Equity Release Inheritance Tax
- MAZ
- Nov 30, 2024
- 25 min read
Updated: Aug 27
Understanding Equity Release and Its Link to Inheritance Tax
Picture this: You've spent decades building up equity in your home, and now you're pondering how to make the most of it in retirement without leaving a hefty tax bill for your loved ones. As a tax accountant with over 18 years advising UK clients—from bustling London business owners to retirees in the countryside—I've seen firsthand how equity release can be a game-changer for inheritance tax planning. But it's not without its nuances. Let's dive in, shall we?
Right off the bat, equity release doesn't directly trigger inheritance tax (IHT), but it can significantly reduce the IHT your estate might owe. In the 2025/26 tax year, the standard nil-rate band remains frozen at £325,000, meaning no IHT on estates below this threshold. Add the residence nil-rate band of £175,000 if you're passing your home to children or grandchildren, and that jumps to £500,000 for singles—or up to £1 million for married couples or civil partners combining allowances. Anything above is taxed at 40%, dropping to 36% if you leave 10% or more to charity. With HMRC collecting a record £7.5 billion in IHT last year, more families are turning to equity release to trim their estates—I've advised on cases where it slashed bills by tens of thousands.
What Exactly Is Equity Release, and Why Does It Matter for IHT?
If you're over 55 and own your home, equity release lets you unlock cash from your property's value without selling up. It's tax-free money—no income tax or capital gains tax on the lump sum or drawdowns. But here's where it ties into IHT: by reducing your estate's value. Your estate includes your home, savings, investments, and more, minus debts. Equity release creates a debt against your home, which gets deducted when calculating IHT upon your death.
There are two main types. First, the lifetime mortgage—the most popular, making up over 95% of plans. You borrow against your home, interest rolls up (typically 4-6% compounded), and it's repaid when you die or enter long-term care. The debt eats into your home's value, lowering what's left for IHT. Second, home reversion: You sell a portion (or all) of your home to a provider for cash but stay living there rent-free. Only the unsold part counts in your estate for IHT.
In my practice, I've handled scenarios where clients used this to their advantage. Take John from Surrey, a widower with a £600,000 home and £200,000 in savings. His estate was heading for £120,000 in IHT. By releasing £150,000 via a lifetime mortgage and gifting it wisely, we reduced his taxable estate below the threshold—saving his kids a fortune. But be careful; if interest compounds unchecked, it could wipe out more inheritance than expected.
How Does Equity Release Shrink Your IHT Bill?
None of us fancies the taxman taking a big bite, right? Equity release helps by devaluing your estate. For a lifetime mortgage, the outstanding loan (principal plus rolled-up interest) is subtracted from your home's sale proceeds on death. If your home sells for £500,000 and you owe £200,000, only £300,000 feeds into your estate calculation.
With home reversion, it's even more direct: Sell 50% of a £400,000 home for £150,000 cash, and only £200,000 of the property enters your estate. The provider gets their share on sale. This can push your total estate under the £325,000 or £500,000 bands, dodging IHT altogether.
But here's a pro tip from years at the coalface: Factor in the new 2025 rules. From April 2025, IHT shifts to a residence-based system— if you've lived in the UK for 10 of the last 20 years, your worldwide assets are taxable, with a 10-year 'tail' after leaving. For expat clients, this has been a wake-up call. And from 2027, unused pensions join the estate for IHT, so using equity release to fund spending now could preserve pension pots tax-efficiently.
Gifting Equity Release Funds: A Smart IHT Buster?
So, the big question on your mind might be: Can I gift the released cash to slash IHT further? Absolutely, but timing is everything. Gifts are potentially exempt transfers (PETs)—free from IHT if you survive seven years. If not, taper relief kicks in: 40% if under three years, sliding to 8% at six to seven years.
I've seen clients trip up here. One business owner in Manchester released £100,000, gifted it to his daughter for a house deposit, but passed away after four years. Taper relief meant 24% tax on the gift, but it still beat full IHT on the estate. Use your annual £3,000 gift allowance (plus £250 small gifts) to chip away safely. Or wedding gifts: up to £5,000 per child.
For larger sums, equity release shines. Release £200,000 from a £700,000 home, gift it over time, and your estate drops—potentially saving £80,000 in IHT at 40%. But document everything; HMRC scrutinises if it smells like deliberate deprivation, especially if care needs arise.
Real-World Example: Crunching the Numbers
Let's think about your situation. Suppose you're a single homeowner with a £450,000 property, £100,000 savings, total estate £550,000. Without action, IHT on £50,000 excess (after £500,000 allowance) is £20,000.
Release £100,000 via lifetime mortgage at 5% interest. Over 10 years, debt grows to about £163,000 (compounded). On death, home sells, debt paid, £287,000 left plus savings: estate £387,000—no IHT.
Scenario | Estate Value | Allowance | Taxable Amount | IHT at 40% |
No Equity Release | £550,000 | £500,000 | £50,000 | £20,000 |
With £100k Release (10 yrs) | £387,000 | £500,000 | £0 | £0 |
Why do these numbers matter? In my experience, clients overlook compound interest—it can double the debt in 14 years at 5%. Always model scenarios; I've saved families surprises by running these projections.
Common Pitfalls I've Seen in Practice
Be careful here, because I've seen clients stumble when assuming equity release is a silver bullet. If you gift and enter care soon after, local authorities might deem it deliberate deprivation of assets, clawing back for fees. One client in Kent released equity for 'home improvements' but gifted most—council challenged it.
Also, means-tested benefits like Pension Credit could drop if cash boosts your capital over £16,000. And for business owners, if your home's a business asset (rare, but possible), check 2026 changes to business property relief—capped at £1m, 20% on excess.
Steps to Assess If Equity Release Fits Your IHT Plan
If you're mulling this over a cuppa, start simple:
Tally your estate: Home value, savings, investments, pensions (noting 2027 inclusion).
Check allowances: Use GOV.UK's IHT tool for a quick estimate.
Model equity release: Use calculators from Equity Release Council members.
Consult pros: Always get independent advice—it's regulated.
In one case, a self-employed client released equity to fund gifts, but we timed them around his health for taper relief and peace of mind.
UK Equity Release Market Statistics
Navigating Equity Release for IHT Planning: Practical Steps and Pitfalls
So, you’re thinking about equity release to cut your inheritance tax bill, but wondering how to make it work in practice? Over my 18 years advising UK taxpayers, from self-employed freelancers in Bristol to business owners in Birmingham, I’ve seen how getting the details right can make or break your strategy. Let’s walk through the nitty-gritty of setting up equity release, spotting tax traps, and tailoring it to your situation—whether you’re an employee, self-employed, or running a business. I’ll throw in real-world insights and tools to keep you on track.
How Do You Start with Equity Release for IHT?
Picture this: You’re sitting down with a cuppa, staring at your mortgage statements, wondering where to begin. First, you need to know your estate’s value—every penny counts for IHT. In 2025/26, the nil-rate band is still £325,000, with the residence nil-rate band adding £175,000 if passing your home to direct descendants. For couples, combining these can shield up to £1 million. Equity release reduces your estate by creating a debt or selling part of your home, but the process isn’t a quick fix.
Start by valuing your assets: property, savings, investments, and (from 2027) unused pensions. I’ve had clients miss ISAs or old share schemes, inflating their estate
unknowingly. Use HMRC’s online IHT checker at www.gov.uk/check-income-tax-current-year to estimate liability. Then, explore equity release options—lifetime mortgages or home reversion—through a regulated adviser. The Equity Release Council’s website lists trusted providers.
In one case, a retired couple in Leeds released £120,000 to gift to their kids. We calculated their estate dropped from £750,000 to £550,000 after 10 years of interest, saving £80,000 in IHT. But they got advice early—crucial to avoid rushed decisions.
Step-by-Step: Setting Up Equity Release Safely
None of us loves tax surprises, so let’s map out the process to keep HMRC happy:
Assess Your Needs: Why release equity? For gifting, living expenses, or both? A client in Cardiff used £50,000 for home repairs, keeping the rest for gifts, balancing lifestyle and IHT planning.
Get a Valuation: Your home’s market value sets the borrowing limit—usually 20-50% depending on age. Over 65? You’ll unlock more.
Choose a Plan: Lifetime mortgages let you draw lump sums or instalments; home reversion sells a fixed share. Compare rates—5% fixed versus variable can save thousands long-term.
Model IHT Impact: Use a calculator to project debt growth and estate reduction. I’ve built spreadsheets for clients showing how a £100,000 loan at 4.5% balloons to £180,000 in 15 years.
Gift Strategically: Use PETs or annual exemptions (£3,000 per person, carry forward one year). Document gifts clearly for HMRC.
Check Benefits: Equity release cash counts as capital, potentially cutting Pension Credit if over £16,000. One client lost £2,000 annually in benefits—plan ahead.
Review Annually: Interest compounds fast. A London client ignored this, and their debt doubled in 12 years, eating into inheritance.
Always work with a financial adviser and solicitor to ensure the plan’s watertight. I’ve seen DIY plans backfire when clients missed legal safeguards like no-negative-equity guarantees.
Tailoring Equity Release for Employees, Self-Employed, and Business Owners
Now, let’s think about your situation. Equity release isn’t one-size-fits-all—it varies by income type and tax status. Here’s how it plays out:
● Employees (PAYE): If you’re on PAYE, equity release won’t affect your income tax, but cash gifts could trigger IHT if you don’t survive seven years. Check your tax code via www.gov.uk/check-income-tax-current-year to ensure no unrelated overtaxing—like a client whose 1257L code was wrong, costing £1,200.
● Self-Employed: Freelancers often have fluctuating income, complicating IHT planning. Equity release can fund business investments (deductible against profits) while cutting your estate. One graphic designer I advised released £80,000 to clear business debts, reducing her estate and boosting tax relief via allowable expenses. But watch IR35—HMRC’s tightened rules in 2025 mean misclassified contractors face hefty penalties.
● Business Owners: If your home’s tied to business assets (e.g., office space), equity release might affect business property relief (BPR). From April 2026, BPR is capped at £1 million, with 20% relief on excess. A client running a family shop released equity to gift shares, preserving BPR while cutting IHT.
Scottish and Welsh taxpayers face quirks. Scotland’s 2025/26 income tax bands (e.g., 21% intermediate rate from £26,562) don’t affect IHT, but higher rates mean less disposable income for gifting. Wales aligns with England’s IHT rules, but local council policies on care fees vary—check deprivation rules.
Common Errors and How to Dodge Them
Be careful here, because I’ve seen clients trip up in ways you’d never expect. One self-employed client released £150,000, assuming it was IHT-free, but gifted it poorly—HMRC challenged a £60,000 gift as deprivation when he entered care two years later. Another forgot to update their will, leaving gifted funds tied up in probate disputes.
Here’s a checklist to stay safe:
● Verify your estate value annually—property prices fluctuate.
● Document all gifts with dates and recipients for HMRC audits.
● Avoid gifting if care needs are imminent—councils can reverse it.
● Check means-tested benefits before taking cash.
● Review loan interest rates yearly; some plans allow overpayments to cap debt.
Rare Scenarios: Emergency Tax and High-Income Charges
Some curveballs catch even savvy taxpayers. If you’re newly retired and take equity release to supplement a pension, watch for emergency tax codes (e.g., M1 or W1). HMRC might overtax your pension until your code’s fixed—check via your Personal Tax Account. One client overpaid £3,500 before we caught it.
For high earners (£50,000+), the High Income Child Benefit Charge can bite. Equity release cash isn’t income, but if you gift to kids and they repay you informally, HMRC might deem it income. A business owner I advised faced a £2,000 charge after muddled gift records—keep it clean.
Worksheet: Plan Your Equity Release IHT Strategy
Here’s a tool I’ve used with clients to map their plan:
Step | Action | Your Notes |
1. Estate Value | List assets (home, savings, etc.) | £__________ |
2. IHT Liability | Subtract allowances (£325k/£500k) | £__________ |
3. Release Amount | Estimate cash needed | £__________ |
4. Debt Growth | Project loan at 5% over 10 yrs | £__________ |
5. Gift Plan | List annual exemptions, PETs | £__________ |
6. Benefits Impact | Check savings < £16k | Yes/No |
Run this with an adviser to spot gaps. In 2024, a client used this to shave £50,000 off their IHT by timing gifts smartly.
Risks and Pitfalls of Using Equity Release for Inheritance Tax Planning
While equity release offers notable benefits for inheritance tax (IHT) planning, it’s important to acknowledge the potential risks and pitfalls associated with these financial products. This section will delve into the complexities and possible downsides, helping you weigh the advantages and drawbacks before making a decision. We’ll cover common concerns related to debt accumulation, interest compounding, impact on means-tested benefits, and how equity release may affect your overall financial flexibility. Understanding these potential challenges is crucial for a balanced perspective on using equity release as part of an estate planning strategy.
Debt Accumulation and Compound Interest: A Double-Edged Sword
One of the main risks with equity release, especially with lifetime mortgages, is that debt can grow rapidly over time due to compound interest. Unlike traditional loans, which often require monthly repayments, lifetime mortgages allow interest to accumulate, causing the debt to increase substantially. Here’s how this can impact inheritance planning:
Accelerated Debt Growth:
Interest on a lifetime mortgage compounds annually, meaning that interest is calculated not only on the original loan amount but also on the accumulated interest from previous years. If no repayments are made, this compounding effect can quickly escalate the debt owed.
Example: Mr. and Mrs. White take out a £100,000 lifetime mortgage at a 6% interest rate. If they make no repayments, the debt doubles to around £200,000 in approximately 12 years. For those planning to leave a significant inheritance, this can severely reduce the equity left for beneficiaries.
Risk of High Debt Relative to Property Value:
If the property’s value does not increase significantly over time, or if the housing market declines, the debt could eventually consume a large portion of the home’s value. While most lifetime mortgages include a “no negative equity guarantee,” meaning heirs won’t owe more than the property’s value, the remaining inheritance might be minimal.
The growth in debt can erode the estate faster than expected, which could affect not only the financial legacy left to heirs but also the homeowner’s future financial security if they later need funds for care or other expenses.
Impact on Means-Tested Benefits
Equity release can also affect eligibility for certain means-tested benefits, which could be problematic for those relying on these benefits in retirement. When cash is released through an equity release plan, it becomes part of the homeowner’s liquid assets, which may impact benefits that consider an applicant’s overall financial resources. Here’s how:
Loss of Benefits Due to Increased Capital:
In the UK, benefits such as Pension Credit, Universal Credit, and Council Tax Support are means-tested. When equity release funds are added to savings or investments, they can increase total capital, potentially disqualifying individuals from receiving these benefits or reducing the amounts.
Example: Mrs. Green, who receives Pension Credit, takes out a £30,000 equity release lump sum to renovate her home. However, this increases her total assets above the threshold, reducing her benefit eligibility and impacting her monthly income.
Impact on Benefit Calculations:
Some benefits have complex asset and income thresholds that could be affected by equity release funds, even if they are quickly spent. The Department for Work and Pensions (DWP) may review finances if they see significant changes, which could alter eligibility for certain entitlements.
To avoid this pitfall, those who rely on means-tested benefits should carefully consider how equity release might impact their overall financial aid eligibility.
Reduced Flexibility for Future Financial Needs
Another risk of equity release is the potential reduction in financial flexibility, which can be a concern for retirees who may face unexpected expenses later in life, such as health care costs or home repairs. Since equity release typically involves giving up a share of home equity or accumulating debt against it, there may be fewer financial resources available if new needs arise.
Limiting Future Borrowing Capacity:
For those who anticipate needing additional funds in the future, equity release can reduce the ability to borrow against the property, as it lowers the remaining equity. Once an equity release plan is in place, obtaining other forms of credit or further advancing on the property may not be an option.
This could be particularly limiting for those who later require funds for high-cost care or who wish to pursue further investments that rely on home equity.
Inflexibility in Repayment Options:
While some lifetime mortgages offer partial repayment options, home reversion plans generally do not. This can limit the ability to reduce debt during the homeowner’s lifetime if financial circumstances improve.
Individuals with fluctuating financial needs might find this lack of flexibility a drawback, especially if they wish to make adjustments later. Although lifetime mortgages often offer “voluntary repayments,” these are usually capped annually and may not be sufficient to significantly reduce the debt.
Costs and Fees Associated with Equity Release
Equity release products can come with a range of fees that add to the overall cost, making it important to account for these expenses when considering equity release. Common fees associated with equity release include:
Arrangement Fees:
Most equity release providers charge an arrangement or set-up fee, which can vary widely from a few hundred to several thousand pounds. This is typically a one-time cost, but it adds to the total cost of the equity release transaction.
Valuation Fees:
Equity release providers require a property valuation to determine eligibility and calculate how much equity can be released. Valuation fees are generally based on property value, with higher fees for higher-value homes.
Legal Fees:
Legal services are necessary for setting up equity release, and while some providers may include these in the arrangement fee, others do not. Legal fees typically range from £500 to £1,500 and are crucial for ensuring the terms are fair and protect the homeowner’s interests.
Early Repayment Charges:
Some equity release products include early repayment charges if the homeowner decides to repay the loan earlier than expected. These charges can be substantial, depending on the provider’s policies and the timing of the repayment.
Example: Mrs. Thomas, who took out a lifetime mortgage, wants to repay it three years later after an inheritance. However, she faces an early repayment charge of 5%, making it expensive to settle the debt early.
Potential Family Tensions and Misunderstandings
Equity release can sometimes cause tension or misunderstandings within families, particularly when beneficiaries are unaware of or misunderstand the implications of the financial decision. If beneficiaries expect a certain inheritance but find it reduced or eliminated due to equity release, it can lead to disappointment and even disputes.
Misalignment of Expectations:
Family members may assume that the property will pass on without debt, especially if the homeowner has not clearly communicated the decision to opt for equity release. This can lead to tension or disputes when beneficiaries discover the debt obligation upon the homeowner’s passing.
Open communication with family members about the equity release decision and its implications can help manage expectations and avoid potential conflicts.
Generational Differences in Financial Views:
For some families, there may be generational differences in how financial decisions are viewed. Older family members may prioritise having liquid cash in retirement, while younger generations may prioritise preserving inheritance.
Clear discussions about the motivations behind equity release and its benefits for the homeowner’s quality of life can help bridge understanding gaps and foster support.
Possible Decline in Property Value
Although property values in the UK have generally increased over time, there is always a risk that property values could decline. If property values decrease, the amount of equity available for inheritance could be even further diminished.
Market Downturns:
In the event of a housing market downturn, the remaining equity after repaying the loan could be much less than anticipated, potentially impacting beneficiaries who rely on inheritance.
Example: Mr. Allen takes out a lifetime mortgage and expects the home to increase in value by the time of repayment. However, a market downturn reduces the property’s value, leaving less equity for his heirs than initially planned.
No Negative Equity Guarantee:
Most equity release plans in the UK offer a “no negative equity guarantee,” which means that heirs are not liable for debt exceeding the property’s sale value. However, this guarantee only applies in extreme situations and does not prevent the erosion of estate value.
Alternatives to Equity Release for IHT Planning
For those who find these risks concerning, there are alternative strategies for reducing inheritance tax without the need to tap into home equity. Here are some options:
Downsizing:
Selling a larger home to move into a smaller, more affordable property can free up cash without accruing debt. This can reduce the overall estate value while providing funds that can be gifted or invested for tax-efficient estate planning.
Pension Drawdowns:
Pension funds are not subject to inheritance tax in the same way property and other assets are. By drawing from pension funds instead of releasing home equity, retirees can manage their estate tax liabilities while preserving property assets.
IHT-Exempt Investments:
Certain investments, such as those in the Alternative Investment Market (AIM), are exempt from inheritance tax if held for a minimum of two years. These investments may carry higher risk but offer an option for those aiming to reduce IHT without impacting property assets.
Case Scenario: Balancing Equity Release with Alternative Strategies
Consider this scenario:
Mr. and Mrs. Roberts, both 72, own a home worth £800,000. They are concerned about inheritance tax and want to provide financial support to their children.
After consulting with a financial advisor, they decide to downsize to a £400,000 property, freeing up £400,000. They gift £100,000 to each of their children, reducing their estate’s value while avoiding the long-term debt accumulation associated with equity release.
Advanced Equity Release Strategies for Minimising IHT in 2025 and Beyond
Right, we've covered the basics and the practical setup—now let's get into the clever stuff that can really supercharge your inheritance tax savings. As a tax accountant who's navigated these waters for clients through economic ups and downs, including the post-2025 shifts, I can tell you that advanced planning turns good intentions into solid results. We'll look at integrating equity release with other tax tools, handling recent rule changes, and those edge cases that catch people out. Think of it as fine-tuning your engine for the long haul.
What’s New in IHT Rules for 2025/26 That Affects Equity Release?
None of us saw the full extent of the 2025 changes coming, but here we are. From April 2025, IHT moves to a residency-based system—if you've been a UK resident for 10 of the last 20 years, your worldwide assets get taxed, with a 10-year tail if you leave. For clients with overseas properties, this has meant rethinking equity release on UK homes to offset foreign asset exposure.
Then there's the big one: from April 2027, unused pensions join your estate for IHT. Draft legislation in July 2025 confirmed this, so if your pension's untouched, it could push your estate over the £325,000 nil-rate band. Equity release helps here—use it to draw down home value now, spend or gift, preserving pensions tax-free until then. One client, a semi-retired engineer in Edinburgh, released £90,000 to fund living costs, keeping his £300,000 pension out of IHT calculations for now.
Business and agricultural reliefs tighten from April 2026: 100% relief on the first £1 million, then 50% on excess. If your business owns property, equity release on personal homes can balance this—reducing personal estate while claiming relief on business assets.
Interest rates for late IHT payments? Up to 8% from August 2025, so delays hurt more. Thresholds stay frozen: £325,000 nil-rate, £175,000 residence band, up to £1 million for couples.
Integrating Equity Release with Trusts and Life Insurance
So, the big question on your mind might be: How do I lock in IHT savings without losing control? Pair equity release with trusts. Release funds, pop them into a discretionary trust—gifts to trusts are PETs, potentially IHT-free after seven years. Trustees manage it, shielding from care fees or divorce claims.
I've advised on this for a family in Glasgow: They released £200,000 from their £800,000 home, placed it in trust for grandkids. Estate shrank, and trust growth (e.g., investments) stays outside IHT. But beware: If you benefit from the trust, it could be a gift with reservation, pulling it back in.
Life insurance in trust covers the equity release debt. Policy pays out tax-free on death, settling the loan—leaving more home value for heirs. A Manchester couple I worked with saved £40,000 in IHT this way, as the policy didn't inflate their estate.
Handling Multiple Income Sources and Side Hustles in IHT Planning
Picture this: You're a business owner with rental income, a side gig, and pensions—how does equity release fit? Multiple sources bloat your estate, but equity release trims it. For self-employed, deduct business expenses from equity funds (e.g., equipment), lowering profits and thus IHT on business value.
One pitfall: Unreported side hustles. HMRC's 2025 data-sharing ramps up, spotting undeclared income that pads estates. A freelancer client discovered a £20,000 Airbnb side earner pushed her over the threshold—we used equity release to gift and offset.
For employees with shares or bonuses, equity release funds can buy more assets into ISAs (IHT-free growth). But if you're Scottish, higher income tax bands (21% from £26,562) mean less net for gifting—plan equity draws accordingly. Wales matches England, but devolved care rules vary.
Rare Cases: Emergency Situations and High-Income Traps
Be careful here, because I've seen clients in sticky spots like sudden health declines. If you release equity then enter care quickly, councils might reverse gifts as deprivation—especially if over £23,250 assets in England (2025 figures).
High-income child benefit charge? It's income tax, but ties in if equity release boosts 'income' via interest. Actually, equity cash isn't income, but if you invest it yielding over £50,000 total, you repay child benefit. A client earning £55,000 released £100,000, invested poorly, and faced a £1,200 charge—diversify wisely.
Emergency tax on pensions? If retiring mid-year, HMRC slaps a high code—check via your Personal Tax Account at www.gov.uk/personal-tax-account. Equity release can bridge gaps without triggering this.
Original Analysis: Comparing Lifetime Mortgage vs. Home Reversion for IHT
Let's think about your situation—if you're risk-averse, which is better? Lifetime mortgages keep full ownership, debt deducted on death—great for variable estates. Home reversion sells a chunk outright, fixing the reduction but losing upside if property booms.
Factor | Lifetime Mortgage | Home Reversion |
Estate Reduction | Debt + interest subtracted | Sold portion excluded |
IHT Savings Potential | High, but interest erodes | Fixed, predictable |
Ownership | Retained | Partial loss |
Flexibility | Drawdown options | Lump sum only |
Pitfalls | Compound interest balloon | Undervalued sale if prices rise |
In practice, mortgages suit most—80% of my clients choose them. But for a Welsh farmer with agricultural relief, reversion preserved BPR on land while cutting home IHT.
Why matter? Post-2025, with frozen bands and rising house prices (up 4% yearly), unchecked interest could negate savings. Model with 5% rates: £100,000 release grows to £265,000 in 20 years.
Checklist for Future-Proofing Your Plan Amid 2025 Changes
Here's what I give clients to stay ahead:
● Review estate post-pension inclusion (2027).
● Stress-test for residency rules if international ties.
● Update wills for BPR caps (2026).
● Monitor gifts for seven-year clock.
● Get annual valuations—property inflation bites.
A London business owner used this, adjusting after July 2025 drafts, saving £30,000 projected IHT.
How a Tax Accountant Can Help You with Equity Release Inheritance Tax in the UK
Wondering if you need pro help? Absolutely—I've turned complex messes into streamlined plans for hundreds. A tax accountant digs into your full picture: Estate audit, projections with 2025 changes, and bespoke strategies like trusts or gifting timetables. We spot overpayments (HMRC refunds averaged £3,000 last year), ensure compliance to avoid penalties, and liaise with advisers for seamless equity setups.
In rare cases, like IR35-hit contractors, we reclaim deductions boosting funds for release. For business owners, we optimize reliefs around equity debts. It's not just numbers—it's peace of mind, drawing on real scenarios to dodge pitfalls others miss.
Summary of Key Points
Equity release reduces your estate's value by creating a debt or selling a portion, potentially slashing IHT at 40% on amounts over £325,000.
Lifetime mortgages, the most common type, roll up interest (around 4-6%), deducted on death to lower taxable estate.
Gifting released funds as PETs escapes IHT after seven years, with taper relief if sooner.
From 2027, unused pensions enter IHT calculations, so use equity release to preserve them by funding spending now.
Recent 2025 changes shift IHT to residency-based, taxing worldwide assets for long-term residents.
Business relief caps at £1m full relief from 2026, making equity release key for excess assets.
Pair with trusts for control and protection from care fees or challenges.
Avoid pitfalls like deliberate deprivation by documenting gifts and timing carefully.
Tailor to your status: Self-employed deduct expenses from funds; employees check tax codes.
Consult professionals for modelling, compliance, and maximising allowances up to £1m for couples.
FAQs
Q1: Can someone use equity release to fund care costs without triggering IHT issues?
A1: In my experience with clients, using equity release for care costs can reduce your estate’s value, potentially lowering IHT, but it’s a tightrope. If you gift funds to cover care and enter a care home soon after, local councils might see it as deliberate deprivation of assets, pulling the gift back into your estate for IHT. For example, a retiree in Bristol released £80,000 for care, but the council challenged a £50,000 gift to her son within a year. Always consult a solicitor to time gifts carefully and document intent clearly.
Q2: How does equity release impact IHT for someone with a holiday home?
A2: Well, it’s worth noting that equity release on your main home doesn’t directly affect a holiday home’s IHT status, but it can still shrink your overall estate. Only your primary residence qualifies for the £175,000 residence nil-rate band. A client with a £300,000 holiday home and £500,000 main home released £100,000 from the latter, dropping their estate below £500,000 total—no IHT. But if the holiday home’s value rises, it stays taxable unless gifted seven years before death.
Q3: Can a business owner use equity release on their home to fund business investments and reduce IHT?
A3: Absolutely, and I’ve seen this work brilliantly for clients. Equity release funds used for business investments (e.g., equipment) can be deducted as allowable expenses, lowering taxable profits and your estate’s value. A Birmingham shop owner released £120,000 to buy stock, cutting her estate by £150,000 after interest and saving £60,000 in IHT. From 2026, watch the £1m business property relief cap—excess faces 20% IHT.
Q4: What happens if someone gifts equity release funds but dies within three years?
A4: It’s a common mix-up, but gifts within seven years of death can trigger IHT. If you die within three years, the gift faces full 40% IHT above the £325,000 threshold. A Manchester client gifted £70,000 from equity release but passed away after two years—her estate paid £28,000 IHT on the gift. Taper relief starts at three years, dropping to 32% at year four, so timing is critical.
Q5: Does equity release affect IHT differently for Scottish taxpayers?
A5: In my years advising Scots, IHT rules are UK-wide, so equity release impacts are similar. However, Scotland’s higher income tax bands (e.g., 21% from £26,562 in 2025/26) mean less disposable income for gifting, which can limit IHT planning. A Glasgow freelancer released £60,000 but struggled to gift due to tight cash flow from taxes. Plan equity draws to align with your net income.
Q6: Can someone with multiple jobs use equity release to simplify IHT planning?
A6: Definitely—multiple jobs often mean complex income streams bloating your estate. Equity release can fund gifts or spending to reduce it. A client with two PAYE jobs and a side hustle released £90,000 to gift, dropping her estate below £500,000. But check your tax codes across jobs—HMRC often applies emergency codes, overtaxing you. Use your Personal Tax Account to verify.
Q7: How does equity release work for IHT if someone’s estate includes a trust?
A7: Trusts add a layer of complexity, but I’ve guided clients through this. Equity release funds gifted to a discretionary trust are PETs, IHT-free after seven years. If you’re a settlor and benefit from the trust, it’s a gift with reservation, taxable at death. A Leeds couple released £150,000 into a trust, saving £60,000 IHT, but we ensured they had no access to avoid HMRC challenges.
Q8: Can equity release help avoid IHT on pensions post-2027?
A8: From April 2027, unused pensions enter your estate for IHT, so equity release can be a lifesaver. By using home equity for living costs, you preserve your pension, keeping it out of IHT calculations. A client in Cardiff released £100,000 to fund retirement, leaving her £200,000 pension untouched—potentially saving £80,000 in IHT. Start planning now to maximise this.
Q9: What if someone releases equity but their home’s value drops?
A9: A drop in property value can amplify IHT savings, as the equity release debt stays fixed while your estate shrinks. However, I’ve seen clients panic when home values dip below the loan. A no-negative-equity guarantee ensures your estate isn’t liable beyond the home’s sale price. A Southampton retiree’s £400,000 home fell to £350,000, but her £100,000 loan didn’t increase IHT.
Q10: How does home reversion differ from lifetime mortgages for IHT planning?
A10: In my experience, lifetime mortgages are more flexible—you keep ownership, and the debt (plus interest) reduces your estate at death. Home reversion sells a fixed share, so only the unsold portion counts for IHT. A Devon client sold 40% of her £500,000 home, reducing her estate by £200,000 instantly, but lost future price gains. Mortgages suit most; reversion’s niche.
Q11: Can equity release funds be used to pay off debts and still reduce IHT?
A11: Yes, and it’s a common strategy. Paying off debts with equity release reduces your estate’s net value. A self-employed client in Newcastle cleared £50,000 in credit card debt, dropping her estate below £325,000—no IHT. But if you gift the cash instead of paying debts, ensure it’s not seen as deprivation if care needs arise.
Q12: How does equity release affect IHT for someone with overseas assets?
A12: The 2025 residency-based IHT rules hit hard here—10 years of UK residency in the last 20 brings worldwide assets into IHT. Equity release on your UK home can offset this by lowering your estate. A client with a £200,000 Spanish villa released £150,000, gifting it to keep her estate under £500,000. Plan early to shed the 10-year tail if you leave the UK.
Q13: What if someone’s equity release loan outstrips their home’s value?
A13: It’s a worry I’ve eased for clients. Most plans have a no-negative-equity guarantee, so your estate doesn’t owe more than the home’s sale price. A Londoner’s £600,000 home had a £400,000 loan; when sold for £350,000, the provider absorbed the loss. This keeps IHT calculations clean, based on net proceeds.
Q14: Can a self-employed person deduct equity release interest as a business expense?A14: Tricky, but sometimes possible. If you use equity release funds for allowable business expenses (e.g., equipment), you can deduct them, not the loan interest itself. A freelancer in Sheffield used £40,000 for a studio, claiming it against profits, reducing her estate and IHT. HMRC scrutinises this—keep clear records.
Q15: How does equity release impact IHT for cohabiting couples not married?
A15: Cohabiting couples get no spousal IHT exemption, so equity release can be crucial. Each partner’s estate faces IHT above £325,000 (or £500,000 with residence band). A Brighton couple released £100,000 each, gifting to kids, cutting both estates below thresholds. Without marriage, plan separately to maximise allowances.
Q16: What if HMRC challenges an equity release gift as deprivation?
A16: This is a real risk I’ve seen trip clients up. If you gift equity release funds and enter care soon after, councils may argue deprivation, adding gifts back for IHT. A Kent client gifted £80,000 but needed care within a year—council reversed it. Document gifts as part of long-term planning, not care avoidance, and seek legal advice.
Q17: Can equity release fund a life insurance policy to cover IHT?
A17: Smart move, and I’ve set this up for clients. Use equity release to pay premiums on a life insurance policy in trust, which pays out tax-free to cover IHT. A Manchester business owner released £50,000 for a policy, saving her heirs £100,000 in IHT. Ensure the policy’s outside your estate to avoid adding to IHT.
Q18: How does equity release affect IHT for someone with a side hustle?
A18: Side hustles inflate estates if undeclared—HMRC’s 2025 data sweeps catch these. Equity release can fund gifts to reduce your estate. A client with a £30,000 Etsy income released £60,000, gifting it to drop below £325,000. Declare all income via Self Assessment to avoid HMRC penalties inflating your estate.
Q19: What if someone releases equity but wants to move home later?
A19: No problem, but it needs planning. Most lifetime mortgages let you transfer the loan to a new property, subject to provider approval. A client moved from London to Cornwall, transferring a £150,000 loan; her estate stayed reduced for IHT. Home reversion’s trickier—you may need to buy back the sold share. Check terms upfront.
Q20: Can equity release help high earners avoid the child benefit charge and IHT?
A20: High earners (£50,000+) face the High Income Child Benefit Charge, but equity release cash isn’t income, so it’s safe there. Use it to gift or spend, lowering your estate for IHT. A client earning £60,000 released £70,000, gifted it, and avoided both IHT and child benefit repayment issues. Keep gift records clear to avoid HMRC misclassifying.
About the Author
Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Fellow Chartered Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible articles. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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