IN THE UPPER TRIBUNAL	Case No. CIS/3386/2014 and CIS/4086/2014  
ADMINISTRATIVE APPEALS CHAMBER

Before Judge of the Upper Tribunal Miss E. Ovey

Decision:  The decision of the First-tier Tribunal given on 30th April 2014 contained an error on a point of law.  Accordingly, I allow the claimant’s appeal and I set aside the tribunal’s decision.  In exercise of the power given by s.12(2)(b) of the Tribunals, Courts and Enforcement Act 2007 I remit the case to the First-tier Tribunal.

REASONS FOR DECISION

Preliminary

1.	The claimant claimed and was awarded income support from 5th April 2007.  It appears that he had previously been in receipt of income support for the period 24th September 2003 to 1st March 2007.  In 2012 the Department for Work and Pensions became aware that on 1st December 2006 the claimant had mortgaged his property and had received an advance originally believed to be in the sum of £39,433.25.  Very shortly thereafter the claimant paid the proceeds of the advance to his three sons.  As a result of the discovery of those facts:

(1)	on 11th January 2013 the decision maker decided that the claimant was to be treated as having the capital raised by the mortgage on the ground that by giving it to his sons he had deprived himself of it for the purposes of reg. 51 of the Income Support (General) Regulations 1987, S.I. 1987 No. 1967;

(2)	on 14th March 2013 the decision maker decided that as a result the claimant had been overpaid a sum of £33,118.40 in respect of income support. 

2.	The claimant appealed against both those decisions.  Further documents were produced from which it became clear that the original advance was in the sum of £70,000.  As a result, the amount of the overpayment was recalculated as being £51,162.  The tribunal hearing the appeal against the overpayment decision was requested to substitute the new amount.

3.	At the hearing on 30th April 2014 the tribunal decided that:

(1)	the appeal against the decision on 11th January 2013 was dismissed.  The claimant was to be treated as having capital in excess of £16,000 from 1st December 2006;

(2)	the appeal against the decision on 14th March 2013 was dismissed.  This was subject to a provision relating to the recalculation of the amount of the overpayment in the light of a capital repayment made on 7th September 2010.

4.	The appeal before me in CIS/3386/2014 is the claimant’s appeal against the tribunal’s decision that he was to be treated as having capital in excess of £16,000.  That appeal is supported by the Secretary of State, who invites me to set aside the tribunal’s decision and to remit the case for hearing by a differently constituted tribunal.

5.	The appeal before me in CIS/4086/2014 is the claimant’s appeal against the tribunal’s decision on overpayment.  The Secretary of State submits that the outcome of the appeal in CIS/3386/2014 will have a direct bearing on the outcome of the appeal in CIS/4086/2014 and should be decided first.  He then invites me, if I accede to his submission in the first case, to remit the overpayment case also.

6.	For the reasons which follow, I accept the Secretary of State’s submissions in both appeals.

The facts in more detail

7.	Although there was initially a degree of confusion about the details of the mortgage, it is now clear that on 1st December 2006 the claimant mortgaged his property to Abbey National Plc (now Santander) to secure an advance of £70,000.  The claimant’s bank statement for December 2006 shows that there was a payment in of £69,976.50, perhaps by cheque, on 4th December 2006 and a payment out of £66,520 on 13th December 2006 by way of CHAPS transfer under a reference which appears to include “Global solicitor”.

8.	The papers before me include statements by the claimant and his three sons which strongly suggest that one of the sons wished to acquire and run a newsagent’s business, possibly with support from the other sons, and the three sons together persuaded their father to mortgage his property to raise the purchase price of the business.  Not surprisingly, the idea was that as between them and their father they would be responsible for repayment of the advance and for meeting the monthly payments.  The claimant’s wife was supportive of the idea.

9.	The sons did indeed provide their father with funds from which to pay the mortgage, but unhappily the business was unsuccessful and eventually was disposed of at a significant loss.  The sons, however, continue to recognise their responsibility for that state of affairs and the claimant’s property has recently been transferred into the joint names of himself and his sons.  The transfer was with the consent of Santander given, I think, on terms that that the sons are now liable directly to the lender for the mortgage payments.

10.	There is also material which suggests that the mortgage was partly redeemed on 2010, when a capital repayment of £20,000 was made and the terms and conditions of the mortgage were changed.  It appears that the property, and the mortgage, may in fact have been in the names of the claimant and his wife.  It does seem clear, however, that until the recent transfer the sons were not registered proprietors of the property or borrowers under the mortgage. 

11.	It appears from the Secretary of State’s submissions on these appeals that the facts I have summarised in paragraph 8 and 9 above are not disputed.  The Department’s stance before the tribunal was, in effect, that even if all of that was correct, the claimant acquired capital of £70,000 which would have affected his entitlement to income support if he had retained it and he is to be treated as having that capital by virtue of the notional capital provisions of reg. 51, subject to the effect of the diminishing notional capital rule in reg. 51A.

The tribunal’s decision

12.	In the statement of reasons dated 30th May 2014, the tribunal said:

“The central issues for determination by the Tribunal [are] whether the Appellant acquired capital in this case £70,000, whether he had beneficial ownership in that capital and if so, whether he had deprived himself of it.”

13.	That is a convenient summary of the position.  Entitlement to income support depends, of course, on whether a claimant’s financial resources, calculated in accordance with the Income Support Regulations, fall below the specified amount relevant to that person.  Reg. 46 of the Regulations requires the whole of a claimant’s capital to be taken into account, subject to the specific disregards set out in Schedule 10 to the Regulations.  (It is not suggested that Schedule 10 has any relevance here.)  It is well established, however, that the capital must belong to the claimant beneficially before it can be taken into account; that is to say, if a claimant happens to hold property on trust for another person, that property will not be treated as part of the claimant’s capital resources.

14.	If a claimant has at some point held capital which he owned beneficially but no longer holds it, the question arises whether he is nevertheless to be treated as still having that capital by virtue of reg. 51.  So far as material, reg. 51 provides:

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

Clearly, therefore, the purpose test in reg. 51(1) must be satisfied before the regulation applies.

15.	In a submission dated 31st March 2014, the claimant’s solicitors argued:

“[The claimant] had no intention to deprive himself of capital as it is clear that the intention was simply to create a trust where money was transferred to his sons with the sole purpose of furthering their business endeavours.  On this basis, it is submitted that the principle laid down in Barclays Bank Ltd. v.  Quistclose Investments Ltd. [1970] A.C. 567 should apply and that the money transferred to [the claimant’s] account for the specific purpose of paying towards the mortgage should be said to have been held on trust in favour of his sons until that specific purpose had been carried out.

It is clear from the statements that it was always their intention to pay the money back to the mortgagor which indicates that [the claimant] set out to create a trust.  It is further submitted that each payment of this nature in relation to each month should be impressed with this type of trust.  Therefore, it is submitted that none of the monthly payments formed part of [the claimant’s] resources and as such should not be treated as an income available to him …”

16.	As to that argument, the tribunal said in paragraph 12 of the statement of reasons that it was not concerned with the treatment of the payments received from the sons towards the mortgage.  That is plainly correct.  The Secretary of State put his case on the basis that the claimant had acquired capital from the lender and had then disposed of that capital.

17.	The tribunal went on to deal with the three central issues identified in paragraph 9 of the statement of reasons as follows:

“13.	In this case there is no dispute that the Appellant’s capital in [the property] fell to be disregarded under Schedule 10 to the 1987 IS Regulations.  In this case however part of that capital asset has been liquidated by the Appellant when he obtained a mortgage on the property of £70,000 in 2006.  He was perfectly entitled to do this and to dispose of that asset in such way as he thought fit.  However, the Tribunal accepts that those actions may impact on his entitlement to IS.  This tribunal had to determine whether the Appellant then became beneficially entitled to that sum.  The Tribunal is satisfied that he was the beneficial owner of that sum and that in giving that sum of cash to his sons by way of a loan or gift he deprived himself of it and was to be treated as possessing capital of £70,000.”

18.	As to the overpayment appeal, the tribunal said simply that the claimant accepted that if it determined the central issues as it had done, there was a consequent overpayment which was recoverable from him.

The appeal in CIS/3386/2014

19.	In the application for permission to appeal dated 17th June 2014, the claimants’ solicitors said:

“The appellant’s argument was that he did not have a beneficial interest in the capital, but rather raised it for the specific purpose of assisting his sons to further their business interests, and hence created a purpose trust in favour of his sons, for which he acted as trustee, following the principle laid down in the Quistclose case.  The Tribunal has not addressed this issue in the statement of reasons.”

Permission to appeal was granted by the Tribunal Judge on 25th June 2014.

20.	The matter then came before Judge Lane for directions.  In her observations dated 7th October 2014, she pointed out that in her view two issues arose:

(1)	the issue identified by the claimant’s solicitors, that the First-tier Tribunal had failed to address their Quistclose submission;

(2)	secondly, that the tribunal did not address the purpose element of reg. 51.

21.	In his submission on CIS/3386/2014, the Secretary of State rightly observes that there appears to have been some confusion about the argument being put to the First-tier Tribunal.  If I had been in the tribunal’s position, I should similarly have understood the submission dated 31st March 2014 as addressed to the treatment of the payments made by the sons to their father for the purpose of funding the mortgage payments.  So understood, the submission clearly was irrelevant.

22.	The Secretary of State then goes on to deal with the further submission which is certainly made on the appeal that the claimant did not own the capital of the advance beneficially, because, as in Quistclose, the money in his hands was subject to a trust in favour of Abbey National except to the extent that he applied it in lending it to his sons for their business purposes.  He submits:

“10.1…  as is discussed at paragraph 9 of R(SB) 53/83, the decision in Quistclose  applies where the lender loans capital for a specific purpose and that money can be reclaimed by the lender if it is not used for that purpose.  In this case there is nothing to suggest that the lender advanced the £70,000 on condition that it was only to be used to set up the business in which the claimant’s sons were involved.  It was, therefore, a general loan that the claimant could use as he chose.  Consequently, even though the claimant had a specific purpose in mind when he took out the loan, the principle established in the case of Quistclose cannot apply …”

23.	The Quistclose principle and its application in the field of social security law (in particular reg. 46 of the Income Support Regulations) are discussed at some length in the 2014-2015 edition of Wood and others, Social Security Legislation vol. II at pp.469-471.  The Secretary of State’s submission fairly identifies the principle and rightly draws attention to the complete lack of evidence that the advance was made by Abbey National on terms that if the funds were not applied for the specified purpose they would be held on trust for Abbey National.  There is no material to suggest that the claimant was not legally free to do as he wished with the proceeds of the loan, at least vis-à-vis Abbey National.  On that basis, the £70,000 belonged to him beneficially.

24.	The claimant resists this conclusion in his solicitors’ submissions dated 17th December 2014 on the ground that:

“… the claimant did not have the benefit of hindsight when he took the mortgage, and, being a layman, could not have reasonably foreseen the impact his actions would have on his benefit entitlement.  It is considered that his intent when he took the mortgage should be the main factor, and not the mechanics of how the loan agreement was structured.”

25.	This is missing the point of Quistclose, which was that the lender would never have lent on terms that the loan became part of the general assets of the borrower, but only on terms that the loan was applied for a specific purpose.  In those circumstances, Lord Wilberforce held that the lender acquired an equitable right to see that the loan was applied for that purpose and when that did not and could not happen the secondary purpose of repayment to the lender which was found to exist was given effect.  If there is no evidence that the lender lent otherwise than on terms that the loan became part of the borrower’s general assets, the case does not fall within the Quistclose principle.  The borrower does not create a trust in favour of the lender simply by having his own clear intent as to the application of the money borrowed.

26.	It follows that if the tribunal had considered the Quistclose argument as now advanced (and I am far from convinced that it was at fault in not having done so), it could not properly have come to the conclusion that a Quistclose trust of the necessary kind was established.  Accordingly, even if there had been an error of law in the failure to address the point, I would not have set the tribunal’s decision aside on that ground.

27.	For good measure, the Secretary of State considers whether, assuming that the proceeds of the advance were not subject to a Quistclose trust, the claimant could nevertheless argue that since the money was by way of loan and was subject to a repayment obligation, it did not form part of his capital.  On the basis of the authorities cited by the Secretary of State, and in particular on the basis of the decision of Mr. Commissioner Jacobs (as he then was) in CIS/2287/2008, my present view is that any such argument would fail.  It is available only where money is received under a certain and immediate obligation to repay, and in this case the advance was clearly repayable over a period of 20 years.  I do not decide the point, however, since, as I am remitting the case for other reasons, I do not need to make a decision on it.

28.	I should nevertheless say that I do not at present understand the comments made on the point by the claimant’s solicitors in their letter dated 17th December 2014.  It is there suggested that despite the terms of the mortgage between Abbey National and the claimant, the focus should be on the agreement between the claimant and his sons, which encompassed that the money passing from the claimant to his sons would be repayable if the sons did not use the funds for the purpose specified.  I am afraid I cannot see how that affects the issue whether, when the claimant received the proceeds of the advance, it was excluded from his capital resources on the ground that he was under a certain and immediate obligation to repay it, although it may be relevant to the issue of the claimant’s purpose in depriving himself of the capital resource which he had.

29.	The point on which the Secretary of State says the tribunal fell into error is indeed the purpose point which was the second of those raised by Judge Lane.  The submission before the tribunal did not address the issue whether, in giving or lending the proceeds of the advance to his sons, the claimant had the purpose of securing entitlement to income support or increasing the amount of the benefit he received.  Nor does this element of the statutory provisions appear to have been addressed either on 11th January 2013 or on reconsideration.  The approach seems to have been that if the claimant owned the capital beneficially and factually deprived himself of it, reg. 51 was satisfied.

30.	This appears also to have been the approach of the tribunal, which, as the Secretary of State says, “appears to have done no more than accept that a natural consequence of the deprivation was that entitlement to the benefit was secured”.  There are no findings of fact as to the claimant’s purpose, no express statement that the claimant had the necessary purpose and inevitably no reasons for any such conclusion.  In failing to deal with the purpose element of reg. 51, the tribunal was in error of law.

31.	Both the Secretary of State and the claimant agree that if I come to the conclusion that the tribunal erred in this respect, I should remit the matter.  I agree that that is the sensible course and one which will enable further oral evidence to be directed to this specific point if that is desired.

32.	I further accept the Secretary of State’s submission that the tribunal should be constituted differently from the previous tribunal.

The appeal in CIS/4086/2014

33.	It is clearly an essential prerequisite to there having been an overpayment in this case that reg. 51 should apply, with the consequence that the claimant falls to be treated as having substantial capital which he does not have in fact.  It follows that the tribunal’s decision on overpayment cannot stand now that I have set aside its decision on the claimant’s entitlement to income support.  This is accepted by both parties.

34.	No additional submissions have been made by either party on this aspect and accordingly I need say nothing further about this appeal, save to add that it would obviously be sensible if the new tribunal rehearing the entitlement issues also dealt with any overpayment issues.

Other matters

35.	No further directions are required in this case.  The new tribunal will of course pay due regard to what I have said above about the applicable law.

36.	For the assistance of anyone looking at these files in future, I comment that the overpayment decision has got into file CIS/3386/2014 and the entitlement decision has got into file CIS/4086/214.

(Signed)	E. Ovey
		Judge of the Upper Tribunal

						(Dated)  	13th February 2015