Notional Capital and Deprivation

Philip Laidlow, Associate Solicitor - Eversheds

Introduction

The deliberate disposal of assets to avoid or reduce personal liability for charges for accommodation is the obvious planning technique, and often the first thought, of those about to, or who may in the future, enter care. However, assets deliberately and purposively disposed of can be added back by the local authority on a notional basis in making the financial assessment. This is one of a number of remedies available to the local authority. It is probably the most important remedy, particularly as the application of some of the other local authority remedies (such as recovery from the donee, the use of bankruptcy procedures, and the potential use of non-bankruptcy insolvency remedies) either require the local authority to have gone some way down the application of the notional capital deprivation procedures and/or have a parallel purposive element. This article looks at "deprivation". There is not a great deal of authority to refer to. What there is comes from income support cases, and to a lesser extent from supplementary benefit cases. This is likely to remain the situation. Income support has a defined route of appeal - to the Adjudication Officer and then onwards. There is nothing parallel to that in the local authority financial assessment regime. Questions of deprivation are only likely to be given a court hearing in resisting summary debt collection proceedings in the Magistrates Court brought by a local authority relying on deprivation, or conceivably through judicial review proceedings.

Notional Capital

Regulation 25 of the National Assistance (Assessment of Resources) Regulations is the one in point. "A resident may be treated as possessing actual capital of which he has deprived himself for the purpose of decreasing the amount that he may be liable to pay for his accommodation....". The inclusion of the word "may" should be noted in passing but not relied on. It does not introduce any sort of discretion requiring to be exercised on an objective or principled basis and capable of judicial review. It is there to recognise that the local authority is operating the system in the real world and that situations will exist where it is simply not worth the local authority relying on regulation 25 (1), perhaps because to do so would get the local authority nowhere, but generally because of a wider cost/benefit analysis.

If the local authority can make use of regulation 25 (1) then it can bring the capital in question back into the estate of its resident for financial assessment purposes; as notional capital. "Deprivation" is not a word with any precise legal meaning, and is not one with which comparisons can be found in tax law. IHT uses "disposition" and CGT uses "disposal". The main emphasis would seem to be on the purpose of the deprivation rather than on what might or might not be some precise legal mechanism or operation which could be called deprivation. Both a disposition and a disposal would usually be deprivation (putting purpose aside). On the contrary, deprivation, while invariably amounting to a disposal, will not always involve any disposition. Deprivation certainly has no comparison with the IHT concept of a transfer of value and does not require a net outflow from the estate. Obvious examples of deprivation are gifts, the creation of trusts, sales at undervalue. Less obvious are the conversion of property from one form to another e.g. cash to disregarded life products or disregarded antiques, highly extravagant spending (though it is not obvious that many local authorities take this point yet) or even the repayment of a bona fide debt if there is a flavour of preference about it.

Purpose

To bring capital back into the assessment as notional capital the local authority have to do more than identify something which they can call deprivation. They have to attach a purposive element to it, i.e. to minimise potential personal liability for accommodation. The burden of proof is on the local authority to the civil standard and in a sense is a shifting thing. One can imagine that certain arrangements or dealings which amount to deprivation will so obviously raise a purposive presumption as immediately to throw the burden of proof back on to the resident to justify why the action was taken.

In theory the purposive element is subjective to the resident. In practice there will have to be an objective element. The matter will often be examined in retrospect, sometimes at a time when input from the resident might be impossible, and certainly at a time when a resident might be reluctant to offer frank observations. Hence, the absence of direct evidence of purpose is going to have to be drawn from the apparent primary facts. In theory time is not a relevant consideration. The test is an open ended subjective one. In practice, where there is no clear evidence of purpose or no overwhelming inferences to be drawn, then time will be crucial. Clearly, the longer the period between the act of deprivation and it becoming an issue, the better. Where there is more than one purpose or more than one purpose can be inferred, then the phrase coined in respect of income support has been "significant operative purpose" i.e. the significant operative purpose of the deprivation has to be the planning against care fees. If other purposes can be shown such that even if the motive included minimising the exposure but was not its significant operative purpose, then the notional capital rule will not apply.

In summary, therefore in respect of disposals or transactions to which the deprivation/notional capital rule might apply there are broadly three answers which will skirt its application:

1. That the disposal occurred at a time when entry into care was simply not an issue and not on the horizon e.g., the house was put into a trust when both spouses were still alive at which time they made wills and EPA's and generally had a solicitors financial health check.

2. That there are other explanations such that no significant operative purpose can be shown e.g. the parent might have a moral or purely parental concern justifying the making available of their house to a child, perhaps a gift of the home to an adult child who has lived there long term, the placing of the home in trust for a handicapped child.

3. That time has gone by to such an extent that it is too late to raise relevant inferences e.g. the parent made a substantial cash gift four years ago.

Income support case law offers one or two observations on what might be purposive deprivation. Not all of it is greatly convincing. In the past significance has been attached to the knowledge of the claimant; a claimant with knowledge of the relevant financial limits has been off to a bad start. With the paranoia generated by financial journalists recently, the relevant financial limits are almost a matter of public record, and certainly now as well known as the inheritance tax nil rate band limit; hence knowledge is now probably unimportant. Personal circumstances have been found to be important, which in the context of the present regime puts emphasis on the state of health of anyone undertaking any transaction. Moral obligations to which the resident is subject have much relevance. One curious case involved a claimant notifying the benefits agency of an intention to undertake a transaction, which resulted in a benefits agency warning of the consequences of the intended deprivation. On the transaction being carried through, despite the warning, it was eventually held that as the transaction was carried through regardless and in despite of the warning that weighed heavily against finding a significant operative purpose.

Extent of the Deeming

It now seems to be generally accepted that the interaction of disregards and the deprivation test is as follows. If one deals with an asset which otherwise would be a disregard that dealing can nevertheless amount to deprivation if the relevant motive is shown. Of course, the disregard status might assist in countering the motive. If capital is brought back within the estate as notional capital because of deprivation then that notional capital can still take the benefit of the disregard status, if that is its then form. For example, in the context of a life interest and reversion trust if the reversioner passes on his reversionary interest with the necessary intent then that could be deprivation notwithstanding the disregarded status of the reversion. If the reversion were still a reversion at the time of financial assessment then no question would be raised. If though the life tenant had died so that the reversion had fallen in then potentially deprivation would apply.

What is interesting, is the extent of the deeming if notional capital is added back into the estate. If, for example, a person grants a reversionary lease in his home to his children, which is added back because of deprivation, does that reversionary lease fall back in as a reversion which is disregarded. There is no actual authority on the point, but probably the reversionary lease as notional capital would have to be deemed to have re-merged with the fag end freehold interest retained. Likewise, if a person settles his house on trust for self for life with capital interests to follow for his children, then the application of the deprivation provisions is not simply to add back notional capital being the children's reversions as disregards; in principle, the whole property would seem to be added back notwithstanding a personal life interest behind the trust.

Deeds of Variation

This is an old chestnut. Deeds of variation potentially do amount to deprivation. Albeit there is re-writing and the dressing up of the whole thing as the act of the deceased, the reality is a re-writing fiction only for IHT and CGT. Bounty is invariably provided by the person making the deed of variation. For confirmation of this look at the stamp duty certificate, which invariably is category L - which used to be the voluntary disposition head. That said, local authorities seem not to be alive to the point, though the benefits agency certainly are. Not all deeds of variation will be caught, even those done deliberately and within a risk time frame. Supplementary benefit authority does exist which found that a daughter taking on intestacies from her father and who spread the entitlement fairly generously around her family, was accepted to have been carrying out the wishes of her father. (Perhaps it should be added that it became apparent on cross examination that she was unaware of the effect her actions would have on her benefit entitlement). That was a case probably unique on its facts but does illustrate the point that the motive behind a deed of variation might potentially take it out of deprivation.

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