Do You Want to Know More About Inheritance Tax and Equity Release in 2024?

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.
  • Last Updated: 30 Jan 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.


Francis Hui

Key Takeaways:

  • Equity release in the UK can affect inheritance tax as it reduces the value of your estate, potentially lowering the taxable amount upon your death.
  • Through reducing the value of your estate, equity release can potentially lessen the inheritance tax burden your heirs have to pay.
  • The relationship between equity release and inheritance tax is that releasing equity decreases your estate's worth, which can potentially lower the inheritance tax due.
  • Inheritance tax is not directly payable on equity release in the UK, but it may affect the total inheritance tax owed on your estate.
  • Minimizing inheritance tax through equity release can be achieved by decreasing your estate's value, thereby potentially lowering the total tax due.

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.


    What Exactly Is Equity Release?

    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.

    Learn More: Equity Release Explained

    What Is Inheritance Tax?

    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.

    How Does Equity Release Affect Inheritance Tax in the UK?

    Equity release allows homeowners to unlock the value tied up in their properties, providing cash for their retirement years.

    However, it's essential to understand its potential effects on the inheritance tax.

    When the value of an estate exceeds the tax-free threshold (£325,000 per person), the amount above the limit is liable to 40% inheritance tax.

    By reducing the value of your estate through equity release, you could effectively lower your inheritance tax bill.

    However, as financial experts, we should point out that this strategy isn't without drawbacks.

    When you release equity, the money received is no longer part of your estate and won't be passed on to your beneficiaries.

    Essentially, you're trading a portion of their inheritance for financial comfort in your later years.

    It's crucial to discuss these implications with your family and seek professional advice to make an informed decision that suits your circumstances best.

    What Is the Impact of Equity Release on Inheritance Tax?

    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:

    Lifetime Mortgage

    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.

    Home Reversion

    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 Your Inheritance Tax Obligations?

    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?

    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

    What Is the Current Inheritance Tax Threshold?

    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 Responsible for Inheritance Tax?

    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

    Inheritance Tax When Gifting Equity Release Funds

    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.

    What Is the 7-Year Rule and How Does It Work?

    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.

    How Can Equity Release Be Used as Part of Inheritance Tax Planning?

    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 Benefits of Using Equity Release as an Inheritance Tax Planning Strategy?

    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 Risks of Using Equity Release as an Inheritance Tax Planning Strategy?

    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.

    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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