R(IS) 11/94
Mr. D. G. Rice CIS/687/1992
4.10.93
Housing costs – loan taken out to cover materials and labour for building the home – whether for the purpose of "acquiring an interest in the dwelling"
In January 1989 the claimant, a self employed builder, started to build the home in which he was to live. The plot of land was purchased with the proceeds from the sale of a property he had owned. Money for the building of the new home was obtained on an overdraft from Lloyds Bank. When the claimant moved into the property in April 1990 the overdraft was £73,717. This continued to increase, as final accounts connected with the building were paid, until by June 1990 it was £82,933.56. By January 1991, when the claimant raised a mortgage of £115,000 to repay the overdraft, it stood at £101,276.19.
On 14 January the claimant made a claim for income support which included housing costs. The adjudication officer restricted the eligible housing costs to interest payable on £51,894.59 used for materials to build the home, allowing nothing toward labour or bank charges. The claimant appealed to the social security appeal tribunal who awarded eligible housing costs based on the £101,276.19 outstanding on the overdraft at the time the mortgage was obtained.
The adjudication officer appealed to a social security Commissioner.
Held that:
- a plot of land will never fall to be treated as a home, regulation 2 of the Income Support (General) Regulations 1987 (para. 7);
- in addition to the interest on a loan for materials, interest payable on a loan to pay for labour, and any expense connected with the loan before the dwelling is occupied, are allowable expenses for the purpose of acquiring an interest in the dwelling occupied as the home, paragraph 7(1)(a) of Schedule 3 to the Income Support (General) Regulations 1987 (paras. 7, 8 and 9);
- any bank interest arising after the date the claimant fast occupied the dwelling as the home do not fall to be treated as costs connected with acquiring an interest in the home (para. 10).
DECISION OF THE SOCIAL SECURITY COMMISSIONER
- My decision is that the decision of the social security appeal tribunal given on 5 July 1992 is erroneous in point of law, and accordingly I set it aside. I direct that the appeal be reheard by a differently constituted tribunal who will have regard to the matters mentioned below.
- This is an appeal by the adjudication officer, brought with the leave of the tribunal chairman, against the decision of the social security appeal tribunal of 5 July 1992. I found the written submissions of the adjudication officer unpersuasive, and accordingly I directed an oral hearing. At that hearing the claimant, who was present, was represented by Mrs. E. Low from the Citizens Advice Bureau, whilst the adjudication officer appeared by Mr. M. Jenking-Rees from the Solicitor's Office of the Department of Social Security.
- In January 1989 the claimant, a self-employed builder, started to build a home for his future occupation on a plot which he had purchased for £33,000 out of his own resources from the proceeds of sale of a property he had formerly owned. He acquired the necessary additional funds to build the new house from Lloyds Bank on overdraft. In April 1990 the claimant and his family moved into the finished property, and the building account at Lloyds then stood at £73,717. In June 1990 it had risen to £82,933.56, but thereafter it ceased to be used for the purchase of building supplies. I presume that, as the development had been completed in April 1990, the increase in the overdraft reflected the payment of building debts previously incurred, and I proceed on this basis. The claimant then attempted to convert the outstanding overdraft into an ordinary mortgage. However, he did not succeed in that object until 3 January 1991, when he obtained a mortgage of £115,000. But by that time bank charges had continued to accrue, and the outstanding overdraft had risen to £101,276.19.
- On 14 January 1992 the claimant applied for income support, and the adjudication officer decided that the eligible mortgage interest (payable from 17 January 1992) was restricted to that payable on a loan of £51,894.59. In computing the amount of the loan, he was prepared to allow the cost of materials, but nothing more, and particularly nothing in respect of bank charges. In due course, the claimant appealed to the tribunal who in the event allowed as eligible interest the mortgage interest on the whole of the £101,276.19.
- Regulation 17(l)(e) of the Income Support (General) Regulations 1987 [SI 1987 No. 1967] provides that mortgage interest payments, or such other housing costs as are prescribed, are to be determined in accordance with Schedule 3 to the regulations. The crucial provision of that Schedule is paragraph 7(3) which reads as follows:
"7. (3) ..., in this paragraph 'eligible interest' means the amount of interest on a loan, whether or not secured by way of a mortgage or, in Scotland, under a heritable security, taken out to defray money applied for the purpose of-
(a) acquiring an interest in the dwelling occupied as the home; or
(b) paying off another loan but one only to the extent that interest on that other loan would have been eligible interest had the loan not been paid off."
Manifestly, eligible interest only arises where the relevant loan was taken out in the circumstances described in sub-paragraph (3) of paragraph 7.
- The adjudication officer now concerned, in his written submissions, contended that in the present case the expense, which the mortgage was taken out to defray, was incurred by the claimant before the dwelling in question was in fact occupied as the home. In other words, the property did not become the claimant's home until after the expenditure had been incurred. He said:
"The claimant owned the land outright and therefore was not occupying the land outright and therefore was not occupying the dwelling as the home until after the costs were incurred. I submit that paragraph 7(3) contemplates the existence of a dwelling house which the claimant is occupying, and not the building of a house which is subsequently occupied by the claimant as his home. This interpretation is enhanced by paragraph 8 which expressly provides for the carrying out of repairs and improvements (my emphasis) to the dwelling occupied as the home, but makes no provision for the building of a home."
- I find this submission unpersuasive. In my judgment, where a person takes on a mortgage to acquire a house, he normally does so when the property is not yet his home, but he intends it to be. Accordingly, if paragraph 7(3) is to have other than a very limited effect "the dwelling occupied as the home" would seem to extend to "the dwelling intended to be occupied as the home". If this is so, the interest can be acquired before the dwelling becomes the home, and this is normally what happens. Generally, a person acquires the home in one single transaction, but it is open to him instead to acquire the land first and then arrange for the home to be built thereon under a building contract. On completion of the building work he will go into occupation, and it will become his home. The land itself without a building on it can never, in my judgment, constitute a home. As I see it, all the costs connected with the acquisition of the site and subsequent building work will constitute the:
"money applied for the purpose of-
(a) acquiring an interest in the dwelling occupied as the home."
and if a mortgage is taken out to defray that money, the interest thereon will be "eligible interest" within paragraph 7(3). This is what has happened in the present case except that the loan was taken out to cover only the building cost, the site was purchased outright from the claimant's own resources. At the time the claimant went into occupation of the completed house, the building expenses had amounted to £82,933.56. Moreover, in his submissions to me Mr. Jenking-Rees did not resist the above analysis, and was content to resile from the written submission of the adjudication officer. His only qualification was that he doubted whether bank charges should be included in the cost, and further doubted whether the value of the claimant's own labour should be so included.
- I do not share Mr. Jenking-Rees' apprehensions. As regards the interest and other charges demanded by the bank as a condition of their making funds available to discharge the building expenses, I consider that such charges, being unavoidable, are an intricate part of the acquisition of the home and are properly to be included for the purposes of determining the total acquisition cost. The cost of banking facilities is as much a cost of the development as such items as bricks, mortar and timber. Moreover, the matter can be tested another way. Supposing the suppliers of the materials said that they would be prepared not to press for payment until the claimant had raised a mortgage on completion of the project, but as a quid pro quo imposed an enhanced charge to cover the delay in payment. It could not reasonably be contended that the enhanced charge was not a part of the cost of the development. There is no fundamental distinction, in my view, between on the one hand an enhanced charge for materials to reflect late payment, and on the other a standard charge coupled with liability for interest and other banking costs for the facility of being able to pay off the suppliers timeously. Accordingly, I consider that banking charges were properly included in the cost of acquisition.
- The claimant was a self-employed builder, and during the period of the construction of his home, on which he himself worked, he undertook no other project. He valued his labour at some £9,000, and this appears to have been included in the £82,933.56. I think this was as much a cost of the development as employing an outside contractor who might even have charged more. The work had to be done by somebody and the value of that labour constituted, in my judgment, a legitimate expense. Accordingly, I consider that the figure of £82,933.56 correctly represented the cost of acquisition.
- There was a further payment by the claimant of £18,342.63 by way of interest which accrued subsequently to his moving into the home. However, that was, in my judgment, something which, having arisen after that event, could not be allowed to form part of the acquisition cost. In allowing this sum to be included in the loan on which the mortgage interest was based, the tribunal clearly erred in point of law. It should be stressed that, when a claimant goes into occupation of a property as his home, he cannot include in the figure, on which the mortgage interest is to be based, any new liabilities. If he wishes to undertake any improvements e.g. the acquisition of adjacent land on which to build a garage, the cost of the development will not give rise to eligible interest, unless the claimant can bring himself within regulation 8.
- For completeness, I should also say that the tribunal further erred in point of law in failing to consider possible restriction on the claimant's housing costs pursuant to paragraph 10(4) of Schedule 3. The house now occupied has apparently five double bedrooms and only the claimant and his wife and son live in the house; his daughter left home at the end of February 1992.
- It follows from what has been said above that I must set aside the tribunal's decision and direct that the appeal be reheard by a differently constituted tribunal, who will have regard to the matters mentioned above. In the light of their findings, they will determine the extent of the claimant's entitlement to housing costs as from 17 January 1992.
- I allow this appeal.
Date: 4 October 1993 (signed) Mr. D. G. Rice
Commissioner
