Equity Release and Inheritance Tax: Preserving Your Wealth in 2025

Can you use equity release to reduce inheritance tax?
A lifetime mortgage is deducted from your estate on death and can be used to reduce your IHT bill.

Equity Release and Inheritance Tax: Preserving Your Wealth

Can I use equity release to avoid inheritance tax? A lifetime mortgage is deducted from your estate on death and can be used to reduce your IHT bill, if used correctly.

Our expert guide will help with your research.

Later Life Finance

Author Paul Murphy

Equity release can help save inheritance tax by reducing the size of your estate when you pass away. It provides a method of raising cash from your home without downsizing to spend as you wish.

As the money borrowed plus interest is deducted from your estate upon death or long term care, this helps reduce any IH tax due payable.

How does equity release reduce inheritance tax?

Inheritance tax is due within six months of the death of the last surviving homeowner, but how does equity release reduce inheritance tax?

Tax-free equity from a lifetime mortgage can be used to boost retirement wealth and distribute to family members.

The reduction of the estate can potentially bring it below the applicable allowance IH tax thresholds. This can reduce IH tax, as long as the person making the gift remains alive for more than seven years.

Understanding how inheritance tax works and its implications on your estate is crucial for effective estate planning.

Recent significant property inflation has seen many homeowners being caught in the ‘inheritance tax trap’, but can you avoid this with forward planning to preserve your wealth?

Families only have 6 months to settle when IH is due payable, which also comes as a surprise for many people, and avoiding this level of pressure to pay a potentially large tax bill is attractive.

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Lifetime mortgages and inheritance tax

Equity Release lifetime mortgages provide access to tax-free cash, which can be spent and gifted outside of your estate to help reduce your Inheritance Tax (IHT) bill.

On death, your IHT liability is calculated from your assets, minus your liabilities.

The seven-year rule for inheritance tax purposes is also a prime consideration for gifting lump sums. A pragmatic approach with early stage planning is crucial; ‘the earlier the better’ strategy is logical if you wish to release equity to gift.

Avoiding inheritance tax is concern for an increasing number of families. We explore how equity release can be used to extract the wealth in your home.

How does equity release affect inheritance tax?

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How can equity release affect my inheritance tax bill?

Equity release affects the value of your estate by potentially decreasing, or even eliminating the inheritance tax bill.

By lowering the value of the estate, you can minimise the amount of inheritance tax payable, allowing your beneficiaries to inherit more of your assets.

Equity release allows homeowners to access the value of their property without selling it, providing a source of tax-free cash for retirement planning, home improvements and gifting an early IH, for example.

Equity release & inheritance tax case study

Without any estate planning, his daughters could be faced with a large IH tax bill.

Mr Cook wanted to gift an early inheritance to his daughters. Releasing equity with a lifetime mortgage, he was able to help his daughters with their own property purchases. Based on his life expectancy, the projected mortgage sum repayable upon death including interest is £600,000. Providing Mr Cook lives for at least seven years, the gifts fall outside of his estate for inheritance tax purposes.

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Lifetime mortgage and inheritance tax

How do lifetime mortgages affect inheritance tax?

Lifetime mortgages, a popular form of equity release, can be used strategically to minimise IHT through careful planning and gifting. By borrowing money against the value of your home through a lifetime mortgage, you can access the equity needed to make gifts that reduce your estate’s value and, consequently, your inheritance tax bill.

When taking out a lifetime mortgage, you are using the equity in your home as security for the money you borrow. This has the effect of reducing the value of your estate by the original amount of the lifetime mortgage, plus any interest and charges.

For example, let’s say you take out a lifetime mortgage and use the funds to make a series of gifts to your beneficiaries within the annual tax-free gifting allowance and in accordance with the seven-year rule. By doing so, you can effectively reduce your estate’s value and minimise the inheritance tax bill for your loved ones while still retaining ownership of your home.

You can also use the funds from equity release as part of your retirement planning strategy, for holidays, lifestyle and leisure purposes. Funds can be taken on a drawdown basis to reduce the effect of interest charged on the mortgage.

How does equity release affect inheritance tax?

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Equity release inheritance tax planning

Equity release and inheritance tax planning are two important areas to explore when considering the impact of inheritance tax on your estate.

By reducing the value of your estate through equity release, you may decrease or even eliminate the inheritance tax bill for your beneficiaries. Furthermore, gifting cash from equity release to a designated beneficiary of the will and surviving for more than seven years after making the gift can result in the gifted funds being exempt from inheritance tax.

However, it’s essential to consider the potential implications of equity release and inheritance tax on your family’s financial future. Communication and family involvement are crucial to ensuring all parties understand the situation and make informed decisions that are in their best interests.

When considering equity release and inheritance tax planning, it’s crucial to seek professional advice from financial advisers and estate planners. These professionals can provide personalised guidance based on your unique circumstances, helping you make informed decisions about how to best manage your estate and minimise your inheritance tax bill.

Later Life Finance provides access to lifetime mortgages from the whole marketplace of providers, offering a completely free service unless you decide to go ahead with a plan. By seeking professional advice, you can ensure that you’re making the best possible decisions for your estate planning and securing a brighter financial future for your loved ones.

Gifting money from equity release

One way to reduce inheritance tax is by gifting money from equity release to family members. This strategy allows you to make use of the annual tax-free gifting allowance and the seven-year rule, which can help lower the inheritance tax for the recipients of your gifts. However, it’s essential to understand the rules and limitations surrounding tax-free gifting and the seven-year rule in order to effectively use this strategy and avoid potential pitfalls.

By gifting fund from equity release to your loved ones, you can not only provide financial support during your lifetime, but also potentially reduce the amount of inheritance tax they’ll need to pay upon your passing. But it’s crucial to be aware of the risks involved, as it’s impossible to predict how long you will live after making the financial gift, which may impact the tax implications of the gift.

The annual tax-free gifting allowance

The annual tax-free gifting allowance is a valuable tool for those looking to minimise inheritance tax. Under this allowance, you can gift up to £3,000 per year without incurring inheritance tax. The annual tax-free gifting allowance provides a straightforward way to reduce your estate’s value and, consequently, the potential inheritance tax bill for your beneficiaries.

By making regular gifts up to the annual tax-free gifting allowance, you can provide financial support to your loved ones during your lifetime while also reducing your estate’s value for inheritance tax purposes. It’s a win-win situation that benefits both you and your beneficiaries.

The seven year rule to consider when gifting

The seven-year rule is another essential aspect of inheritance tax planning when it comes to gifting money from equity release. Under this rule, if you give away assets and live for at least seven years after making the gift, it becomes completely tax-free. However, if you pass away within seven years of making the gift, it may be subject to inheritance tax, depending on the value of the gift and the time elapsed since it was given. If you pass away within 7 years of making the gift, the tax due is calculated using a taper relief scale.

Understanding and utilising the seven-year rule can help you strategically plan your gifts to minimise the inheritance tax bill for your beneficiaries. By timing gifts appropriately and taking advantage of this rule, you can ensure that your loved ones receive the maximum possible inheritance without being burdened by a hefty tax bill.

Inheritance protection and equity release

IH protection in equity release is a feature that allows homeowners to guarantee a certain percentage of their property’s value for their beneficiaries, even if the sale price doesn’t cover the entire loan amount. This protection can provide peace of mind for those who want to ensure that their loved ones will receive a portion of the property’s value, regardless of the outstanding mortgage balance and interest at the time of their passing.

However, it’s important to note that removing inheritance protection from an equity release plan can lower the amount that can be borrowed through equity release. This trade-off should be carefully considered when deciding whether to include IH protection in your equity release plan, as it can impact the overall benefits of the plan for you and your beneficiaries.

Equity Release & Inheritance tax -
Your Questions Answered

How does Equity release affect inheritance tax?

How can Equity Release reduce Inheritance Tax?

Gifting funds via a lifetime mortgage can reduce your inheritance tax bill. The money borrowed via the mortgage is deducted from your estate upon death or long term care, which helps reduce any tax due payable. If you make a gift and survive for 7 years or more, the gift can be tax-free.

Is Equity Release Tax free?

Equity release is tax free and not subject to Income Tax as it is not a form of income, as it is a mortgage. Since the lending is taken out against your home, this is not taxable for income or capital gains tax. Even if you are planning to Release Equity to supplement your income, you are not subject to any taxation on the money released.

How does Equity Release work when someone dies?

Equity release is repaid within 12 months of the last surviving homeowner passing away or going into long term care. On first death or long term care, the plan continues until the surviving homeowner passes away or goes into long term care. Then the property is sold and the plan is settled. The executors of your estate will have control over marketing the property with an estate agent. When the property is sold, the outstanding balance owing is settled and after any professional fees such as legal costs are settled the residual balance will be paid to your estate

Is Equity Release Subject to Inheritance Tax?

Equity release is not subject to inheritance tax if any gifts made meets the 7 year rule criteria. As the money borrowed plus interest is deducted from your estate upon death or long term care, this helps reduce any tax due payable. Equity release is an option for older homeowners to consider if distributing the wealth to family is a consideration. For many people their home will form most of their estate, which ultimately makes this an important decision to make.

How is Inheritance Tax calculated?

Inheritance tax is a tax due on the estate of someone who’s died. The amount of tax due depends on the value of the deceased’s estate – which is worked out based on their assets (cash in the bank, investments, property or business, vehicles, payouts from life insurance policies), minus any debts including mortgages and equity released from their home.

Does a mortgage reduce inheritance tax

When you die the value of the mortgage is deducted from the value of the person's estate, which reduces the amount of inheritance tax (IHT) due. This can help homeowners reduce their exposure to the IH tax trap, and protect their family and their estate.

How can equity release save inheritance tax?

Equity release can help save inheritance tax by reducing the size of your estate when you pass away. It provides a method of raising cash from your home without downsizing to spend as you wish. As the money borrowed plus interest is deducted from your estate upon death or long term care, this helps reduce any IH tax due payable.

Is Equity Release a Good Idea To Avoid Inheritance Tax?

Releasing equity is a popular way of reducing the amount of inheritance tax payable, as it decreases the size of your estate when you pass away. Avoiding inheritance tax completely will rely on various factors, however Equity release via a lifetime mortgage is a common method of raising cash from property whilst you are alive.

How does equity release affect inheritance tax?

Equity release can affect the impact of inheritance tax by reducing the size of your estate when you pass away. The effect can be reduced tax payable by your estate.

How does equity release affect IHT planning?

Equity release can be used for inheritance tax planning as a means of reducing the size of your estate when you pass away. Using a lifetime mortgage to reduce the impact of tax on your estate is a concept increasing levels of homeowners are using to preserve their wealth.

Equity release and inheritance tax example case study

Mr Cook is a retired solicitor and enquired about reducing his inheritance tax liability. He is widowed. He owns a property worth £1.2 million and has other assets of £400,000. He has two daughters who will be the sole beneficiaries of his estate. Without any estate planning, his daughters could be faced with a large IH tax bill. Mr Cook wanted to gift an early inheritance to his daughters. Releasing equity with a lifetime mortgage, he was able to help his daughters with their own property purchases. Based on his life expectancy, the projected mortgage sum repayable upon death including interest is £600,000. Providing Mr Cook lives for at least seven years, the gifts fall outside of his estate for inheritance tax purposes.