for the purpose of reducing the local authority charge.”

It is suggested that the CRAG uses slightly unusual examples from the point of view of ordinary people entering care.

This is probably to make the point to local authorities that the expression is to be used generously and without any imputation of an upper value limit. This would seem to be a humane approach. An older person might, for instance, have been given or inherited some valuable jewellery or other heirloom. The forced disposal of such things could cause them great distress.

Also, the assessment of the value of personal possessions would carry the negative emotional and political baggage resulting from bad memories of the ‘man from the board’ who was charged with assessing resources, which included chattels, under the unemployment means-test during the economic depression of the 1930’s. The means-testing of personal possessions would appear to be politically unacceptable and this seems unlikely to change.

NA(AR) Regs and the CRAG are not very helpful in indicating the boundaries of what might be personal possessions. If a resident has a beneficial interest in an asset, something 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, then that beneficial interest will usually count as their capital. This would naturally include all personal possessions but for the benefit of the disregard.

The author suggests that ‘personal possession’ implies something in the form of a material object that is applicable to the living of a resident’s private life or their celebration of it.

The author’s definition only includes tactile items and excludes cash, investments, land, buildings, pure business assets, and the cash value of a resident’s legal rights. It will also include pets. As animals have limited rights and can be bought and sold they can be considered to be their owner’s personal possessions although most animal lovers would not view them other than as fellow companions in this world.

The hinterland between a personal possession and an investment is an interesting one. An art collection, motor cars, antiques, historical coins, stamps, Toby jugs, stuffed birds or Barbie dolls might amount to a good investment but, it is submitted, that is usually secondary to its application to the living of a person’s private life. A pile of gold bars in a resident’s safe might be very pretty but arguably has more akin with cash and investments than with the active material aspect of the living of that person’s private life.

The value of a resident’s cherished number plate (especially one minus a vehicle to put it on) might be treated either as an investment (in the broadest sense) or perhaps as a ‘personal adornment’. There is no case on the point.

A resident who is a natural hoarder of possessions may fair very well under the means-test, but there are probably limitations to this disregard as with others.

For most people that is one of space as much as one of general reasonableness. Unless the family home and its wider curtaillage can hold the hoard, then it might be possible for possessions stored elsewhere to cease to be or to never truly have been sufficiently personal or involved in the life of the resident, so as to fall within the definition of the disregard. But this is speculation and the author considers it a very slight risk.

It is not unheard of for a resident’s small fleet of relatively vintage cars to be garaged at the rear of certain care homes as a neat example of disregarded assets. It should also be noted that if an older person is in the process of entering long-term care, or is indeed living in it, they can give their personal possessions away with impunity. A disregarded asset, such as a valuable ring or other chattel, can be freely gifted because if it was kept by the resident it would still be disregarded and irrelevant to the new resident’s means-test.

The NA(AR) Regulation 25(1) rules on deprivation of capital, which are mirrored by the rule intrinsic to the specific disregard for possessions, do not apply in such situations.

If a resident sells personal possessions, which they can no longer store themselves, then the sale proceeds will be part of their assessable capital and therefore a pre-sale gifting strategy may be appropriate. There is a slight risk that items not actually gifted (or perhaps simply loaned) but which are stored away from the resident’s care home might cease to fall within the definition of their personal possessions as a result of that separation; but again, this is speculation and the author considers it a very slight risk.

Personal possessions can 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 intention can be proven (and the burden of proof is against the local authority asserting that the disregard should be dis-applied) the value that is counted is the current market value of the personal possession involved and not its 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, while only the current market value of the personal possession 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 CIS 494/1990).

This approach is adopted in the CRAG at paragraphs 6.065 and 6.066: “Where, for the purpose of avoiding or reducing the charge for accommodation, capital which would not have been disregarded has been used to acquire personal possessions, the current market value of those possessions should be taken into account as an actual resource. Their market value should not be disregarded under para 6.028.

“If the resident, in depriving himself of an actual resource, converted that resource into another actual resource of lesser value, he should be treated as notionally possessing the difference between the value of the new resource and the one which it replaced; for example, if the value of personal possessions acquired is less than the sum spent on them the difference should be treated as a notional resource.”

There is a useful worked example in the CRAG paragraph 6.063 specifically relating to personal possessions. It emphasises that intention is crucial, even more important than mere timing: “A resident has £18,000 in a building society. Two weeks before entering the home, he bought a car for £10,500, which he gave to his son on entering the home. If the resident knew he was to be admitted permanently to a residential care home at the time he bought the car, it would be reasonable to treat this as a deliberate deprivation.

However, all the circumstances must be taken into account. If he was admitted in an emergency and had no reason to think he would not be in a position to drive the car at the time he bought it, it would not be reasonable to treat it as deliberate deprivation.”

The disregard of a resident’s right to receive an annuity and its surrender value (if any): NA(AR) Schedule 4 paragraph 9

While the disregard is very specific in content it is useful to address it in the general context of the treatment of annuities under the NA(AR) Regs means-test.

NA(AR) Regs Schedule 4 paragraph 9 notes the following as disregarded capital:

“Any amount which would be disregarded under paragraph 11 of Schedule Ten to the Income Support Regulations (income under an annuity).”

IS(G) Regs Schedule 10 paragraph 11disregards: “The value of the right to receive any income under an annuity and the surrender value (if any) of such an annuity.”

The CRAG paragraph 8.013 suggests a working definition of an annuity that is not otherwise defined in the NA(AR) Regs or the IS(G) Regs. It states: “An annuity is a fixed sum payable at specified intervals (normally annually), in return for a premium payable either in instalments or as a single payment. The annuity income is payable for a specified period, such as the recipient’s lifetime.”

This definition is not entirely satisfactory. Some market-linked annuities can pay variable amounts as a result of the reintroduction of an element of risk, which is absent from the more traditional annuity situation. Some other annuities are index-linked.

Furthermore, annuities may pay an annual sum but that might be distributed by way of monthly instalments. It can, however, be correctly drawn from the CRAG definition that an annuity is essentially a repayment of capital.

That repayment comes with the benefit of a guarantee that the repayment will continue even if the total amount paid for the annuity is eventually repaid in full. This can work to the advantage of an older person who outlives the lifespan attributed to them by the annuity provider working from actuarial assessments.

Annuity purchase is often the result of a resident having considered their post-retirement income-related needs, which involves the purchase of an annuity from an accumulated fund upon retirement. It should be noted that an annuity need not be provided by an insurance company. It might, for instance, be granted by one individual to another in connection with a purchase of land. The purchaser may effectively gamble that the seller will die before the ordinary purchase price would have been paid by the instalments made up to death.

While it is primarily a repayment of capital to the annuitant/resident the annuity payments/repayments of the sum paid to the annuitant are treated as income under NA(AR) Reg 16(2).

That regulation simply states that: “Any payment received under an annuity shall be treated as income.”

The CRAG paragraph 6.037 simply repeats the NA(AR) Reg 16(2) but also adds a comment recommending a wary approach is necessary to avoid misunderstandings: “In cases of doubt councils should take their own legal advice.”

This income-type treatment is superficially quite reasonable. The annuity payments are only taken into account upon receipt by the resident and, as they are steady, guaranteed amounts with the characteristic of an income stream such as a pension, it is simplest to treat them as such. However, if annuity receipts were treated as capital repayments, the resident might choose to hover just below the capital limit, thus avoiding the annuity payment being taken into account in either the capital assessment or income assessment process. At the same time, they would be able to take full advantage of the regular receipt on a regular basis. That would create scope for a considerable cash flow, which would be immune from the NA(AR) Regs means-test. This possible form of asset protection, rather than any inherent reasonableness of the regulatory position, appears to dictate the reason why annuity payments are treated as a resident’s income.

The disregard contained within NA(AR) Schedule 4 paragraph 9 is important in that it disregards not the annuity receipt, which is treated as part of the resident’s assessable income, but the right of the resident to that stream of receipts.

Otherwise that might have a capital value if it could be sold or surrendered back to the annuity provider. If it could be sold it would be an assessable capital asset belonging to the resident. Therefore, it is a support to the overall scheme of the regulations. It may be argued that it helps create a compromise. The resident who has made provision for their post-retirement needs has that recognised in that the capital value of their annuity rights are ignored while only the value in receipt is taken into account. This may still facilitate some degree of choice and extra comforts for the resident.

Special rules also apply to annuities purchased as ‘structured settlements’ in personal-injury cases. The right to the stream of income from such an annuity is disregarded under NA(AR) Schedule 4 paragraph 9. The income from annuities purchased as structured settlements is disregarded in most circumstances.

Special rules also apply to annuity income from ‘home income plans’ for which see NA(AR) Regs Schedule 3 paragraph 12 and the CRAG 8.014 (a) and 8.025 to 8.030. Furthermore, Victoria Cross annuities and George Cross annuities are disregarded income under NA(AR) Regs Schedule 3 paragraph 8.

References

1. Income Support (general) Regulations 1987 (as amended)

2. National Assistance (Assessment of Resources) Regulations 1992 (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