Does Equity Release Reduce Inheritance Tax?

Equity release can reduce inheritance tax (IHT) in certain circumstances ⁠-⁠ but it’s not automatic, and it depends entirely on how the released funds are used and your personal circumstances. You would need to seek advice from a qualified tax adviser to understand how inheritance tax rules apply, to establish if it aligns with your long term financial goals. If it does, one of our advisers can discuss your objectives for the money to establish if equity release is suitable for you.

Many homeowners explore equity release as part of wider estate planning, especially as rising property values could push more families above the IHT threshold.

How Equity Release Affects Your Estate Value

Equity release may involve a lifetime mortgage, secured against your property, or a home reversion plan. Since money released, plus accrued interest, would need to be repaid when the last borrower dies or enters long term care, which could be covered by the proceed of the house sale, it reduces the net value of the estate for IHT purposes.

Using Equity Release to Gift Money

One of the most common motivations for equity release is to gift money to children or grandchildren while you’re still alive — sometimes called a “living inheritance.”

Why this can reduce IHT liabilities

• Under HMRC rules, some gifts are classed as ’potentially exempt transfers‘ which may fall outside their estate for inheritance tax purposes. These are general tax rules, and Age Partnership does not provide tax advice.
• If you survive seven years after making the gift, it falls outside your estate for IHT purposes.
• If you die within seven years of making the gift, taper relief may reduce the tax, as the rate charged decreases, depending on how long you lived after gifting the money.

Gifting money from equity release does not automatically avoid IHT ⁠-⁠ the same gifting rules apply as if you gifted cash from savings, and there are annual gift exemptions that sit outside the 7⁠-⁠year rule available to everyone which a qualified tax advisor could help you understand.

Releasing equity to make gifts is a significant financial decision and is not suitable for everyone.

When Equity Release Could Reduce IHT

Equity release may reduce inheritance tax when:

1. The loan reduces your estate below the IHT threshold
   
   If the outstanding loan (including interest) brings your estate under the IHT threshold, your heirs may pay less or no IHT.
2. You use the funds to make gifts and survive seven years
   
   Some people use equity release as part of wider estate planning. Specialist tax advice should always be taken to understand any potential impact on your IHT position
3. You spend the funds on lifestyle, care, home improvements, or your other objectives.
   
   Money spent is no longer part of your estate, reducing the amount subject to IHT.

When Equity Release May Not Reduce IHT

1. If the funds remain unspent
   
   Cash held in your accounts is still part of your estate.
2. If gifts fall within the 7 year rule
   
   They may still be counted for IHT.
3. If the interest roll up is small relative to your estate value
   
   Depending on the size of the loan and the interest that builds up over time, your property may still exceed the inheritance tax threshold once the equity release has been repaid, meaning IHT could still be due

Equity Release as Part of Wider Estate Planning ⁠-⁠ it’s essential to get advice

Equity release may help homeowners with high⁠-⁠value properties reduce the overall value of their estate for IHT purposes.

However, it should be seen as one tool among many, not a standalone tax planning strategy. Professional financial advice is essential, as the benefits depend on:

• Your age
• Property value
• Family circumstances
• Existing estate planning
• Long⁠-⁠term care plans

Equity release can reduce inheritance tax ⁠-⁠ in the right circumstances. The key is understanding that the loan itself reduces your estate, and how you use the released funds determines the rest.

For many families, equity release offers a way to support loved ones sooner and manage future tax liabilities. But it’s essential to get personalised advice to ensure it aligns with your long term financial goals.

Equity release may involve a lifetime mortgage, secured against your property, or a home reversion plan. It will reduce the value of your estate and impact funding long⁠-⁠term care.

Equity release requires repaying any existing mortgage. Money released, plus accrued interest, would need to be repaid upon death or moving into long⁠-⁠term care.

Advice is required before proceeding with Equity Release, and there may be other options which better suit your circumstances. Only if your case completes would our advice fee of £1,995 be payable. Other lender and solicitor fees may apply.

Request a callback or calculate how much you might be able to release.

Correct at the time of publication.