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Equity Release Inheritance Tax – What You Need To Know

equity release affect inheritance tax

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Equity release and inheritance tax are two topics that may have more to do with each other than you think. 

In this guide, we recap on equity release before discussing how lifetime mortgages and other schemes can affect or even reduce the amount of inheritance tax owed. If you want to know about the tax implications of equity release, including inheritance tax obligations, you’re in the right place. 

What is equity release?

Equity release schemes are types of loans available to people aged 55 and over and are secured against a percentage or all of your property. 

You continue living in the property and do not have to make any loan repayments or interest payments until the home is sold, which usually happens after you die from your estate. But it might happen earlier if you need to move into an aged care centre. 

Lifetime mortgages are the most common method of equity release. With a lifetime mortgage, you receive a lump sum that is repayable as explained above with a fixed interest rate. You can choose to let the interest roll over or pay some of it back. 

You are protected in that only the value of your home will ever be repaid. If the home sells for less than expected after you pass away, or the total debt exceeds the property value, the rest does not have to be repaid. 

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Why do people choose to release equity?

Most people choose to release equity to make retirement more comfortable or to provide financial gifts to family members earlier than they would have received through inheritance. 

Does equity release affect inheritance?

Equity release does affect the amount of inheritance you leave to beneficiaries in your last will and testament. This is because the loan is only repaid when you sell the house, which will either happen after death or earlier if the homeowner needs to move into an aged care facility

In either scenario, the repayment of the loan will reduce the value of your estate and leave loved ones with less than they would have received if you did not use an equity release scheme.

Because it will affect the amount of inheritance left to beneficiaries, most people discuss their plans with those people while they are still alive, or even give them some of the money they receive to give them some inheritance earlier. However, there is no law forcing you to discuss your equity release plan with any beneficiary. It’s entirely your decision. 

What are the tax implications of equity release?

When you release equity and receive a lump sum, this money is not subject to income tax or Capital Gains Tax (CGT). The reason the amount you receive is tax-free is that it is neither personal income nor a capital gain (profit for the sale of an asset). 

Although it may feel as though you have sold part of your home to a company – because no repayments are due – in fact, you have taken out a loan to be repaid later. Money from loans is not subject to any type of UK tax.  

There could be some inheritance tax (IHT) implications because equity release is likely to affect the value of your estate. Read on! 


Equity release and inheritance tax

We’ve answered the most asked questions to do with equity release and inheritance tax in this section.

Is equity release subject to inheritance tax?

IHT is applied to all money and assets within someone’s estate when they die, as long as their estate is above a set value (£325,000 rising to £475,00 if you leave a property to a child or grandchild) and they are not passing the estate to a spouse or civil partner. 

If the estate is going to someone who is not a spouse or civil partner and is above the 0% IHT threshold, then a rate of 40% will be applied. 

IHT also accounts for financial gifts in the seven years prior to death. Any money given to someone in these seven years will be included in the value of the estate and could be subject to IHT. 

Therefore, equity release could be subject to inheritance tax if you give some of the money you receive through a lifetime mortgage to someone else within the seven years prior to your death. 

Any money kept as savings will also make up part of your estate and be subject to inheritance tax, if applicable. 

How can equity release reduce inheritance tax?

There is a possibility that equity release can reduce inheritance tax. If the money received from equity release is gifted to a planned beneficiary of your will and you live for more than seven years, this money will no longer be subject to inheritance tax as it falls outside of the seven-year period. Nobody can guarantee how long you will live after making the financial gift and this inheritance tax planning tactic involves some risk. It may not even be worth it. 

If your property is sold as part of the loan agreement and not handed to a child or grandchild, you’ll also miss out on increasing the inheritance threshold by £150,000. Keep this in mind when considering equity release. 

What is inheritance protection in equity release?

Inheritance protection is a clause within an equity release plan that enables the homeowner to ensure that a certain percentage of the property is given to a beneficiary or beneficiaries. For example, you could guarantee that 20% of your property remains theirs. The property would still be sold, but 20% of the sale value would be your beneficiaries to keep. This remains the case even if the sale price does not cover all the money owed. 

What are the pitfalls of equity release?

The biggest pitfall of equity release is getting involved in a lifetime mortgage or other scheme without fully understanding how they work and how they can affect you and your beneficiaries. For this reason, it is paramount that you seek professional advice from an equity release expert that is authorised and regulated by the Financial Conduct Authority (FCA). 

Learn more about equity release and inheritance tax!

For more information on equity release and inheritance tax, and other topics to do with releasing equity, check out more guides on MoneyNerd today. They’re all free!