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[2008] UKSSCSC CPC_3322_2007 (17 January 2008)

DECISION OF THE SOCIAL SECURITY COMMISSIONER

My decision is given under section 14(8)(a)(i) of the Social Security Act 1998:

I SET ASIDE the decision of the Sutton appeal tribunal, held on 4 May 2007 under reference 154/06/01548, because it is erroneous in point of law.

I give the decision that the appeal tribunal should have given, without making fresh or further findings of fact.

My DECISION is the housing costs element of the claimant's state pension credit is to be based on a qualifying loan of £40,000 only.

REASONS

The issue in this case is whether the claimant's deferred capitalised mortgage interest is a housing cost for the purposes of state pension credit.

History

The claimant became 60 on 23 June 2006. Prior to that, she was entitled to income support. In the run up to her 60^th birthday, she was invited to apply for state pension credit. She did so and was awarded a credit. This appeal concerns the housing costs element of that award. The Secretary of State took into account a loan of £40,000. That was the original amount of the loan taken out by the claimant to assist her to purchase her home. However, the amount of capital outstanding had increased. The increased amount included deferred interest. It may also have included an amount in respect of building insurance, ground rent and services charges. These were not paid by the claimant and were met by the mortgagee in order to protect their position.

The claimant exercised her right of appeal and was successful before the tribunal on the ground, according to the chairman's decision notice, that 'The mortgage was obtained for the purpose of acquiring her current home (her permanent residence) and not for any other purpose.' In his full statement of the tribunal's decision, the chairman recorded that the claimant's evidence was credible and reliable. He accepted that she had used the deferred mortgage to allow her to buy her home. She had not used the deferred payments for any other purpose. On that basis, he distinguished Mr Commissioner Rowland's decision in R(IS) 14/01, a decision on the comparable provision in the Income Support (General) Regulations 1987.

The Secretary of State applied for leave to appeal, which was granted by a district chairman of tribunals. The case was referred to me for case management directions. I directed the claimant to make observations and advised her to obtain advice on the legal issues. She did not make observations and the Secretary of State had nothing to add. The case is now ready for decision.

The evidence

The claimant's mortgagee provided evidence for the Department. It said the mortgage was a deferred interest only mortgage, the amount advanced was £40,000 and the current interest charging balance (including any unpaid insurance premiums, arrears of interest and deferred interest) was £48,920.42.

The mortgagee also explained the nature of the mortgage to the claimant:

'When your mortgage started in 1989 you opted for a 20 Year Low Start type loan where the initial payments were reduced. Any interest charged which was not met by your payment would have been placed on a second balance. The account had the potential to increase by up to 50% of the original borrowing.'

And in a letter to the Pension Service, the mortgagee wrote:

'How this mortgage works is under the terms of this product, a proportion of the annual interest is deferred, during the first 10 years of the mortgage, to allow the benefit of lower monthly repayments in the early years. The deferred interest accrued during this period is then repaid during years 10 to 20. Therefore, payments rise progressively each year, on the anniversary of the account, to ensure that the total amount owed will revert to the original amount borrowed, by the end of the 20 year period.'

The legislation

State pension credit was established by the State Pension Credit Act 2002. It may consist of a guarantee credit and a savings credit. Section 2(3) provides that

'The appropriate minimum guarantee shall be the total of-

(a) the standard minimum guarantee; and

(b) such prescribed additional amounts as may be applicable.'

The State Pension Credit Regulations 2002 are made, in part, under the authority of section 2(3)(b). Regulation 6(6)(c) and (7) deal with housing costs:

'(6) Except in a case to which paragraph (3) applies, an amount additional to that prescribed in paragraph (1) shall be applicable-

…

(c) except where paragraph (7) applies, in accordance with Schedule II (housing costs).

(7) This paragraph applies in the case of a person who has been detained in custody for more than 52 weeks pending trial or sentence following conviction by a court.'

The relevant provision of Schedule II is paragraph 11:

'Loans on residential property

11.-(1) A loan qualifies under this paragraph where the loan was taken out to defray monies applied for any of the following purposes

(a) acquiring an interest in the dwelling occupied as the home; or

(b) paying off another loan to the extent that the other loan would have qualified under head (a) above had the loan not been paid off.

…

(3) Where a loan is applied only in part for the purposes specified in heads (a) and (b) of sub-paragraph (1), only that portion of the loan which is applied for that purpose shall qualify under this paragraph.'

The Secretary of State's grounds of appeal

The Secretary of State's representative has argued simply that the tribunal misapplied paragraph 11. Only the original £40,000 capital qualified for the purpose of paragraph 11, as the remainder was not used to acquire an interest in the claimant's home.

Analysis

There has been a degree of continuity between the provisions on housing costs for the purposes of supplementary benefit, income support, jobseeker's allowance and now state pension credit. None of those benefits has ever contained an express general provision taking account of interest on capitalised arrears. There was an express limited provision incorporated into the income support provisions from 1990, but it has no equivalent in the current legislation. The issue that arises in this case must, therefore, be determined by basic principles of statutory interpretation and on the authorities.

The first question is whether the deferred interest was a loan. Left entirely to my own devices, I would decide that the deferred interest was not a loan. The mortgagee did not describe it as a loan. And it is, of course, possible to incur a debt other than by way of loan. I note that in R(IS) 14/01 at paragraph 6 Mr Commissioner Rowland said that it was right to treat deferred interest as a loan, because 'There is no practical distinction between agreeing to allow payments to be deferred for a period and making a loan to enable payments to be made during that period.' However, it seems to me artificial to describe deferring interest as making a loan when the mortgagee has not treated it in that way.

However, I am not entirely free to decide as I wish as R(IS) 14/01 is a reported decision. I am not so convinced it is wrong that I would be perpetuating error to follow it (R(I) 12/75, paragraph 21). Mr Rowland's approach is, perhaps, analogous to an overdraft, which is treated in law as borrowing although it not usually called a loan (Cunliffe Brooks & Co v Blackburn and District Benefit Building Society (1884) 9 App Cas 857). I will, therefore, accept that the deferring of interest was permitted by way of loan.

The second question is whether that any part of the loan other than the original £40,000 was taken out to defray the monies applied for acquiring an interest in the claimant's home. I do not consider that it is. I note that in R(IS) 14/01 Mr Commissioner Rowland said (paragraph 7): 'In reality in both cases, only the primary loan was used for the purpose of "acquiring an interest in the dwelling occupied as the home". The secondary financing may have had the purpose of enabling the claimant to afford to buy the home, but that is not enough.' And in CIS/141/1993, Mr Commissioner Mitchell said (paragraph 5) of a deferred interest arrangement: 'Quite simply, no interest in his home was acquired by the claimant with or by reason of the sums represented by such enhancement.' I respectfully agree with those two similar analyses.

If the current capital represents a single loan, it can be severed under paragraph 11(3) so that only the original amount advanced, which was applied to acquire an interest in the claimant's home, qualifies for housing costs.

This conclusion is supported by reference to the history of the legislation. In R(IS) 14/01, Mr Commissioner Rowland said that the removal of the specific limited provision for interest on capitalised arrears did not show that such interest was not covered by the general housing costs provisions:

'5. … Mr James at first submitted that the revocation of paragraph 7(6)(c) without replacement showed that it was the intention of the legislature that a claimant should not receive income support in respect of interest paid on deferred interest and that the new paragraph 15(1) should be construed accordingly. However, the new paragraph 15(1) must plainly be construed in the same way as the old paragraph 7(3) and the old paragraph 7(6)(c) cannot be prayed in aid of the construction of the old paragraph 7(3) because the former provision was added by amendment only in 1990 and cannot have altered whatever meaning the old paragraph 7(3) already had.

I respectfully agree with that reasoning for rejecting the argument put by Mr James. However, two days after Mr Rowland made his decision, Mr Commissioner Angus dealt with the history of the legislation in CJSA/888/1999. He explained why the history was relevant to the provisions governing housing costs in income support:

'11. Thirdly, although I am rejecting the claimant's case I think that it is, as I say above, arguable. Where there is some doubt about the correct interpretation of a Social Security regulation it is the practice of Commissioners to look at the relevant report of the Social Security Advisory Committee, or other relevant background papers, to ascertain the object which the regulation is intended to achieve (R(G) 3/58, R(M) 1/83 etc.).

12. Schedule 3 to the General Regulations was inserted in those regulations by the Social Security (Income Support and Claims and Payments) Amendments Regulations 1995. Those Amendment Regulations were the subject of consultation between the Secretary of State for Social Security and the Social Security Advisory Committee which is recorded in that Committee's report and the Secretary of State's Statement under, respectively, subsection (1) and subsection (2) of section 174 of the Social Security Act 1992 (both published in Command Paper 2905 of June 1995). Appendix 2 to the Command Paper is a memorandum by the Department of Social Security to the Advisory Committee on the new provisions relating to mortgage interest intended to be enacted by the Amendment Regulations.

13. Paragraph 31 of that memorandum is as follows:-

"31. Help with Accumulated Arrears

In the existing scheme, Income Support will help with interest that is charged on arrears of interest that have been claimed during the 16 week period. Additionally, deferred interest mortgage products, where the period of deferment is 2 years or longer, are treated advantageously, in that interest is allowable on the full amount outstanding when the unpaid interest is capitalised at the end of the deferment period.

The Government does not intend to bring these arrangements forward into the new arrangements as such measures are incompatible with a simple scheme based on the principle that private provision will take the main role.".

I think that the word "claimed" in that passage is a misprint for "accumulated".

14. The Secretary of State's statement to the Committee explained that the main object of the amendments to the housing costs provisions of the General Regulations was to introduce a standard rate of interest eligible as housing costs and to move the defrayal of housing costs in the first weeks of a period of claim for Income Support, with certain exceptions, from Income Support to private insurance arrangements. In paragraphs 61 to 63 of its report the Advisory Committee acknowledges those intentions and "in view of the difficulties of recommending protection without introducing a perverse incentive not to insure" made no recommendation for the protection of claimants who could not obtain insurance.

15. It is apparent from those papers that both the Secretary of State and the Advisory Committee were clear that the object of the 1995 amendments to the Income Support (General) Regulations was to exclude interest on capitalised deferred mortgage interest from the eligible housing costs specified in schedule 3 to those regulations. As I say above, schedule 2 to the Jobseeker's Allowance Regulations makes provisions parallel to those of Schedule 3 and falls to be interpreted in the same way.'

I respectfully agree with those paragraphs. The state pension credit provisions are clearly derived from the income support provisions and there is no reason to interpret them differently.

The tribunal's interpretation of R(IS) 14/01

I now consider the tribunal's interpretation of R(IS) 14/01. It turns on paragraph 7 of that decision:

'7. What was required under the old paragraph 7(3) was that the loan have been taken out to defray money applied for the purpose of acquiring an interest in the dwelling occupied as a home. In CIS/3774/97, the Commissioner appears to have found that condition satisfied in respect of the secondary loan because the claimant intended to use the money lent to pay the interest on the primary loan. I have some considerable doubts about that approach but, in any event, this is an aspect upon which the present case is distinguishable if it is necessary to distinguish it. In the present case, the sum "lent" to the claimant was not for the purpose of paying interest on the main loan because the amount paid was reduced. It was lent to enable the claimant to buy other things during the first three years of the agreement. In those circumstances, it was not a qualifying loan under the new paragraph 15. I would respectfully suggest that, in fact, the underlying purpose of the secondary loan in CIS/3774/97 was also to enable the claimant to buy other things because the point of lending money to pay interest on the primary loan was to release other funds that would otherwise have been applied for that purpose. In reality in both cases, only the primary loan was used for the purpose of "acquiring an interest in the dwelling occupied as the home". The secondary financing may have had the purpose of enabling the claimant to afford to buy the home, but that is not enough.'

The tribunal has misinterpreted what is, admittedly, a complex piece of reasoning. Mr Rowland began by expressing his doubts about CIS/3774/1997. He then said that even if it was right, he was able to distinguish it. Then he concluded by saying why he thought that decision was wrong. It was in that context that he made the remark, relied on by the tribunal, that the loan would allow the claimant to buy other things. I do not read what he said as suggesting that the loan had to be to make specific purchases. All he was saying was that the deferred arrangement left the claimant with more money than would otherwise be available. That could be used for buying things or just to make things easier financially for the claimant, which is what has happened here.

Conclusion and disposal

The tribunal misinterpreted R(IS) 14/01. I must set aside its decision. It is not necessary to direct a rehearing, as I can substitute the decision that the tribunal should have given. That was to confirm the Secretary of State's decision in respect of the claimant's housing costs.

Signed on original
on 17 January 2008

Edward Jacobs
Commissioner