The Home Reversion and the Means-Tested Care Question
Doris, 79, owns her home outright, worth £340,000. She has savings of £18,000 and a state pension plus a small occupational pension totalling £14,000 a year. She needs £30,000 for home adaptations and wants to remain in the home. She is considering a home reversion plan: she would sell 40% of the property to a provider for a lump sum, retaining a lifetime lease to remain in the property rent-free. The provider's offer is £68,000 for the 40% share (the property value is £340,000, so 40% = £136,000 - the provider is offering roughly 50% of the open-market value of that share). She asks whether this will affect her eligibility for means-tested care and whether she can later buy the share back.
1. Explain the key features and risks of a home reversion plan for Doris, and why the provider's offer is below the open-market value of the share.
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A home reversion plan is a lifetime mortgage alternative in which the homeowner sells all or part of the property to a provider for a lump sum or income, retaining a lifetime lease to live there rent-free.
Key features and risks:
- Discounted price: the provider pays less than the open-market value of the share because it must wait (potentially decades) before it can realise the property, and it bears longevity and house-price risk. A 50% discount on a 40% share reflects the provider's expected return and the lifetime lease.
- Irreversible: reversion plans are generally not repayable - the share sold is gone, and there is usually no facility to buy it back. This is a key difference from a lifetime mortgage, which can often be repaid.
- No negative equity guarantee is needed because the provider owns its share outright; but the homeowner's estate receives only the value of the retained share on death.
- Security of tenure: the lifetime lease protects her right to remain, but she must keep the property insured and maintained.
- Regulation: home reversion is a regulated equity release product; advice is mandatory and the adviser must consider alternatives (e.g. a lifetime mortgage, a local authority disabled facilities grant, or downsizing).
Judgement: the discount is normal for reversion, but she should compare it with a lifetime mortgage (which may allow partial repayments and preserves more of the estate) and check whether a Disabled Facilities Grant could fund the adaptations without selling any share.
2. Advise on the effect of the reversion on means-tested care and on her estate.
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Means-tested care: the lump sum received is capital. If she keeps it, it counts toward the capital limit for local-authority means-tested care (in England, above £23,250 she is a self-funder). The property itself is usually disregarded in the financial assessment while she (or a spouse) lives there - but once she has sold a share, the cash is counted, and the provider's share is no longer hers. So the reversion can increase her assessed capital in the short term if she holds the lump sum, even though it reduces her property wealth.
Deprivation of assets: if she later needs care, the local authority may treat the sale as deliberate deprivation if the main purpose was to avoid care charges - the timing and intent matter. Spending the lump sum on adaptations (a genuine need) is defensible; gifting it away is not.
Estate: on death, her estate receives only the value of her retained 60% share (plus any savings). The provider takes its 40%. The lump sum she spends is gone from the estate, reducing the inheritance tax estate but also reducing what her family inherits.
Judgement: she should take regulated advice, consider a lifetime mortgage with a drawdown facility (which preserves the option to repay and may be cheaper if she needs only £30,000), and check grant funding first. The reversion is irreversible, so it should be a last resort after grants, a small lifetime mortgage, and family support are considered.