Equity Release and Care Home Fees UK (2026): Can It Help and What Are the Risks?

Yes, equity release — typically a lifetime mortgage — can be used to fund residential care home fees, but there are important limitations and risks. The fundamental question is whether the person taking out equity release still has mental capacity and, if so, whether equity release makes financial sense compared to the alternatives: (1) WHAT EQUITY RELEASE DOES: equity release allows a homeowner aged 55+ to release cash from their property without selling it or making monthly repayments. The most common type is a lifetime mortgage — a loan secured against the home that rolls up compound interest until the property is sold (typically on death or when the owner moves permanently into care). The proceeds can be used for any purpose, including funding care home fees; (2) THE CORE PROBLEM WITH CARE HOME FUNDING: the main issue is that once a person moves permanently into a care home, the property is no longer their main home and is not automatically disregarded in the local authority means test — unless a qualifying person (spouse; civil partner; dependent child; disabled relative; carer) continues to live there. If the property is included in the means test, the person must contribute to their care costs from all assets above £14,250 (lower threshold) — including the property value. Taking out equity release in this context can be complex: (a) If the property is already included in the means test, taking equity release releases cash from the property — but that cash then becomes a capital asset included in the means test; it does not reduce the liability (the loan is a deductible liability, reducing the net property value); (b) The net effect may be neutral for means-testing purposes; (c) The equity release proceeds are immediately available for care — but the loan accumulates interest; (3) MOST USEFUL SCENARIO — BEFORE PERMANENT CARE HOME MOVE: equity release is most useful where the person: (a) Still lives at home and is funding home care (not in a care home yet); (b) Is using the release to fund adaptations, care, and support to remain at home longer; (c) Has a spouse who will continue to live in the property after the other partner moves into care (the property remains disregarded while the spouse lives there — but the equity release proceeds might fund one partner's care costs without triggering a means test on the property); (4) LPA IS ESSENTIAL: the homeowner must have mental capacity to enter into an equity release agreement. If they lack capacity, no lender will offer equity release. A registered Property and Financial Affairs LPA enables the attorney to manage existing equity release products but does NOT enable taking out a new equity release on behalf of the donor — this requires a Court of Protection order.

Equity release interacts with the care home means test in a nuanced way, and the outcome depends on timing and the structure of the product: (1) THE MEANS TEST TREATS EQUITY RELEASE AS A DEDUCTIBLE LIABILITY: under the Care and Support (Charging and Assessment of Resources) Regulations 2014, a mortgage or secured loan is deducted from the property value when assessing capital. A lifetime mortgage with £100,000 outstanding against a property worth £400,000 means the assessed property value is £300,000 — not £400,000. The loan is a deductible liability because it is secured against the property; (2) EQUITY RELEASE PROCEEDS — TREATED AS CAPITAL: when equity release funds are withdrawn and held as savings or cash, those funds are treated as capital in the means test. The person who released £50,000 and holds it as savings has £50,000 of assessable capital (above the lower threshold). The net effect: property value reduced by the loan; but cash proceeds added as capital. If the loan roughly equals the cash proceeds, the net assessable estate is similar with or without equity release (assuming the cash is not spent); (3) SPENDING THE PROCEEDS REDUCES ASSESSABLE CAPITAL — BUT RISKS DEPRIVATION OF ASSETS: if equity release proceeds are spent on genuine care, home adaptations, or genuine personal expenditure, the assessable capital falls. However, if the local authority concludes that the spending was designed primarily to reduce assessable capital rather than for genuine need, it may apply the deprivation of assets rule (Care Act 2014 CASS Guidance Ch.8) and treat the person as still holding the notional capital; (4) DEFERRED PAYMENT AGREEMENT AS AN ALTERNATIVE: in many cases, a deferred payment agreement (DPA — Care Act 2014 ss.34-36) achieves the same objective as equity release (deferring the cost of care against the property) at a lower cost — the DPA interest rate is usually lower than commercial equity release rates, and there are no arrangement fees or advice costs. The local authority deferred payment scheme should always be compared against equity release; (5) LUMP SUM vs DRAWDOWN: equity release products offering drawdown (access funds as needed) result in lower total interest than lump sum products. Only the amount drawn is charged interest. For care funding (ongoing weekly/monthly costs), a drawdown lifetime mortgage is typically more cost-efficient than a lump sum.

Equity release (a lifetime mortgage) is a debt secured against the property. At the date of death, the outstanding loan balance — principal plus rolled-up compound interest — is deductible from the estate for IHT purposes: (1) HOW IT REDUCES THE IHT ESTATE: the property is valued at open market value; the outstanding lifetime mortgage is deducted as a secured debt. Example: property worth £500,000; outstanding equity release at death = £200,000 (rolled up over 15 years at compound interest). Net property value for IHT = £300,000. IHT saving: 40% × £200,000 = £80,000 (if the estate is taxable above the NRB); (2) THIS IS AN INCIDENTAL IHT BENEFIT: equity release is rarely recommended primarily for IHT reasons — the interest roll-up means the eventual loan balance can be very high (at 5% compound over 20 years, a £100,000 loan doubles). The estate reduction is real but comes at a price; (3) THE RNRB AND EQUITY RELEASE: the property must pass to direct descendants for the RNRB to apply. A property subject to a lifetime mortgage can still qualify — the equity release is a deductible liability, but the property itself (minus the mortgage) can pass to children and attract the RNRB (£175,000/person). No conflict between equity release and RNRB qualification; (4) SEVEN-YEAR PET RULE — NOT RELEVANT: equity release itself is not a gift and does not trigger the 7-year PET rule. However, if the equity release proceeds are gifted (not spent by the homeowner), the gifts are PETs — subject to the 7-year rule in the normal way; (5) DEPRIVATION OF ASSETS AND IHT: note that 'deprivation of assets' is a care-home means-testing concept under the Care Act 2014 — it is a separate regime from IHT. Gifting property (whether through equity release proceeds or otherwise) may affect IHT (7-year PET rule) and separately affect care means testing (no fixed lookback period). These are two distinct legal frameworks; (6) ADVICE: equity release for IHT planning alone is rarely cost-effective. The rolled interest cost over time usually exceeds the IHT saving, unless the person is very elderly and the time to death is short.

No — an attorney under a Property and Financial Affairs LPA CANNOT take out a new equity release product on behalf of the donor. This is one of the most important limitations of LPA authority in the care home context: (1) WHY A NEW EQUITY RELEASE REQUIRES COURT OF PROTECTION AUTHORITY: taking out a new lifetime mortgage or equity release product is a 'significant financial decision' that affects the donor's estate value, care funding options, and beneficiaries. The MCA 2005 Code of Practice requires attorneys to avoid transactions that are unduly large or that materially affect the interests of the donor's estate or beneficiaries without independent authorisation. All equity release lenders' eligibility criteria also require the applicant to have mental capacity at the time of application — the lender will decline to lend if the applicant cannot demonstrate capacity; (2) WHAT AN LPA ATTORNEY CAN DO: (a) Manage an existing equity release product (make requests for drawdown from an existing drawdown lifetime mortgage where the product was taken out before capacity loss); (b) Deal with the lender on the donor's behalf for administrative matters; (c) Arrange home care, adaptations, and other spending using funds from an existing facility; (3) TO TAKE OUT A NEW EQUITY RELEASE WITHOUT DONOR CAPACITY: the attorney (or another appropriate person) must apply to the Court of Protection for an order under MCA 2005 s.16. The court will assess whether the transaction is in the donor's best interests. This is expensive (£3,000–£10,000+) and slow (6–12+ months). By the time it is resolved, the care situation may have changed materially; (4) THE PRACTICAL LESSON: if equity release might be useful for a person who is approaching the need for care (particularly for a couple where one may eventually need care), it should be arranged while BOTH parties still have capacity. Once capacity is lost, the window closes. This is exactly why registering an LPA before any health decline is so important — the LPA attorney can manage existing arrangements but cannot create new ones without court authority; (5) EQUITY RELEASE COUNCIL MEMBERSHIP: always use a provider that is a member of the Equity Release Council (equityreleasecouncil.com). Council members are bound by standards that include a no-negative-equity guarantee (you will never owe more than the property value), portability, and independent legal advice for the borrower.

Equity release is one of several options for funding long-term care. The right choice depends on the individual's capital position, family circumstances, care needs, and estate planning objectives: (1) DEFERRED PAYMENT AGREEMENT (DPA — CARE ACT 2014 SS.34-36): the council effectively lends money against the property (legal charge registered at Land Registry). Lower interest rate than commercial equity release; no arrangement fees; no advice costs. The most cost-effective option for people who qualify (non-property capital below £23,250). Available through the local authority — apply as early as possible after permanent care home entry; (2) SELL THE PROPERTY: simplest and cheapest option in the long run. No rolling interest; the full open-market value is realised; the estate is simplified for probate. Drawback: the family home is sold; emotional and practical disruption; capital above the means test threshold must be self-funded; (3) IMMEDIATE NEEDS ANNUITY (INA — CARE FEES PLAN): a specialist insurance product where a lump sum is paid to an insurer which then pays the care home fees for life, regardless of how long the person lives. The payments are income-tax-free if paid directly to the care provider (ITTOIA 2005 s.725). Advantages: eliminates the risk of running out of money; simple to administer; no ongoing decision-making. Disadvantages: expensive upfront; you 'lose' the capital if the person dies quickly; quotes required from a whole-of-market specialist adviser (Carer Finance Council); (4) FAMILY CONTRIBUTION: family members pay care costs directly or via a loan to the estate. The loan should be properly documented to protect the estate and avoid IHT complications. If treated as a gift, the 7-year PET rule applies to the donor's IHT position; (5) BENEFITS AND ENTITLEMENTS: before committing to equity release, check all entitlements — many people qualify for Attendance Allowance (£108.55/week higher rate 2026/27); NHS Continuing Healthcare (CHC) — full NHS funding for care where the primary health need is medical (social care assessments often overlook CHC eligibility); Council Tax Reduction; (6) COMPARISON TABLE: key question: what are the total long-term costs compared to a DPA? In almost all cases, a DPA is cheaper than a commercial equity release product for the same net result. Only where the DPA is unavailable (e.g., inadequate equity; council refuses) should equity release for care home funding be seriously considered.