Does Equity Release Affect Inheritance Tax? UK Rules (2026)
Equity release can be a legitimate estate planning tool to reduce inheritance tax. Here's how it works, what the current thresholds are, and the traps to avoid.
Yes — equity release can reduce your inheritance tax bill by lowering the value of your estate. The outstanding loan balance (including accrued interest) is deducted from your estate before IHT is calculated. However, any funds you gift to beneficiaries may be subject to the 7-year gift rule.
Contents
How inheritance tax works in 2026
Inheritance tax (IHT) is charged at 40% on the value of your estate above the nil-rate band. The current thresholds (frozen until 2030) are:
| Allowance | Per Person | Married/Civil Partner |
|---|---|---|
| Standard nil-rate band | £325,000 | £650,000 |
| Residence nil-rate band | Up to £175,000 | Up to £350,000 |
| Total potential allowance | Up to £500,000 | Up to £1,000,000 |
The residence nil-rate band applies only when passing your main residence to direct descendants. It tapers down for estates worth over £2 million.
With average UK house prices near £270,000 and London/southeast properties often exceeding £500,000, many estates now fall within the IHT net.
How equity release reduces your estate
When you take out a lifetime mortgage, the loan balance grows over time through compound interest. When you die, the outstanding balance is repaid from the sale of your property. This reduces the net value of your estate — and therefore the amount subject to IHT.
James, 72, from Surrey — His property is worth £650,000. He has savings of £150,000. Total estate: £800,000. After allowances (£500,000), £300,000 is subject to IHT at 40% = £120,000 tax bill.
James takes out a lifetime mortgage of £200,000. Over 10 years at 5.8% interest, the balance grows to £352,000. His property is now worth £700,000. The net estate is £700,000 + £150,000 - £352,000 = £498,000. This is below the £500,000 allowance. IHT bill: £0.
This is a simplified example. The actual calculation depends on property value growth, interest rates, how long you live, and what you do with the released funds.
Gifting and the 7-year rule
If you release equity and gift the money to beneficiaries, those gifts may be subject to the 7-year rule:
- Gifts made more than 7 years before death: Not subject to IHT (potentially exempt transfers).
- Gifts made 3–7 years before death: Taper relief applies (reduced IHT rate).
- Gifts made less than 3 years before death: Full 40% IHT applies.
This means timing matters. If you are in your 70s or 80s and in good health, gifting soon after releasing equity may be effective.
The residence nil-rate band
The residence nil-rate band (RNRB) is a valuable additional allowance, but it comes with conditions:
- The property must be your main residence (not a buy-to-let or second home).
- It must be passed to direct descendants (children, grandchildren, step-children, adopted children).
- The total estate must be below £2 million (the RNRB tapers by £1 for every £2 above this threshold).
Equity release does not affect your eligibility for the RNRB, provided you still own and live in the property.
Pensions entering IHT from 2027
From April 2027, unused pension pots will be included in your estate for IHT purposes. This is a significant change that will affect many retirees who previously relied on pensions as an IHT-efficient asset.
For those with substantial pension pots, equity release may become an even more attractive estate planning tool. By releasing equity from your property to fund retirement, you can preserve your pension for beneficiaries — though from 2027, the pension itself will be subject to IHT.
This is a complex area. Professional advice from a regulated financial adviser and potentially a tax specialist is essential.
Case study: reducing a £1.2m estate's IHT
Patricia, 75, from London — Her property is worth £900,000. She has investments of £250,000 and a pension pot of £200,000. Total estate: £1.35 million. With allowances of £500,000, £850,000 is subject to IHT at 40% = £340,000 tax bill.
Patricia takes out a lifetime mortgage of £300,000, using £100,000 for home improvements and gifting £200,000 to her two children. She survives for 8 years. The gift is now fully exempt. The loan balance has grown to £480,000. Her property is worth £1,000,000. The estate is now £1,000,000 + £250,000 - £480,000 = £770,000. After allowances of £500,000, only £270,000 is subject to IHT = £108,000 tax bill.
Tax saved: £232,000 (minus the cost of the equity release interest and fees).
Model your estate and IHT
Use our calculator to see how equity release could affect your loan balance and estate value over time.
People Also Ask
Not necessarily. If you spend the released funds on yourself, the estate value may not reduce significantly. The IHT benefit comes from reducing the net property value, not from spending the money.
Yes, but the gift may be subject to the 7-year rule. If you die within 7 years, taper relief or full IHT may apply.
No, provided you continue to own and live in the property as your main residence. The RNRB is unaffected by having a mortgage.
Probably not. Equity release is expensive. The IHT saving should significantly exceed the cost for it to make sense. Get professional advice.
From April 2027, unused pension pots will be subject to IHT. This may make equity release more attractive as a way to fund retirement while preserving pensions.
Related guides
Reviewed by Chris, CII-qualified equity release specialist · Last reviewed July 2026