How Does Equity Release Impact Inheritance Tax in 2024?

Equity release can reduce your estate's value, potentially lowering inheritance tax obligations, as the money released might fall outside of your taxable estate. However, it's essential to consider how this impacts the inheritance you intend to leave behind.
  • Last Updated: 07 May 2024
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  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.


Francis Hui
Are You Looking for the Ultimate Guide on Inheritance Tax and Equity Release in 2024? Learn More About Inheritance Tax Obligations and Inheritance Tax When Gifting Equity Release. Keep Reading to Get the Answers You Need.
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Key Takeaways
  • Equity release in the UK can affect inheritance tax as it shrinks your estate’s value, potentially lowering the taxable amount upon your death.
  • By diminishing your estate’s worth, equity release may lessen the inheritance tax your heirs face.
  • While not directly taxable, equity release impacts the overall inheritance tax on your estate.

When it comes to equity release and Inheritance Tax, what do you really need to know in order to make the best possible decisions for you and your family?

Inheritance tax (IHT) is a reality that is not going away any time soon, as can be seen from the roughly £7bln that was paid in IHT in the 2022/23 tax year, up from £6bln during the previous year.1

To avoid leaving your beneficiaries in a messy relationship with HMRC once you are gone, find out more about important tax matters now so you can plan strategically.

In This Article, You Will Discover:

    Every Investor’s dedicated team of researchers and writers specialises in producing guides for retirement financing. 

    This guide aims to help individuals understand both the potential benefits and risks of equity release on their beneficiaries in terms of Inheritance Tax (IHT).

    In order to bring you the latest and most reliable news on all matters equity release, our articles are regularly updated and subjected to strict fact-checking and compliance checks.


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    Inheritance Tax and Equity Release

    How Does Equity Release Impact Your Inheritance Tax Planning?

    Equity release can reduce the value of your estate, potentially lowering inheritance tax liabilities.

    How Does Equity Release Work and Affect Your Inheritance Tax?

    Equity release is a financial option where homeowners over 55 can access the value tied up in their property.

    It provides a lump sum or regular payments, without the need to sell your home.

    This approach allows you to tap into your home’s value while continuing to live there.

    It’s a popular choice for supplementing retirement income, but it’s vital to consider its long-term impact on your estate.

    Understanding the interaction between inheritance tax and equity release is crucial for effective estate planning.

    Learn More: Equity Release Explained

    How Can Equity Release Affect Your Inheritance Tax Liability?

    The impact of equity release on Inheritance Tax could be significant if the value of your estate would trigger an IHT liability. 

    If your estate’s value exceeds the minimum threshold, Inheritance Tax will be payable.

    Equity release, however, lowers the value of your estate.

    What does that mean?

    Depending on the size of your estate, equity release loans could devalue the inheritance you leave behind to the extent that your estate’s IHT burden is reduced or even eliminated altogether.2

    The two types of equity release plan available in the UK and how they differ in this respect:

    How Does a Lifetime Mortgage Impact Inheritance Tax?

    With a lifetime mortgage, your home will be sold upon your death or when you move into long-term care. 

    The sale proceeds will cover the balance of your equity release plan along with any outstanding interest on the loan. 

    Then, if money is left, it will be allocated to your estate. 

    The total amount in your estate after the loan has been repaid will determine the IHT liability.

    How Does Home Reversion Fit Into Your Inheritance Tax Planning?

    Since a home reversion plan entails selling a portion of your home to an equity release lender, only the portion you retain ownership of will form a part of your estate when you pass away.

    This means getting a home reversion plan will reduce your beneficiaries’ IHT liability.

    Take note:

    Nowadays, home reversion plans are not a very popular form of equity release and only make up 1% of the equity release market.3

    While lifetime mortgages and home reversion plans can potentially help manage your Inheritance Tax, these are complex financial products that have risks and should only be considered after consulting with a financial advisor.

    What Are the Key Considerations for Equity Release and Inheritance Tax in the UK?

    In the UK, key considerations include how equity release affects the estate value and subsequent tax dues.

    What Should You Know About Inheritance Tax and Equity Release?

    Inheritance Tax in the UK is a levy on the estate (property, money, and possessions) of someone who’s passed away.

    If the value exceeds a certain threshold, currently £325,000, the tax applies, usually at 40%.

    Understanding Inheritance Tax is crucial, especially for those planning their estate’s future.

    It’s a key factor in decisions about gifting assets or setting up trusts, directly affecting how much your heirs will inherit.

    What Are Your Inheritance Tax Duties When Considering Equity Release?

    Your Inheritance Tax obligations are primarily determined by the overall value of your estate and how it is distributed after your death.

    Of course, since IHT on your estate is only payable after your death, it makes sense for you to plan for that eventuality in the best interest of your beneficiaries.

    When Is Inheritance Tax Due With Equity Release?

    Inheritance Tax is due after your executor has settled all your financial obligations and the remaining total value of your estate has been determined.

    However, the process has to be concluded within six months of your death or HM Revenue and Customs will start charging your estate interest on the outstanding IHT.4

    IHT is only due if the total value of your estate exceeds the IHT threshold unless the portion that exceeds the threshold is left to your spouse, a registered civil partner, a charity, or an amateur community sports club.5

    How Does the Current Inheritance Tax Threshold Apply to Equity Release?

    The current IHT threshold is £325,000.6

    So, if your estate’s assets are worth less than £325,000, your estate falls under what is known as the ‘nil band’, and your estate will not pay any IHT.

    If you leave your home to your direct descendants, such as your children or grandchildren, and your property is worth less than £2mln, an additional £175,000 allowance is not subject to Inheritance Tax.7

    This means that when it comes to leaving your home to direct descendants, your IHT threshold rises to £500,000 if your property is worth less than £2mln.

    Who Is Liable for Inheritance Tax in Equity Release Scenarios?

    The executor of your estate is responsible for Inheritance Tax, if you have a will, they will pay anything that is owing to HM Revenue and Customs using funds from your estate.8

    How Do Specific Equity Release Strategies Influence Inheritance Tax?

    Different strategies, like lifetime mortgages or home reversion, have varied impacts on inheritance tax calculations.

    How Do Different Equity Release Schemes Influence Inheritance Tax Calculations?

    Equity release schemes, primarily lifetime mortgages and home reversion plans, have distinct implications for inheritance tax calculations.

    With a lifetime mortgage, homeowners borrow against their property’s value, which accumulates interest, potentially reducing the estate value and, consequently, the inheritance tax liability.

    In contrast, home reversion involves selling a part or all of a property to a provider, immediately affecting the estate’s value and the subsequent inheritance tax.

    The choice of scheme significantly influences the estate’s net value and the inheritance tax due, necessitating careful consideration to align with one’s financial and estate planning goals.

    What Is the Impact of Equity Release on Inheritance Tax for Spouses vs. Children and Other Heirs?

    Equity release impacts inheritance tax differently for spouses compared to children and other heirs.

    Spouses typically do not pay inheritance tax due to spousal exemption when inheriting assets, including property.

    However, when equity is released, reducing the property value, children and other heirs face a potentially lower inheritance tax due to the decreased estate value.

    This reduction can be beneficial, but it also means that the overall inheritance left for beneficiaries may be smaller, highlighting the need for strategic planning based on the family’s financial goals and circumstances.

    What Legal and Strategic Factors Should You Consider With Equity Release?

    It’s crucial to understand legal obligations and strategic implications of equity release on your estate planning.

    What Are the Legal Considerations of Equity Release in Relation to Inheritance Tax?

    Legal considerations of equity release in relation to inheritance tax encompass compliance with regulatory guidelines, understanding the legal implications of debt on the estate, and the rights of beneficiaries.

    Homeowners must ensure that the equity release plan aligns with inheritance tax laws, considering how the loan or sale impacts the estate’s value.

    It’s crucial to obtain legal advice to navigate the complexities of equity release agreements, ensuring that the plan does not inadvertently complicate the inheritance process or lead to unforeseen tax liabilities for heirs.

    Can Equity Release Serve as an Effective Inheritance Tax Planning Tool?

    Equity release can be used as part of Inheritance Tax planning by allowing you to reduce the size of your estate, and consequently the potential Inheritance Tax (IHT) liability upon your death.

    To use equity release in this way, you would typically take out a lifetime mortgage.

    With this type of product, the loan and interest are repaid upon death or moving into care, shrinking the taxable estate. 

    The released funds can advance family inheritances, usually exempting them from IHT if you live for seven more years.11 

    Equity release can be a useful tool to employ as part of your IHT planning, but do not attempt this without the help of a qualified financial advisor.

    What Are the Advantages of Integrating Equity Release into Your Inheritance Tax Planning?

    The benefits of using equity release as an IHT planning strategy primarily involve reducing the size of your taxable estate.

    An illustration:

    • Imagine your home is worth £2.5mln and you have other assets of £300,000 by the time you pass away.
    • Your entire estate goes to your daughter.
    • This means your estate is worth £2.8mln, and in this case, the IHT exemption for direct descendants is only £375,000.
    • As IHT only applies to the portion of your estate that exceeds the threshold of £375,000, your daughter will be liable for tax on £2.425mln. 
    • At 40%, her IHT bill will come to £970,000.
    • However, if you released £1.2mln of your home’s value with an interest-only lifetime mortgage (where you settled the interest monthly so that only the principal loan amount is repaid at your death) and gifted the £1.2mln to your daughter more than seven years before your death, IHT would only be due on £1.225mln, resulting in an IHT bill of £490,000 (again, 40% of that amount).
    • This represents a saving of £480,000.

    While equity release can potentially reduce your estate’s Inheritance Tax liability, it is important to bear in mind the potential risks and downsides, such as a decrease in the value of your estate and the potential implications for your beneficiaries.

    What Are the Potential Risks of Using Equity Release for Inheritance Tax Planning?

    The risks of using equity release as an Inheritance Tax planning strategy are primarily linked to the timing of your death.

    Of course, this is something you have no control over, unless you have a terminal illness, when you make a gift as described in the scenario above.

    The our earlier example again:

    1. If you pass away within three years of gifting equity release funds to your daughter, she would be liable for IHT at the full 40% on that gift, exactly as if it had not been given before your death.12
    2. If you pass away within three to seven years of making this gift to your daughter, she would be liable for IHT at between 8% and 32% (as determined according to the taper relief system depending on when exactly your death occurred).13

    There are other risks of equity release to be aware of.

    Keep these drawbacks in mind when considering equity release:

    • Engaging in equity release could affect your eligibility for means-tested benefits, both presently and in the future.
    • Keep in mind that equity release is a long-term commitment. While some plans may impose early repayment fees, your advisor can guide you through this.
    • Equity release can be an expensive form of borrowing owing to compound interest.  All new lifetime mortgages allow you to make repayments, however, enabling you to manage the interest accumulation.
    • It is a good idea to discuss your consideration of equity release with your loved ones, so they are aware of your financial planning.
    • Be aware that setting up equity release may involve some fees.
    • After opting for an equity release plan, you will not be able to use your home as collateral for additional borrowing.
    • Undertaking equity release will diminish the value of your estate, resulting in less inheritance for your heirs.

    Speak to a qualified equity release advisor to discuss all the benefits and risks that apply to using equity release for estate planning. 

    *This example is for indicative purposes only.

    How Does Equity Release Interact With Inheritance Tax Rules and Exemptions?

    Equity release can interact with tax rules, affecting exemptions and the overall tax strategy.

    How Does Gifting Equity Release Funds Impact Inheritance Tax?

    When gifting equity release funds, Inheritance Tax liability could be reduced, as you will be reducing the size of your estate by taking equity out of your home.9

    You will have to take note of the seven-year rule when giving your loved ones gifts, however.

    How Does the 7-Year Rule Affect Inheritance Tax and Equity Release?

    The seven-year rule stipulates that if you gift someone an ‘early inheritance’ from equity release funds and survive for seven years following this, the recipient will not have to pay IHT unless the gift is part of a trust.10

    However, if you pass on within seven years and your gift is above the nil band, the receiver of the gift will have to pay IHT on the portion that is not exempt.

    The beneficiaries will need to pay tax if: 

    • 40% if the money was gifted in the three years before your death.
    • Between 8% and 32% as determined by ‘taper relief’ (a sliding scale) if the money was gifted three to seven years before your death.

    While the seven-year rule may seem appealing, it is important to understand that this approach carries a risk: If you pass away within seven years, the recipient of the gift may face an unexpected Inheritance Tax burden.

    Comparing Equity Release With Other Inheritance Tax Mitigation Methods

    Understanding how equity release compares with other methods is vital for informed inheritance tax planning.

    How Does Equity Release Compare to Other Inheritance Tax Mitigation Strategies?

    Compared to other inheritance tax mitigation strategies, such as gifting, trusts, or investing in tax-efficient assets, equity release offers an immediate financial solution without parting with assets.

    While gifting can reduce an estate’s value over time, equity release provides liquidity without waiting for tax exemptions to apply.

    However, the impact on the estate’s value and potential interest accumulation with equity release must be weighed against the more controlled, potentially tax-efficient transfers of wealth through trusts or gifts.

    Each strategy has its merits and drawbacks, necessitating a tailored approach based on individual financial situations and goals.

    Can You Provide Case Studies Illustrating the Impact of Equity Release on Inheritance Tax?

    Consider a case where a homeowner opts for a lifetime mortgage, releasing a significant sum that is then used for living expenses, thereby reducing the property’s net value.

    Upon the homeowner’s death, the estate’s value is lower, resulting in a reduced inheritance tax liability.

    Another scenario involves a homeowner choosing a home reversion plan, selling a portion of the property, and immediately decreasing the estate value, impacting the inheritance tax calculation.

    These cases illustrate how equity release can be a strategic tool in estate planning, offering tangible benefits in reducing inheritance tax liabilities while also demonstrating the need for careful consideration of the heirs’ eventual inheritance.

    Equity release may involve a home reversion or a lifetime mortgage, which is secured against your property. To understand the features and risks, ask for a personalised illustration. Equity release requires paying off any existing mortgage. Any money released, plus accrued interest would be repaid upon death, or moving into long-term care.

    Common Questions

    How Does Equity Release Affect Inheritance Tax in the UK?

    Can Equity Release Reduce the Inheritance Tax Burden?

    What is the Relationship Between Equity Release and Inheritance Tax?

    Is Inheritance Tax Payable on Equity Release in the UK?

    How to Minimize Inheritance Tax Through Equity Release?

    How Does Equity Release Affect My Beneficiaries’ Eligibility for Inheritance Tax Relief?

    Can I Use Equity Release to Reduce the Inheritance Tax My Beneficiaries Will Have to Pay?

    Is It Possible to Release Equity From My Property Without Affecting Inheritance Tax?

    Are There Any Specific Inheritance Tax Planning Strategies That Involve Equity Release?

    In Conclusion

    Equity release could be a way to lower the Inheritance Tax payable by your beneficiaries when you pass on, but it is not without its risks and should be carefully considered.

    It is essential to obtain an advisor to assist you and ensure that any risks you consider taking in this regard are as low as possible.

    So do not wait to reach out to a professional, because when the time comes, your beneficiaries may be very grateful for the approach you have taken with equity release and Inheritance Tax.

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