Does equity release affect benefits and inheritance?

Equity release lets a homeowner draw a lump sum or regular smaller sums from the value of their home while remaining in it¹. The money itself is tax-free, but it is not invisible: it counts as capital for means-tested benefits, and the interest rolls up until the home is sold, so the estate left behind is smaller².

Two consequences matter most before signing. First, equity release may impact your entitlement to means-tested benefits such as Pension Credit, Universal Credit and Council Tax Reduction³. Second, equity release reduces the value of your estate and the amount that will go to the people named as beneficiaries in your will⁴. Neither is a reason to rule it out, but both need working through before you apply.

The Equity Release Council's own consumer guide puts the warning plainly: "Important: Equity release reduces your estate's value and could affect means-tested benefits or tax."²

Equity release is tax-free, but it can reduce means-tested benefits

The money released is not taxed as income. Equity release can provide tax-free money to help pay for home repairs, care costs, everyday living expenses or debts³. The Council's position is that, done correctly, equity release should have no impact on an individual's tax position or their state benefits, but that each individual's circumstances need to be assessed⁹.

The qualification matters more than the headline. If you receive any means-tested benefits, they may be reduced or lost entirely, and the list includes income-related Employment and Support Allowance and Council Tax Support⁴. Independent Age's guidance is blunt: it can be expensive, reduce the value of your home, and may impact your entitlement to means-tested benefits such as Pension Credit, Universal Credit and Council Tax Reduction³.

The mechanism is capital, not income. Having savings in the bank that you do not need could affect your eligibility for benefits¹⁰. Money released from housing is treated in the same way once it sits in an account, which is why the timing and size of a drawdown matter as much as the total.

Benefits that can be cut: Pension Credit, Universal Credit and Council Tax Reduction

Each benefit has its own capital rules, and they do not move together.

Pension Credit has no upper capital limit, but any savings and capital you have over £10,000 will impact how much Pension Credit you might receive⁵. Pension Credit recipients may also be entitled to a Council Tax Reduction, so a change to one can ripple into the other¹¹.

Universal Credit is assessed on capital and on other income. Your Universal Credit payments will be reduced by the amount of the payments you get for a list that includes Carer's Allowance, Carer Support Payment (Scotland), State Pension, Armed Forces Pensions and several disability benefits¹². Universal Credit has replaced the legacy benefits: Income Support, Income-based Jobseeker's Allowance, Income-related Employment and Support Allowance, Housing Benefit, Child Tax Credit and Working Tax Credit¹³.

Council Tax Reduction is administered by councils and is means-tested, so capital released into an account can reduce it. Separately, if Council Tax goes unpaid, the council can apply to take money from Employment and Support Allowance, Income Support, Jobseeker's Allowance, Pension Credit and Universal Credit¹⁴. In Scotland, deductions can be made from Universal Credit, Job Seeker's Allowance, Income Support and Pension Credit under a Deductions from Benefits Order¹⁵.

Why your estate shrinks: interest rolls up until the home is sold

With a lifetime mortgage you retain ownership of your home and interest on the loan is rolled up, meaning it compounds¹. Because you do not make repayments, the debt grows over time and can erode the value of your property¹⁶. The plan is repaid when you pass away, move into permanent care or choose to sell your home¹⁷.

That roll-up is what changes the inheritance. Borrowing via equity release will often reduce the size of your estate and the amount you can leave behind for loved ones¹⁸. The Council states that the use of an equity release scheme will reduce the value of your estate, and that taking out a plan could leave your family with little or nothing to inherit from your property¹⁹. Shelter Cymru's Welsh-language guidance makes the same point: it is likely there will be less to pass on to your family as an inheritance²⁰.

How much you can borrow is based on your age and how much your home is worth, not on what you can afford to repay¹⁷. Sometimes your health will be taken into consideration as well²¹. The longer the plan runs and the higher the rate, the more of the property's value the rolled-up interest consumes.

Protecting an inheritance: ring-fencing and the no negative equity guarantee

Two features limit the damage to what you leave behind.

The first is ring-fencing. For both types of plan, you may be able to protect some of the value of your home as inheritance, and this is known as ring-fencing³. Ask your adviser about inheritance protection, which protects some of the property's future value¹⁷. It usually means borrowing less at the outset in exchange for a guaranteed slice of the eventual sale proceeds.

The second is the no negative equity guarantee. Products from Equity Release Council members must meet certain standards: you have the right to remain in your property for life or until you need to move into long-term care, and they offer a no negative equity guarantee, meaning you will never owe more than the value of your property when it is sold²². The amount you borrow against the value of your home, plus any rolled-up interest, can never go above the value of the property²³. When the property is sold, and agents' and solicitors' fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more⁷.

If the family wants to keep the property, they would have to discuss with your equity release provider whether it might be possible for them to pay off the remaining debt¹⁹.

Care costs, fees and early repayment charges that eat into what you leave

Three costs sit between the headline sum and what your family eventually receives.

Fees come first. You will have to pay application, legal and other fees, and these can be high³. The Council requires that all customers are given independent legal advice when they are about to enter into their equity release contract, which is a cost in itself²³.

Early repayment charges come next if the plan ends early. You might have to pay an early repayment charge if you end an equity release agreement early, which can often be a significant amount²⁵. Some providers charge for paying back the plan in full¹⁷, and there may also be early repayment charges if you decide to repay what you owe within a short time after taking out the deal¹⁵. Check whether early repayment charges apply when choosing a plan¹⁰.

There is one important exception. No early repayment charges are payable if the borrower moves into long-term care and the property is sold, where no spouse or partner is still entitled to live in the property²⁴.

Care costs themselves are a separate question. An equity release mortgage may not be permissible if the property owner or owners are moving into long-term care and leaving their home²⁶. The money released is capital, so it can affect means-tested support for care in the same way as other savings.

Getting advice before you apply

Equity release cannot be bought without advice. You are required to get professional financial advice before purchasing⁸, and a suitably qualified and authorised adviser will need to take detailed information about your situation and requirements, then consider all options, including mainstream mortgages, retirement interest-only mortgages and other options, before making a recommendation⁹.

Council members must make sure that you have received independent legal advice before you enter into an equity release scheme²⁸, and all customers must be given independent legal advice before entering the contract²³. Member advisers will consider your personal circumstances, including an assessment of your income and expenses, and will explore alternatives to equity release²⁹.

Consumers should check that their chosen plan will meet their needs if they want to move or sell their homes or if they want their family to inherit it, and should always seek qualified financial advice³⁰. If something goes wrong, the Financial Ombudsman Service can look at complaints about equity release²⁵.

Free, impartial help is available from MoneyHelper and from debt advice charities such as StepChange and National Debtline if the underlying problem is debt rather than retirement income¹⁰.