3 properties and calculation of capital

The above analysis appears to have all bases covered and off the top of my head (which is less than sharp at this time of day) I can’t think of anything to add.

Unless the property with negative equity can be linked to either (or both) of those with positive equity by way of interconnecting terms and conditions, I can’t see any way in which there can be any encumbrance(s) to offset.  On that basis, my view is that the LA is correct.

One vague possibility: while letting out a single property is not a business, is there an argument that your client is in fact running a property business, which could have a global profit/loss? Business assets are generally disregarded. I guess this would heavily depend on the facts of how your client runs her affairs, http://www.rightsnet.org.uk/pdfs/rfc/2_92.pdf may be of help (or, rule it out).

There could be problems for an ESA claimant in this approach, re permitted work and earnings, or assets no longer being disregarded after 26 weeks of sickness.

dizzymare - 20 September 2011 03:11 PM

Regulations say -  The value of the capital which a person has in the UK shall be:

The current market or surrender value
Less 10% of the value (if there are costs of sale)
And less the amount of any incumbrance on the capital.

The actual reg says:

Capital which a claimant possesses in the United Kingdom is to be calculated at its current market or surrender value less—

(a)where there would be expenses attributable to sale, 10%; and

(b)the amount of any incumbrance secured on it.

The word calculated, I think, means calculated.  A calculation to be accurate must include the possibility of a negative value.

The regs also say

For the purposes of sections 1(3) and 4 of, and Part 2 of Schedule 1 to, the Act as it applies to an income-related allowance, the capital of a claimant to be taken into account is, subject to paragraph (2), to be the whole of the claimant’s capital calculated in accordance with this Part and any income treated as capital under regulation 112 (income treated as capital).

I read that as saying that you start with ‘the whole of the claimant’s capital’ and then it is ‘calculated in accordance with this Part’, in which case the total value (-10%) less the total of encumbrances is the calculation.

Interestingly, to me, I don’t know where there is any authority which says that you can’t have negative capital anyway.  What allows the LA to say that 3-5=0?

Gareth Morgan - 21 September 2011 09:06 AM

Interestingly, to me, I don’t know where there is any authority which says that you can’t have negative capital anyway.  What allows the LA to say that 3-5=0?

The principle that 3-5 = 0 has been long established (see, for example, R(SB) 2/83 and CH/4211/2007).  The only circumstances where “-2” can be the answer is where accounts held with the same bank (or similar) are subject to express terms and conditions that a credit in one account can be used to pay an account in debit (CJSA/3067/2009).

Edited to add case law.  Also see CH/0490/2008 which takes the same approach (i.e. 3-5 = 0).  In a different context, R(IS) 21/93 may also be of interest.

Hmm, R(SB)2/83 is looking at offsetting, distinguishes encumbrances from the generality of debts and doesn’t seem to consider 3-5=0

“14. Now, there is nothing to indicate in the above regulation that capital resources are anything other than the gross capital resources. Indeed, this would seem to be reinforced by paragraph (a)(ii) which makes specific allowance for a debt secured on a particular asset. Moreover, that asset might be a home and the home is itself disregarded in any event under regulation 6(1)(a)(i). It would seem from this that the draftsman had considered the question of indebtedness and had provided for deduction only in the circumstances mentioned in regulation 5(a)(ii).”

I don’t have C(H)4211/2007 and I cant find it on the tribunal’s site.  I’d be interested to read it.

Previous post updated.

Thank you all for your comments. mmm - I am still undecided on this issue -

Craven CAB - we have already won a tribunal arguing that this claimant was not running a business. This lady was previously in receipt of JSA (prior to becoming ill) and JC+ argued that she was not entitled as 3 properties constituted a business. We won that appeal (but in the meantime she became ill and claimed ESA C - so the capital/income was then not an issue)

Her capital is only just over the lower limit for CTB anyway, so it only actually makes a difference of £2 to the calculation of her capital (but who knows tomorrow I may be speaking to someone in a similar situation whose assetts are larger- so I need to explore this)

Gareth - I agree with the use of the word calculate - this implies to work out, compute or determine, and that this should include negative values.

However, I had already looked at R (SB) 2/83 which though sympathetic (.. it is an affront to commonsense to construe “capital resources” without regard to liabilities” still came to the conclusion that the calculation was gross resources and not net resources and therefore indebtedness other than “any outstanding debt or mortgage secured on the them” should be ignored

I have now looked at CH 4211 2007 - which deals with the issue of offsetting an overdraft against other funds, and using R (SB) 2/83 decided that it could not.

CH/490/2008 likewise deals with a similar situation (reducing capital by an overdraft)

I think it is clear that overdrafts and other debts cannot be ‘offset’ against capital to reduce the amount and that it should be a gross figure - but in the cases above (unless there are accounts with the same bank and express terms allow it) we are talking about unsecured debts.

In the case that I have, there are three properties, all with debts secured on them and I am still undecided if this means each assett, less each liability secured on it; or the total assetts less the total secured on it.

I cant find any caselaw which deals with this particular issue. I am going to check the mortgage documents to see if they are with the same lender (but from memory I think not) to see if I can link them.

Sadly, as our service is ending next week (due to withdrawal of funding) I cannot follow this through - but if I were still here (and there was a bit more at stake) I think this would be an interesting one to test at tribunal.

Any other thoughts - please let me know
thank you

Kevin, thank you for posting those decisions; that was very helpful.

Neither of them deal with ‘encumbrances’ which are the one area where ‘negative assets’ count.  We’re all agreed that you can’t offset other debts against capital but you can offset encumbrances against property; it’s a specific exception to the general rule.

None of the decisions therefore look at the issue of 3-5=0 at all; they all stop at the point of saying “you can’t carry out the -5 bit at all because we’re not looking at encumbrances”.

Once you get to a situation where the ‘-5’ is allowable then I can’t see any authority for saying that you don’t use the value as calculated which may include a negative value.

I completely understand the point you’re making Gareth but disagree that the wording of the legislation provides a basis on which to take into account multiple assets as a whole rather than each asset being separately valued (subject to the kind of exceptions the JSA case has identified and assuming I have understood correctly).

Taking two properties for simplicity….

Property A:  +3 (after deductions for 10% and any encumbrance)

Property B:  -5

In my view, none of the net balance caused by B can be offset against the “credit” on A UNLESS the two are contractually interconnected and/or the lender is the same AND the terms and conditions expressly provide for such an offset.  The fact that B causes a net “real world” worth of -2 is not in itself sufficient to create an encumbrance on A.  Albeit in different contexts, R(IS) 21/93 & R(SB) 27/84 may be of interest.  In the latter, there was a home and separately realisable land.  The Cmmr found that the total mortagage of both entities counted as an encumbrance but this was notably based on there being a single mortgage.

The two CDs cited in this post are available from the Tribunals’ website and Rightsnet respectively.

My simplistic analysis: the value of the claimant’s assets is what they would fetch her when selling to a willing buyer. If she were to sell up, she is not obliged to use the profits on property A to pay off the shortfall on property B (or any other outstanding debts for that matter), so why should the LA treat her as if she was?

As an aside: there is a distinction between this sort of aggregation of assets, and how the tax system sees profit/loss. For tax credits, your profit can be offset by your personal partner’s losses, or by your own losses from a previous year; the difference being, this “negative income” is an actual and unavoidable loss that has to be somehow made up during the period in question.

Kevin D - 21 September 2011 10:30 PM

Taking two properties for simplicity….

Property A:  +3 (after deductions for 10% and any encumbrance)

Property B:  -5

In my view, none of the net balance caused by B can be offset against the “credit” on A UNLESS the two are contractually interconnected and/or the lender is the same AND the terms and conditions expressly provide for such an offset.

Kevin, I won’t argue that point (although I think there might be a slightly different argument to be made) but I think there is a clear point which doesn’t require any offsetting.

If we have your values for property A and property B then we have to add the values together - common sense and regs tell us that.

+3 added to -5 gives the result of -2.

Unless there is some authority that says differently, in particular that there is some max(0,capital value) rule for individual items and totals then I can’t see any alternative.

Gareth Morgan - 22 September 2011 11:31 AM

Unless there is some authority that says differently, in particular that there is some max(0,capital value) rule for individual items and totals then I can’t see any alternative.

I guess this is one where we will have to agree to disagree.  In my view, all of the authorities quoted support the principle that one “entity” cannot be offset against another (barring the scenario in the JSA case).  In this context, my view is that separate mortgages would be treated in the same way as separate bank accounts.

One test I used to apply (“used to” because I do very little benefits work now) is “if ‘winning’ was everything at Tribunal, which party would I prefer to represent?”  In this case, definitely the LA / DWP, not withstanding the reality that “winning/losing” is meant to be an irrelevant concept within the determination of entitlement to Social Security benefits.

One thing we can agree on (I think!) is that it would make for an interesting case at the UT.

I should say that I haven’t had the chance to read any of the caselaw quoted above. 

However, I think there may be a difference between a debt, eg an overdraft, and an asset whose value is negative, eg a property with negative equity.  The difference being that, as noted by others, a debt cannot be offset unless in the exceptional circumstances mentioned. 

However, the value of a property in negative equity is not a debt in my view, not yet anyway.  Of course if he sold the property concerned he would then realise its negative equity as it were, and be in debt at that point.  But he hasn’t sold the property so he’s not at that point.  Instead, we’re at the point where we’re valuing his assets.

The law states “any encumbrance” which arguably includes an encumbrance which produces a negative value for the capital.  Otherwise it would say “any encumbrance except to the extent that it reduces the value of the capital to below zero” or words to that effect.  The only requirement is that the encumbrance is “secured” on the capital.  In the above example, where he sells the property which is in negative equity, he would then have a debt which is no longer “secured” on the capital (because he’s sold the capital).  Accordingly, the debt could not be offset against the credit of his other capital.  But he’s not at that point.

The equation I think is not 3 -5 = 0, but 3 + (-5) = -2.  I know what I mean anyway.  I think Gareth has a point.

Otherwise it would say “any encumbrance except to the extent that it reduces the value of the capital to below zero” or words to that effect.

If the regs specified a list of securities to be offset in presumably their full extent, such as mortgaged debts, then I would probably agree with you. But they just refer to an “encumbrance” [or “incumbrance”? perhaps both terms need to be searched in legal resources], which is a ‘term of art’ that, as far as I can tell, amounts to ‘an impediment to sale’. The purpose of the legislation seems to be to not penalise a claimant for owning an asset which has unavoidable costs which will be imposed before the asset can be realised. Unlike a mortgage shortfall, I don’t see how a “negative encumbrance” can really exist.

In R(IS) 21/93 cited by Kevin:

capital is subject to an incumbrance, if a creditor has a secured right to resort to it for (or to prevent disposal until) satisfaction of his debt in priority to any unsecured debtor. The amount of the debt at the date of claim can then be deducted from the capital. This is because the gross capital is not available for income support purposes.

It seems to me that whatever is secured against property B, the equity in property A is available for IS, and is in no way incumbranced by the negative equity of property B. Perhaps approaching the 2 - 5 point, the commisioner also noted a hypothetical mortgage deduction, stating that £20,000 - £80,000 would render the property “worthless”, without going on to speak of “negative” worth.

The DMG cites the above case at ch 29, 29625 when it simply says “A debt which is not secured is not deducted”. This is too laconic to be helpful to anyone, but it is at least arguable that the extent of a mortgage which exceeds the property value is not actually “secured” at all (though insolvency procedures in English law don’t seem to go this far).

All that said, I’d be interested to hear from someone with a legal take on the exact meaning of encumbrance in English/Welsh law. I can see it’s a point to be taken futher. I’m sorry for dizzymare and her clients that funding decisions may stop her from doing that.

Let me walk through my thinking here

Craven CAB welfare benefits - 25 September 2011 10:04 PM

Otherwise it would say “any encumbrance except to the extent that it reduces the value of the capital to below zero” or words to that effect.

If the regs specified a list of securities to be offset in presumably their full extent, such as mortgaged debts, then I would probably agree with you. But they just refer to an “encumbrance” [or “incumbrance”? perhaps both terms need to be searched in legal resources], which is a ‘term of art’ that, as far as I can tell, amounts to ‘an impediment to sale’. The purpose of the legislation seems to be to not penalise a claimant for owning an asset which has unavoidable costs which will be imposed before the asset can be realised. Unlike a mortgage shortfall, I don’t see how a “negative encumbrance” can really exist.

A negative incumbrance can’t exist, it has a positive value.  What can clearly exist is a negative value of an item, in an individual case, we’re all familiar with that.

The regs say

Capital which a claimant possesses in the United Kingdom is to be calculated at its current market or surrender value less—

(a)where there would be expenses attributable to sale, 10%; and

(b)the amount of any incumbrance secured on it.

Let’s take that step by step

Using our value is 3 and incumbrance is 5 by way of an example

3 =Current market or surrender value

Less

.3 (3 * .1 = where there would be expenses attributable to sale, 10%; )

5 (the amount of any incumbrance secured on it.)

Capital …is to be calculated …—
3 – ( .3 + 5 ) = - 2.3

There is nothing, that I can find, in the regs or caselaw that says the calculation, as laid down in the reg, is not to be carried out or the value used.

Craven CAB welfare benefits - 25 September 2011 10:04 PM

, the commisioner also noted a hypothetical mortgage deduction, stating that £20,000 - £80,000 would render the property “worthless”, without going on to speak of “negative” worth.

That would be the case if we were looking at a single property.  Sadly there’s no negative equivalent of tariff income so once there is no positive value of capital, in total, then a total negative value is irrelevant.

Craven CAB welfare benefits - 25 September 2011 10:04 PM

It seems to me that whatever is secured against property B, the equity in property A is available for IS, and is in no way incumbranced by the negative equity of property B.

There’s no question of property a being encumbranced nor is there is any question of offsetting at all.

Going back to the reg again, and assuming that we have two other properties valued at 20 and 10 respectively.

Capital which a claimant possesses in the United Kingdom is to be calculated at its current market or surrender value less—

(a) where there would be expenses attributable to sale, 10%; and

(b) the amount of any incumbrance secured on it.

There are two possible ways of arriving at the total capital value.
(a)  Total the capital and deduct the cost of sales and incumbrances
(b)  Total the individual net values

In (a) we get
Total gross value is 20+10+3 = 33
10% deduction for cost of sales = 3.3
Incumbrances = 5
33-(3.3+5) = 24.7 capital value

In (b) we get
Property 1 is 20-2 = 18
Property 2 is 10-1 = 9
Property 3 is 3 – ( .3 + 5 ) = -2.3
Total gross value is 18 + 9 – 2.3 = 24.7

NB. There is no offsetting involved at all here.  All we are doing is adding the capital values, one of which is negative, as required by the regulation.