IHT Overhaul 2026: What the Inheritance Tax Changes Mean for Equity Release and Estate Planning

Where the IHT thresholds stand

The nil-rate band (NRB) has been frozen at £325,000 since 2009. The residence nil-rate band (RNRB) adds a further £175,000 where a main residence passes to direct descendants. Combined, an individual can pass up to £500,000 free of IHT; a couple, up to £1 million.

Both thresholds are frozen until at least 2030. Meanwhile, house prices across the UK have continued to rise. The combination of frozen thresholds and rising property values means estates that were comfortably below the IHT threshold five or ten years ago may now be above it. Many homeowners are discovering an IHT exposure they did not previously have — and had not planned for.

The pension change: a fundamental shift from April 2027

From April 2027, pension assets will be brought into the IHT estate. This is a fundamental shift. For many years, pensions were considered one of the most efficient ways to pass wealth to the next generation — held outside the estate, free of IHT, and passing to beneficiaries with relatively favourable tax treatment.

Andy Bell, chief executive of AJ Bell, described the change as a fundamental shift in estate planning, warning clients to review their arrangements now rather than wait. The practical consequence: homeowners who had planned to leave their pension intact as a legacy, while drawing from other assets in retirement, will need to reconsider. The tax position of holding a large pension pot has changed materially.

How equity release could reduce the taxable estate

A lifetime mortgage increases the debt secured against a property. Because the outstanding loan balance is deducted from the estate's value on death, taking equity release reduces the net estate subject to IHT. This is not a loophole — it is the straightforward consequence of holding a liability that reduces the estate's value.

In addition, some lifetime mortgage products include drawdown facilities that allow homeowners to access funds in stages over time. These proceeds could be used to make gifts to family members. Under the seven-year rule, an outright gift made to a family member falls outside the estate after seven years. Equity release proceeds used to fund such gifts allow a homeowner to remain in their property while potentially reducing their IHT exposure over time.

This is not a guaranteed outcome, and it depends heavily on individual circumstances — the size of the estate, the amount released, interest rates on the lifetime mortgage, and whether the homeowner survives the seven-year period. It requires proper advice from an estate solicitor and a financial planner, not just an equity release adviser.

Worked example: how equity release could affect the taxable estate

What equity release is not

Equity release is not a simple IHT planning tool, and it should never be presented as one without full regard for the risks. The key points to understand:

• Compound interest: The interest on a lifetime mortgage rolls up over time. On a 20-year plan, the outstanding balance can be significantly larger than the original amount released. This affects both the estate value and the inheritance left for family.
• Largely irreversible: Once completed, a lifetime mortgage is difficult to unwind without incurring substantial early repayment charges. The decision needs to be right at the outset.
• Must suit overall circumstances: The starting point for any equity release conversation is whether the product is suitable for the individual — not whether it achieves a particular tax outcome. IHT planning is one consideration among many.

Equity Release Council protections

All products recommended by Verity Home comply with Equity Release Council standards, which provide important protections:

• No negative equity guarantee: You will never owe more than the value of your home, regardless of how long the plan runs or how property values change.
• Right to remain: You have a guaranteed right to remain in your home for life, or until you move into long-term care.
• Portability: Plans can generally be transferred to a suitable new property if you wish to move.

Working with the right team of advisers

Estate planning is rarely a single-adviser conversation. Where IHT and equity release intersect, Verity Home works alongside estate solicitors and financial planners to ensure the equity release recommendation makes sense in the context of the wider estate plan — not in isolation from it.

If you have an estate solicitor or financial planner already, we are happy to work with them. If you don't yet have those relationships, we can point you in the right direction.