How Equity Release affects inheritance tax

Understanding equity release and inheritance tax

Equity release is a product designed for homeowners over the age of 55 who wish to access some of the equity in their home while continuing to live in it. Equity release products, such as lifetime mortgages and home reversion plans, allow older homeowners to access tax-free cash by either borrowing against their home or selling a portion of it to the provider. The money they receive does not need to be repaid until after they have died or moved into permanent care and the home is sold.

While the money you receive from an equity release product is tax-free at the outset, there can be tax implications down the line depending on how you use the cash. Beyond this, an equity release product will reduce your estate and can have inheritance tax implications as well.

In the UK, inheritance tax only typically kicks in if the value of your estate is over £325,000. That said, if you leave everything above the threshold to your spouse or civil partner, no inheritance tax will be due while they're still alive. Their beneficiaries may need to pay inheritance tax after they die, but if their home is included in the calculation, the Residence Nil-Rate Band (RNRB) could apply. The RNRB is £175,000 for the 2025/26 year which essentially increases your tax-free allowance to £500,000 as long as your overall estate is worth less than £2,000,000.

While many people's estates will fall below the threshold for inheritance tax, others will be liable for up to 40% tax on their estates beyond the threshold. As such, many people naturally look for ways to lower their inheritance tax and pass more of their assets on to their family. This is where options like equity release could sometimes make sense, particularly if you have a lot of money tied up in your home.

Types of equity release plans

The two main types of equity release are lifetime mortgages and home reversion plans. With both equity release products, you can keep living in your property until you die or move into care. You also do not have to settle your debt until after you die or move into care, when your provider is typically paid from the sale of the property.

Lifetime mortgages - Lifetime mortgages are long-term loans secured against your property that allow you to borrow between 20% to 60% of your property's value. The loan is repaid after you die and move into care, but interest accrues throughout the loan's term. We discuss lifetime mortgages in more detail in our article on the topic.

Home reversion plans - Home reversion plans allow you to sell a portion of your property in return for cash ranging from between 20% to 60% of the property's true value. With a home reversion plan, you get less than the property's true worth, but you can continue living in the property which can be appealing to some people. We discuss home reversion plans in more detail in our article on the topic.

Both types will reduce your estate and so both can be used to lower your inheritance tax bill.

Benefits of using equity release for inheritance tax planning

If you have a lot of money tied up in your house, releasing some of the equity could be a good way to give your family an "early" inheritance. You could release cash that could boost your retirement but also allow you to give cash gifts to children or grandchildren who might need help to get on the property ladder or pay for their education now.

You can give away up to £3,000 each year in the form of gifts without this money counting towards your estate for inheritance tax purposes. You could technically give away even more than that, and as long as you live for at least seven years from the date you gifted the money, it won't count towards your estate for inheritance tax purposes.

As such, releasing equity can be one way to make tax-free gifts to your family and friends while you're still alive.

It's also true that equity release reduces your estate which can, in turn, reduce your inheritance tax bill. That said, equity release in itself comes at a cost. This can include:

• The interest compounds over time with a lifetime mortgage
• The below-market sale price you'll achieve with a home reversion plan (usually just 20% to 60% of the true value of the property)
• Losing out on the property's appreciation over the years (as a proportion of it will be used to pay off your provider)
• The initial setup costs of the products (which can amount to several thousand pounds)

As such, if the only reason you're considering equity release is so that you can reduce your inheritance tax bill, it might not be the most cost-effective way to achieve your goals.

If, however, you're planning on taking out an equity release product anyway, there are ways to maximise the inheritance you leave behind while reducing your estate for tax inheritance purposes.

As you can imagine, this is an incredibly complex field so it's a good idea to speak to a qualified financial advisor to discuss your exact circumstances first. You can book a free, no-obligation consultation with a local, FCA-regulated adviser via our website.

What to consider when inheriting a house with equity release

If you inherit a property with equity release, you will typically need to pay the equity release provider what they're owed from the sale of the property. With a lifetime mortgage, this will be the initial balance, along with any interest that has accrued over the years.

With a home reversion plan, this will typically be an amount equating to the proportion of the property that has been sold off to the home reversion provider. So, if the property is sold for £200,000 and 25% has been sold off to the home reversion provider, then you would owe them £50,000 and would get to keep the remaining £150,000.

In some cases, you might find that the property hasn't appreciated enough to settle the debt that's owed. In those circumstances, a no negative equity guarantee usually applies. This means you will only pay however much the property sells for, and the shortfall will be written off.

If you want to keep the property, you'll typically need to settle the debt yourself with your own funds. It's worth speaking to a financial advisor so you can explore your options before you decide what you want to do with the property.

Frequently asked questions

Does equity release reduce inheritance tax?

Equity release can reduce your overall estate's value, which could lower your inheritance tax bill and allow you to give your family cash gifts before you die. However, it can be an expensive way to avoid paying inheritance tax, where you generally won't receive the full market value of your home in the first place.

Generally, there are other alternatives to reducing your inheritance tax bill which can often work better (and cheaper) depending on your circumstances. Check out the ten best ways to avoid inheritance tax if you want to find out more.

What happens if you inherit a house with equity release?

If you inherit a house with equity release, the outstanding equity release loan must be settled first. The loan is typically repaid from the proceeds of the sale of the property. Most equity release products come with a no negative equity guarantee. This means that even if the outstanding debt is larger than the amount you sell the property for, you won't have to pay more than the sale price. If the outstanding debt is smaller, you can keep whatever money remains after you've repaid the debt. If you wish to keep the property, you will typically need to pay off the loan yourself if you have the means to do so.

What are the tax implications of equity release?

An equity release arrangement provides tax free cash in return for a loan secured against your home or a giving up a portion of your home. In that sense, an equity release arrangement itself is tax free.

Equity release products will reduce your estate which can have implications for your inheritance tax bill, i.e you will typically owe less than if you didn't have an equity release arrangement in place.

In addition, the tax free cash you receive from the arrangement can be gifted to friends and family right away. You can gift up to £3,000 a year tax-free with no implications for your estate. Or you can gift as much as you like as long as you live for at least 7 years after the date of the gift. If you die within seven years and have gifted an amount over your tax-free gift allowance, your beneficiaries may owe inheritance tax on the gift.