Does Equity Release Affect Inheritance Tax?

How equity release reduces estate value

When you take out a lifetime mortgage, the outstanding loan balance — including all accrued compound interest — is a liability of your estate. When the property is sold after your death, the loan is repaid first; only what remains after repayment passes to your beneficiaries.

For IHT purposes, the net estate value is calculated after deducting liabilities, including the equity release balance. A £600,000 estate with a £100,000 equity release loan outstanding has a net estate value of £500,000 — not £600,000 — for IHT purposes.

The IHT thresholds in 2026

IHT is charged at 40% on the value of an estate above the applicable nil-rate band. The standard nil-rate band is £325,000 per person. An additional residence nil-rate band of up to £175,000 applies when a main residence is left to direct descendants (children or grandchildren), giving a combined threshold of up to £500,000 per individual.

Married couples and civil partners can transfer unused nil-rate bands to each other, meaning a combined estate of up to £1 million can be passed to children free of IHT in some circumstances.

Example: A sole owner has an estate valued at £600,000, including their home. They take equity release of £100,000. The estate's net value drops to £500,000. If the residence nil-rate band applies, no IHT is due — the entire estate falls within the threshold. Without the equity release loan, £100,000 would have been subject to IHT at 40%, resulting in a £40,000 tax liability.

Using equity release funds as gifts — the 7-year rule

Some people take equity release in order to make gifts to children or grandchildren. If you gift the proceeds, those gifts are potentially exempt transfers for IHT purposes — meaning they fall outside the estate after seven years. However, if you die within seven years of making the gift, a taper relief scale applies, and some or all of the gift may still be included in the estate for IHT.

The combination of an equity release loan reducing the estate and a gift potentially leaving the estate over time can have a compounding IHT benefit — but the calculation is complex. Specialist estate planning advice should be taken before structuring arrangements on this basis.

Not a standalone IHT planning tool

While the IHT interaction is genuine, equity release should not typically be taken primarily as an IHT planning strategy. The compound interest on the loan, the reduction in inheritance, and the impact on other beneficiaries all need to be weighed alongside any IHT benefit. A specialist adviser covering both equity release and estate planning can assess the overall picture.

For a full guide to this topic, see Equity Release and Inheritance.