Deprivation of capital

This article was originally written in August 2022 and updated in May 2024.

Most means-tested benefits have rules about the amount of income and capital the claimant can have. In addition to actual income and capital, rules exist to ‘deem’ a claimant to have ‘notional’ income or ‘notional’ capital in certain circumstances. This article focuses on notional capital and in particular the ‘deprivation’ rule. There are other circumstances in which the notional capital rule can be applied, e.g if a person fails to apply for capital or makes a payment of capital to a third party, but those rules differ between different benefits and are not covered in this article.

Actual or notional capital?

It is important to distinguish between decisions about ‘actual’ and ‘notional’ capital. If a claimant has had capital and then spends it, it’s up to them to show that they no longer have it — R(SB)38/85. For example, if a client previously had a large sum of money which they say they spent but they cannot provide evidence of where the money has gone, then the benefit authorities may decide that the person still has that actual capital and continue to take it into account when deciding their benefit entitlement. (Note, however, that caselaw has stated that the level of evidence required to prove the expenditure must be ‘proportionate’, especially if the expenditure took place some time ago — CIS/515/2006). This is different to a decision which applies a ‘notional’ amount of capital, which occurs when the benefit authority agrees that the client does not have actual capital, but they take the amount into account anyway, e.g. if they feel that the client has deliberately deprived themselves of that capital. Different rules apply to the treatment of ‘actual’ capital and ‘notional’ capital, so it is important to know exactly which type of decision has been made in order to challenge it effectively.

The capital value of a personal possession is usually ignored for working-age legacy benefits, but if the person had deliberately deprived themselves of capital when purchasing that possession, then it’s value is not ignored and the value of that possession is treated as actual capital¹. There may then also be notional capital as well, if the market value of the possession is less than the amount the client paid for it. But the notional capital figure does not increase when the value of the personal possession depreciates — R(IS)8/04

However, for UC and means-tested benefits for those over pension age all personal possessions are disregarded so the full amount of any deprivation would be classed as notional and not actual capital².

If a client disposes of their capital by lending their money to someone, the client may have a right to sue their borrower if the loan is not repaid. In such a case, the client may be classed as having actual capital in the form of a ‘chose in action’ (i.e. the legal right to sue if the debt is not repaid). There may also be an issue of notional capital (under the ‘deprivation’ rule) if the value of that ‘chose’ is less than the actual amount of the loan — CIS/3308/2008

The ‘deprivation’ rule

The relevant benefit provisions state³:

“A claimant shall be treated as possessing capital of which he has deprived himself for the purpose of securing entitlement to (relevant benefit) or increasing the amount of that benefit …”

It is important to note that (except for JSA and ESA), the rule only applies if the claimant’s intention was to secure or increase entitlement to that particular benefit. For example, if a client disposes of capital whilst on ESA but then claims UC later on, the deprivation rule can only apply if the DWP can show that the client’s intention was to secure or increase entitlement to UC, which may be difficult to do if the client had not claimed (nor was intending to claim) UC at the time the capital was disposed of.

Note also, that for IS, JSA and ESA, the deprivation rule does not apply to money from a personal injury which is placed in trust for the claimant or administered on the claimant’s behalf by the Courts.

More importantly, for UC and means-tested benefits for those over pension age, the deprivation rule does not apply if the claimant reduces or pays a debt which they owe or if they purchase goods/services which are ‘reasonable’ in their circumstances (see below)

Caselaw has shown that the word ‘deprive’ must be given its ordinary, everyday meaning and that a person has deprived themselves if “…as the result of his own act he ceases to possess that resource whether or not he becomes possessed of some other resource in its place.” — R(SB)40/85. This confirms that the deprivation rule can apply not only to capital which is given away, but also if a capital asset is converted into another asset which would attract a disregard under benefit rules. — R(IS)7/98 & R(IS)13/94. This can also apply if a client deliberately goes bankrupt in order to gain benefit (as capital has a nil value once a bankruptcy order is made, as the client cannot spend it without consent of the court) — CJSA/526/2009. Although for UC, it might be possible to argue that such action constitutes the paying of a debt, which is not classed as deprivation for UC (see below).

Similarly, a person can deprive themselves of an asset even if it has never been in their possession, e.g. a deliberate failure to cash a cheque — CSB/598/1987 or releasing someone from payment of a debt — CIS/1586/1997.

It can be seen therefore, that the operation of this rule could have a devastating effect on a claimant’s circumstances, resulting in a reduced rate of benefit or no entitlement at all. As the claimant also no longer has their actual capital, this can cause severe hardship as they can then be left without any form of financial support whatsoever.

Significant operative purpose

It is important to remember that the deprivation rule should not be applied automatically in all cases when a claimant has spent money. In order for the deprivation rule to apply, it must be shown that the claimant’s purpose in doing so was to secure or increase entitlement to benefit. The rule will apply even if the claimant had some other reason for spending the money, as long as the obtaining of benefit was a ‘significant operative purpose’ — R(SB)40/85.

If the obtaining of benefit was merely a natural consequence of the claimant’s actions, this will not be enough for DWP to say it was deprivation — it must be shown that there was a positive intention to secure benefit — R(SB)9/91.This involves an element of judgement on the part of a decision-maker and working out another person’s intentions is a difficult thing to do. Careful examination of the facts will be required, which usually involves asking the claimant to explain why the capital was spent in the way it was. Apart from UC and pension-age benefits (where it is not deprivation if the client pays a debt or purchases goods and service which are ‘reasonable’), the key factor is not necessarily whether the expenditure was ‘reasonable’, but more whether the spending was carried out with a significant operative purpose of obtaining or securing entitlement to benefit. Although it may naturally follow that the less ‘reasonable’ such expenditure is, the more likely that a deprivation decision will be made. (For an example of the difficulties in judgment this raises, see the contrasting cases of R(SB)9/91 and CIS/242/1993.)

Many factors may be relevant when determining whether the client had a ‘significant operative purpose’:

Timing

If a claim for benefit is made soon after disposal of a capital asset, then this would point more strongly towards an intention to secure entitlement to benefit. However, the fact that an asset may have been disposed of a long time before any claim to benefit, still does not prevent a finding of deliberate deprivation, as there is no time limit — R(IS)7/98 & CIS/264/1989.

In R(IS)7/07, a client disposed of capital whilst she was on JSA and a year later she became the partner of a client who was receiving IS. Notional capital was included in the IS claim, with the Judge finding that even though the deprivation had occured before the client became a partner on the IS claim, if it was done for the purpose of obtaining IS, then the deprivation rule could still apply. Contrast this with the NI case of DB v DFC (JSA) [2021] NICom 43, where the Commissioner decided that it was ‘inherently improbable’ that a person who spent their capital whilst on ESA had the necessary intention of securing entitlement to JSA more than a year later.

Subjective nature of the test

R(H)1/06 confirms that the test of whether a person has deliberately deprived themselves of capital is subjective, depending on the evidence about that particular claimant in question. Both this case and others (e.g. CIS/2641/2002) clarify that a client’s mental health difficulties will be relevant in determining whether they have an intention to deprive themselves of capital for the purpose of obtaining benefit. Other cases have re-iterated that it is the client’s individual circumstances which are to be taken into account — in CIS/1921/2012, the client stated he had spent his capital on securing fetish sexual services and the Judge held that “the reasonableness or prudence (or otherwise) of the expenditure in question is not the test”- what had to be determined was whether the securing of benefit was the client’s significant operative purpose or whether his purpose was something else, e.g. sexual gratification.

It can therefore be difficult to advise clients in advance about the potential effects of disposing of capital, as the client’s individual circumstances must be taken into account when considering the intention behind their expenditure.

Knowledge of the capital limits

There is some conflict as to the importance of a claimant’s knowledge of the capital limits. In R(SB)12/91, the Judge held that without knowledge of the capital limit, a claimant could not be caught by the deliberate deprivation rules. However, in R(SB)40/85 the Judge stated that “It is certainly possible for a person without knowledge of the details of the restriction to have the purpose of depriving himself of resources with a view to securing, or increasing the amount of, supplementary benefit.” In CE/1517/2016, the Judge held that in cases where the level of the client’s knowledge regarding the capital rules was not clear, then assumptions could be made, especially if there was no other credible explanation for the client’s expenditure.

Official advice

A case which raises an interesting argument over this issue can be found in CIS/621/1991. The claimant, who received IS, owned a property in which he lived with his wife and daughter but was in mortgage arrears and the building society were pressing for repossession. The claimant and his wife both had severe mobility problems and needed to move to a bungalow as they could no longer manage the stairs. The claimant decided to transfer ownership of the home to his daughter who remained living there and took over the mortgage. The claimant and his wife moved to a local authority bungalow. At the time of these arrangements, the claimant telephoned DWP who advised that his IS would end due to notional capital. Nonetheless, the claimant went ahead with the arrangements, as otherwise he would have lost the bungalow, his house would have been repossessed and his daughter made homeless. The Judge stated that the claimant could not have had an intention to secure entitlement to IS when transferring his property, as by that time he had already been told that his IS would end if he did so. The fact that he continued with that course of action regardless, showed that his intention was clearly not to secure IS, but to avoid the other more pressing problems of homelessness.

It is also arguable that if a client tells DWP what they plan to spend their capital on and are told that would not affect their benefit, then they cannot be held to have deprived themselves. As always, however, much depends on the individual facts of each case — CIS/307/1992 & CIS/1470/2012.

Giving money away

Most, if not all, cases involving gifts will be very fact specific — an inevitable consequence of the challenge in trying to determine what another person’s intentions are.

For example, in CIS/40/1989, the claimant received an inheritance and distributed the proceeds between her children, stating this had been the wish of her late father. As she felt under a moral obligation to carry out his wishes, she argued the disposal of capital was not for the purposes of securing entitlement to benefit. The DWP argued that she had an equal moral duty not to have to resort to public funds. The Judge considered the claimant’s actions did not include a significant operative purpose of claiming benefit and so allowed the appeal. However, in common with many decisions on this issue, the Judge reached the conclusion very much on the facts of the individual case and his acceptance of the claimant as “a witness of truth”, (although it is interesting and unusual that the Judge actually took direct evidence from the client in this case).

Contrast this with CIS/218/2005 where the claimant had given substantial sums of her divorce settlement to her two children, stating that she wished to compensate them for the loss of money they would otherwise have received had her marriage not come to an end. In this case, the Judge allowed her appeal on the basis that the tribunal had failed to fully consider the issue of significant operative purpose, but declined to substitute a decision. The case was referred back to tribunal with the Judge commenting that: “Questions of this kind turn entirely on an assessment of credibility.”

Paying off debts

For UC, PC and HB (SPC), disposing of capital for the purposes of reducing or paying a debt owed by the claimant is not classed as deprivation⁴. This applies to re-payment of any debt which the client owes.

For other legacy benefits, however, the position is not so clear-cut.

R(SB)12/91 establishes the principle that if a person has debts which are ‘immediately repayable’ then the deliberate deprivation rule cannot apply — “A person has to pay his debts. He has no choice in the matter and if he has no choice, then any divesting of capital resources in pursuance of the reduction or discharge of his indebtedness cannot be for the purpose of securing supplementary benefit or any increase thereof.” The Judge stressed, however, that this principle only applied to debts which were capable of enforcement in the courts. It would also not apply to debts which were not immediately repayable, such as the usual mortgage situation where interest and capital repayments were kept up, so if a person paid these prematurely then it would still be necessary to look at whether this was done for the purpose of securing entitlement to benefit.

Later decisions — Jones v SoS [2003] EWCA Civ 964 & [2015] AACR 39 — have re-confirmed that each case must be considered on its own merits and no hard or fast rules can be applied to re-payment of debts. So even if a person pays off a debt which is not ‘immediately repayable’ that does not necessarily mean that they have deprived themselves of capital. Similarly, if a person pays an ‘immediately repayable’ debt when the creditor was not actually pressing for repayment, then that could still be deprivation, depending on the client’s intention.

However, the payment of credit card debts was considered in CJSA/1425/2004 which also has had important implications in relation to the concept of ‘significant operative purpose.’(see above). The claimant paid off several credit card debts just prior to his claim for JSA. The Judge found that part of the claimant’s reason for doing this was to ensure entitlement to JSA. This would seem to lead to a finding that notional capital was to be considered but the Judge went on to state that: “If a claimant has mixed motives, the question whether the purpose of obtaining benefits is a significant operative purpose is to be determined by deciding whether it was reasonable for a claimant to act in the way that he did.”

Although the deprivation in this case was closely connected to the date of claim, the Judge held that it was reasonable for the client to pay off the full balance of the credit card debts in order to avoid incurring further interest charges — “In my judgment, the threat of having to make high interest payments is just as capable of making it reasonable to pay a debt as the threat of enforcement of a liability to repay.”

So whilst payment of any debt is definitely not deprivation for UC and pension-age benefits, the individual facts of each alleged debt will need to be examined in relation to determining deprivation for legacy benefits. For all benefits, however, the client must be able to evidence the existence of the debt, which may be tricky in cases where there is no formal record of the debt, e.g. those involving friends or family (see for example R(SB)12/91 & CE/1517/2016

Goods and services

For UC, PC and HB (SPC), purchasing goods or services if the expenditure was reasonable will not be classed as capital deprivation⁵.

For other legacy benefits, there is no similar express provision, although it is likely that if such expenditure was reasonable, the required intention to obtain benefit may not be made out anyway. Benefit authorities will usually accept ‘modest’ expenditure on essential items as not being deprivation, e.g. replacement of household furniture, purchasing clothes for children etc, although it becomes more tricky if the expenditure is on large items, e.g. buying a car, going on holiday etc. But caselaw suggests that it may be reasonable for long-term benefit claimants to want to spend a windfall on improving the quality of their lives — CIS/1775/2007

Tactics

Keep a record of all expenditure to prove the capital has gone.

Be prepared to explain the purpose of the expenditure and show how it was not done to retain/obtain entitlement to benefit, especially if the claim for benefit was made shortly after the expenditure.

Explain any personal circumstances where relevant, e.g.

• if the client has mental health problems/addictive behaviour
• whether they were unaware of the capital rules
• any relevant advice they may have received from the benefit authorities
• whether they would have spent their money in that way regardless of the benefit implications (e.g. if they felt they had some moral duty to do so)

Consider requesting a mandatory reconsideration/appeal against any unfavourable decision

If all the above fails, check whether the diminishing notional capital rule has been applied.

Case law

Upper Tribunal decisions made prior to January 2016 can be found on the ‘old’ Courts & Tribunals judiciary website, and decisions after that date are held on HMCTS’s UT (Admin Appeals Chamber) website. Note that it is expected that all decisions from April 2022 will eventually be published by the National Archives. Advisers may also find copies of case law decisions on the rightsnet website.

Fiona Seymour works in the Expert Advice Team at Citizens Advice.

The information in this article is correct as of the date of publication.

Unfortunately, we are unable to respond to comments left on the medium site — please contact expertadvicesupport@citizensadvice.org.uk if you wish to give feedback on an article.

Footnotes

(1) Sch 10 para 10 IS (Gen) Regs 1987; Sch 8 para 15 JSA Regs 1996; Sch 9 para 14 ESA Regs 2008; Sch 6 para 12 HB Regs 2006.

(2) Reg 46(2) UC Regs 2013; Sch V para 8 SPC Regs 2002; Sch 6 para 8 HB (SPC) Regs 2006

(3) Reg 51(1) IS (Gen) Regs 1987; Reg 113(1) JSA Reg 1996; Reg 115(1) ESA Regs 2008; Reg 49(1) HB Regs 2006; Reg 47(1) HB (SPC) Regs 2006; Reg 21(1) SPC Regs 2002; Reg 50(1) UC Regs 2013

(4) Reg 50(2)(a) UC Regs 2013; Reg 21(2)(a) SPC Regs 2002; Reg 47(2)(a) HB (SPC) Regs 2006

(5) Reg 50(2)(b) UC Regs 2013; Reg 21(2)(b) SPC Regs 2002; Reg 47(2)(b) HB (SPC) Regs 2006