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How does equity release affect Inheritance Tax?

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As Inheritance Tax (IHT) is calculated based on the size of your estate, releasing equity in your home would reduce the value of your property and therefore lead to either less Inheritance Tax payable upon your death, or your estate may fall under the threshold completely, provided the equity released is spent and not invested.  It is important that you consider the wider impact this has on your estate and your future beneficiaries; Kiri Saunders-Brown, Equity Release specialist, discusses here how equity release affects Inheritance Tax and how we can support you if you decide you would like to release equity in your home.

What is equity release?

Equity release is an increasingly popular way to release funds without having to move out of or sell your home.  According to the Equity Release Council, there was a 20% rise in the number of homeowners over 55 releasing equity from their homes in the third quarter of 2018 compared to the same period the year before. 

There are two different equity release products available, with the most popular being a lifetime mortgage.  Under this type of mortgage, you would retain legal ownership of your property as you are borrowing against the value of your home, with the loan payable when you pass away or move into alternative accommodation. 

You do not usually pay the interest on the loan during your lifetime, so the interest rate on this type of equity release product needs careful consideration.  While it may reduce the likelihood of having to pay IHT, the debt and the accrued interest does need to be repaid, usually from the proceeds of selling your home before or after your death, and the interest rates on equity release products do tend to be higher than standard mortgages and loans. In some cases interest is added to the loan and further interest on that is paid – a process known as compounding the interest - leading to the outstanding debt to increase more rapidly.

When is Inheritance Tax due?

IHT is a tax on the estate of someone who has died and on any life time gifts made in the 7 years before death;  and it is payable unless you use the spouse exemption - i.e. by  transferring your entire estate to your spouse or registered civil partner, as long as they are UK residents.  If you are not doing this and your estate (including any life time gifts made to non exempt persons in the previous 7 years before death) is valued at more than £325,000 for an individual or potentially £650,000 for a married couple/civil partner when the survivor dies, having had the exclusive receipt of the first spouse’s or partner’s estate, then your beneficiaries would pay 40% on the amount over this threshold. 

If you are passing your home to a direct descendent, for example a child, step-child or grandchild, this increases the tax-free threshold by £150,000 (for the tax year 2019/20) to £475,000 for each spouse or partner.

Inheritance Tax when gifting equity release funds

If you are releasing equity to gift money to another person, this will be exempt from IHT if you live for 7 years thereafter, and do not derive any direct or indirect benefit back.  However, if you die within 7 years of making the gift, it will be brought back in to account with the rest of your estate when calculating the tax.  If you give more than £325,000 to a non exempt beneficiary in your life time and die between 3-7 years thereafter, “taper relief” can be applied to the tax payable on those gifts. Because tax is potentially payable by the recipient of the gift, often seen as an unfair effect of the tax regime, careful thought is needed before making life time gifts in excess of £325,000.

“When considering equity release it is vital that you also receive the right advice regarding Inheritance Tax planning, as the two go hand in hand,” explains Kiri.  “You should never release equity just to reduce the likelihood of having to pay IHT, and you should receive specific estate planning advice to discuss your own personal situation.  As you can see, there are specific rules regarding IHT, particularly when you are gifting, and it may be that your beneficiaries would find their inheritance more useful now, for example for a deposit for a house or planning a wedding.  By coming to us, you will receive tailored equity release advice which will help you understand whether it is the right option for you, as well as being able to discuss your estate planning with our colleagues in our Private Client team.”

To discuss equity release with Zoe or a member of the team, you can contact Kiri on 023 8071 7438 or email   Alternatively, you may also find the following resources useful:


This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.