A guide to deprivation of capital/income

A how to guide on the main issues

12 min readJul 9, 2019

A claimant can be treated as having capital or income which they do not possess. This is referred to as “notional” capital/income. This document outlines the main issues to consider in queries relating to deprivation of income/capital.

‘Actual’ versus ‘notional’ capital

It is important to distinguish between decisions about “actual” and “notional” capital. Actual capital may include capital, which the claimant states they have spent but cannot prove how they have spent it, for example, if they have no receipts or cannot remember what items were bought and when. The DWP regards the claimant as still possessing this capital.

Notional capital

Notional capital is capital which the claimant does not possess but is deemed to possess, on the grounds that they have deprived themselves of it, in order to retain or increase their entitlement to means tested benefits. This could include disposing of existing capital (by spending it, giving it away or selling assets at below market value); failing to apply for capital available to the claimant or payments of capital made to a third party (e.g. mortgage lender) on the claimant’s behalf.

Notional income

If a claimant deprives themselves of income, to which they would be entitled, such as by failing to apply for (or ceasing to claim) eligible benefits or other available income, or by working for less than the going rate (claimants under pension credit age only), they may be treated as having notional income.

It needs to be clear that the benefit or other income (this doesn’t apply to tax credits) would be available to the client (and at what rate). This should only apply if they deprive themselves of income in order to gain or retain entitlement to benefits for themselves or their family. (Ceasing to claim carers allowance for example to help a disabled person, who is not part of their family, to claim the severe disability premium would not be treated as deprivation of income — see CIS/15052/1996.)

If the claimant or their partner is over pension credit age, claiming pension credit(PC), universal credit (UC), income support (IS), income based jobseekers allowance (IBJSA) or income based employment support allowance (IBESA) and defers applying for a pension or annuity, they may be treated as having notional income (see CPC/3971/2012). A claimant under pension age will be not be regarded as having notional income if they fail to apply for an occupational pension that they may be entitled to.

‘Significant operative purpose’

The key factor is whether the intention in disposing of / depriving themselves of income / capital is to retain or increase entitlement to one or more means tested benefits. If a claimant sought advice from someone this may suggest that this was their intention. How long the claimant has been on benefits and whether they would be expected to understand the capital or income rules may be taken into account. Another factor to consider is whether they would have disposed of the capital (or income) in this way, had they not been on means tested benefits.

Commissioner Howell in R(H)1/06 stated that:

‘In my judgment there is no doubt that the test of whether a claimant is shown to have deprived himself of capital “for the purpose of” securing entitlement to … benefit so as to fall within the notional capital provisions … is a subjective one, depending on the evidence about the particular claimant in question.”……The test depends on “whether the securing of such entitlement is shown to have been a “significant operative purpose” of the claimant’s relevant actions in disposing of his capital. A person’s actions may well have more than one purpose, and the existence of one does not necessarily negate another. Thus in order for the regulation to apply the securing of benefit does not have to be the claimant’s sole, or even his predominant, motive or purpose; and it is not a “wholly and exclusively” test.’

Advising about the disposal of capital

It can be difficult to advise claimants about the potential effect of disposing of capital / income, as a decision maker will have to consider the claimant’s individual circumstances as well as their previous spending patterns, to ascertain their intention behind spending any of the capital / depriving themselves of income. By that time, the claimant may have already spent the money or made decisions about potential income.

The onus of proof is on the decision maker to prove that the claimant’s intention was to increase or retain their entitlement to benefits. A separate decision must be made in respect of each benefit, regarding the claimant’s “significant operative purpose.” Different decision makers may take a more lenient view than others of whether particular items of expenditure should be treated as notional capital or income. Also, a claimant could be found to have deprived themselves of capital or income with the intention of gaining entitlement to one means-tested benefit but not to others.

Using capital to pay debts or buy one’s home

For legacy benefits, there is a risk that if a claimant uses capital to pay off debts that they may be regarded as depriving themselves of capital. It is more likely to be acceptable to a decision maker if a claimant clears debts that are priority debts, immediately due or attract high rates of interest such as a mortgage, money owed to family members or possibly credit cards. If someone releases equity in their property, to pay off non-priority debts, this may be treated as notional capital.

The rules for universal credit and claimants over pension credit age are different, a claimant is not treated as having deprived themselves of capital if they pay off or reduce a debt. For universal credit a claimant will not be regarded as having deprived themselves of capital if they purchase goods and services if the purchase was reasonable.

Case law on this issue:

CIS/1775/2007 — may be helpful as it reinforces the fact that it is reasonable for long-term benefit claimants to want to spend a windfall (in this case an inheritance) on improving the quality of their lives.

R(SB)12/91 — covers repayment of legally enforceable debts & whether claimant should have been aware of the capital limits.

CJSA/1425/2004 — contains a comprehensive review of previous case law regarding deprivation of capital and supports the repayment of credit card debts to avoid incurring high interest rates.

Tactics for challenging decisions on deprivation

You need to ascertain how much actual and notional capital your client is considered to have (with separate decisions for each benefit).

Although the onus is initially on the decision maker to prove that increasing benefits was the claimant’s ‘significant operative purpose,’ the claimant may still have to show that they would have spent the money in this way if they were they not on benefits. Even if the claimant spent the money months before they claim means-tested benefits, if there is a causal link between disposing of the capital and claiming benefits, they could be considered to have notional capital. The longer the period between disposing of the capital and claiming benefit, the less likely it will be considered as “notional” capital, although there is no set period after which benefit could be claimed without raising the question of deprivation (see R(IS) 7/98). If a partner disposes of capital / income before they move in with a claimant, this could also be treated as “deprivation” of income / capital (see R(IS)7/07).

A claimant should be advised to keep receipts and a record of how they spend any of their capital (even if they lose entitlement to benefits — but may claim again in the future) as evidence to support their case. Any large items of expenditure: new furniture, family holiday, repayment of priority debts or credit card debts etc (which incur high interest charges) may be accepted as reasonable expenditure, which they would have made, had they not been receiving benefits.

Evidence of claimant’s lifestyle and spending patterns may be helpful to demonstrate that the client’s intention was not connected to their benefits entitlement. There may be mental health problems or addictive behaviour such as gambling, drug, alcohol or substance abuse, which may explain erratic and/or excessive spending patterns.

It may be difficult to argue that the claimant was ignorant of the benefit rules if they have been on a number of benefits for several years. However, it is easy for claimants to confuse the rules for non-means tested and means-tested benefits e.g. capital is ignored for DLA/PIP and contribution based Employment and Support Allowance (ESA) but not for income related ESA, Income Support or HB.

If you give written advice to the client and they still feel compelled to dispose of capital e.g. by clearing their mortgage, they could use the letter as evidence that they were aware of the implications of their actions, but still felt compelled to clear the mortgage debt. (However, we can’t guarantee this would work!).

It is always worth a claimant challenging a negative decision on deprivation. An independent tribunal may take a different view of a claimants circumstances than the DWP/local authority decision maker. A claimant should, if possible, always attend their appeal to give evidence directly to the tribunal.

Case law summary on deprivation

R(H)1/06 — concerned a claimant with schizophrenia, who was considered to have deprived himself of capital of over £68,000. The Commissioner held that the relevant test should be whether his “significant operative purpose” had been to secure benefits entitlement, regardless of whether he had spent the money prudently.

R(SB)12/91 — covers repayment of legally enforceable debts & whether claimant should have been aware of the capital limits.

CJSA/1425/2004 — contains a comprehensive review of previous case law regarding deprivation of capital and supports the repayment of credit card debts to avoid incurring high interest rates.

R(IS)7/98 — relates to claimant having “sheltered” her assets in an investment bond, with a future surrender value. Stresses that there is no “safe” period, after which “deprivation of capital” would not be considered.

R(IS)7/07 — relates to a subsequent partner’s capital being taken into account.

CPC/3971/2012 — [2014] UKUT 246 (AAC) — relates to a 63 year old PC claimant, who had elected to draw his personal pension at age 65 but could have opted to draw an income from it from the age of 55, and was therefore held to have notional income.

The following is some other general case law regarding deprivation of capital, which you may find useful:

CIS/621/1991 — concerns a claimant who still disposed of capital, despite having been advised of the potential effect on their Income Support.

CIS/2540/2004 — concerns whether finding of appeal tribunal that claimant is to be treated as having notional capital is binding in relation to a subsequent claim.

CIS/218/2005 — concerned gifts of capital to claimant’s daughters. Also stresses that decision maker must consider the subjective intention of the claimant and not just the reasonableness and prudence of their actions.

CIS/1366/2008 — concerned misleading advice from DWP, which led to claimant spending excess capital, in the belief he would then requalify for benefit.

CIS/3308/2008 — concerned a loan / gift of £40,000 made to claimant’s homeless daughter (who had a drug problem) and whether it was notional or actual capital.

[2010] AACR 3; CJSA/526/2009 — concerns bankruptcy and held that once a bankruptcy order is in force, a claimant’s assets should either be treated as not their capital at all or be valued at nil for benefit purposes as s/he is prohibited from dealing with them without the consent of the court. However, a claimant might deprive themselves of capital if they submit to a bankruptcy order or delay its annulment for the purpose of securing entitlement to benefits.

CIS/1213/2011- WR v SSWP [2012] UKUT 127 (AAC) — considers the difference between “actual” and “notional” capital.

CIS/1921/2012 — KW v SSWP [2012] UKUT 350 (AAC) concerned a claimant with possible mental health issues, who stated he had disposed of most of a £40,000 inheritance by spending £40 to £100 per day on fetish sexual services. The Judge stressed that the reasonableness or prudence of the expenditure was irrelevant; it was the claimant’s “significant operative purpose” which had to be determined. Judge also noted that these payments are likely to be cash transactions and thus claimant may not be able to provide documentary evidence of the expenditure.

CIS/1470/2012 — LH v SSWP [2014] UKUT 60 (AAC) — use of endowment policy to repay debts and whether client acted on the “advice” of a DWP officer.

CIS/4315/2012 — [2015] UKUT 51 (AAC) — concerned a claimant, who had withdrawn £7,000 to repay a loan to her ex-partner, on the same day she was visited by a DWP compliance officer (who would have explained the capital rules to her). However, she was held not to have notional capital (and the debt to have been immediately repayable) as there was evidence that the ex-partner’s working hours had reduced and he needed the money to repay his own debts.

CIS/4086/2014 — [2015] UKUT 85 (AAC) — concerned a claimant, who had mortgaged his property and given the capital to his sons to set up in business, with them making the mortgage repayments on his behalf. The Judge rejected the claimant’s contention that he had never had beneficial ownership of the capital (and thus could not have notional capital), since he had been holding the money in a purpose (“Quistclose”) trust for his sons. However, the Judge remitted the appeal as the Tribunal had failed to make findings of fact regarding the client’s “operative purpose” in giving his sons the capital.

CH/4640/2014 — [2016] UKUT 175 (AAC) — concerned the proceeds of the former marital home being held by a solicitor, pending agreement as to how the money should be split. Judge held that the valuation of the claimant’s share of the proceeds may be minimal until agreement is reached; also, the decision maker should allow sufficient time for the claimant to try to reach an agreement before they apply to the courts and until then, they should not be deemed to have notional capital (for failing to apply for the capital).

CE/1912/2016 — [2017] UKUT 333 (AAC) — concerned over £50,000 in a fixed rate bond, which the claimant had “ring-fenced” to pay pending court costs. Judge held that once the asset was part of the claimant’s capital, he had beneficial ownership of it and could spend it as he wished, even though he had sensibly set it aside to meet his court costs liability. It could not be considered to be held in trust and thus counted as his capital.

BL v SSWP (SPC) [2018] UKUT 4 (AAC) — CPC/384/2017 — in 2001 the claimant had “drawn down” a personal pension and arranged for maintenance payments to be made directly to his wife, under a separation agreement originally in place from 1994 but unpaid until 2001. The UT decided he was deemed to possess the income as he “retained practical control over the money.” Also, his situation had moved on since he made the separation agreement (he’d retired, been made bankrupt and moved back into the marital home), so by the time he drew down the pension money, he was not under a certain and immediate obligation to pay that money to his wife.

MW v Leeds City Council [2018] UKUT 319 (AAC) — CH/1718/2017 — the claimant had been found by a FtT to have notional capital after giving money to her children including allegedly to clear a debt to her daughter. On later reclaiming HB she stated she had spent money on gambling (and provided medical evidence of treatment for compulsive gambling) and additionally that the £80,000 had been given to a daughter to keep for her and that it had been paid back to her for living costs when she had lost money gambling. The FtT decided that despite the new evidence, it couldn’t disturb the deprivation of capital decision of the earlier FtT. However, The UT Judge held that a new decision made in respect of a different period, whether on supersession or a new claim, need not perpetuate any error made in an earlier decision in respect of an earlier period.

LP v SSWP [2018] UKUT 389 (AAC) — CE/729/2018 — the UT Judge held that while it was for the claimant to explain how the capital had been disposed of — with such supporting evidence as could reasonably be required — once that was accepted, the burden shifts back to the Secretary of State in a supersession case, to prove whether it was with the purpose of securing or increasing benefits entitlement. The FtT had misdirected itself in putting the onus on the claimant to prove and provide a ‘satisfactory explanation’.

All the above should be available on the HM Courts & Tribunals Service website at: http://www.osscsc.gov.uk/Aspx/default.aspx or for decisions since January 2016 at https://www.gov.uk/administrative-appeals-tribunal-decisions or on the Rightsnet website, together with several more which may be relevant to your client.

Legislation

IS (General) Regs 1987, Reg 51 IS (Gen) Regs 1987, Reg 42

JSA Regs 1996, Reg 113 JSA Regs 1996, Reg 105

ESA Regs 2008, Reg 115 ESA Regs 2008, Reg 106

HB Regs 2006, Reg 49 HB Regs 2006, Reg 42

CTB Regs 2006, Reg 39 CTB Regs 2006, Reg 32

UC Regs 2013, Reg 50 UC Regs 2013, Reg 60 &74

SPC Regs 2002, Reg 21 SPC Regs 2002, Reg 18

HB (SPC) Regs 2006, Reg 47 HB (SPC) 2006, Reg 41

CTB (SPC) Regs 2006, Reg 37 CTB (SPC) Regs 2006, Reg 31

Also see CPAG Welfare Benefits Handbook 2019/2020 pp. 129/130, 145–147, 450–453, 481/482, 501–506 and 524/525.

Rachel Ingleby works in the Welfare Benefits Expert Advice Team at Citizens Advice.