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Equity Release Inheritance Tax – What You Need To Know

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By
Scott
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Scott Nelson

Managing Director

MoneyNerd’s founder, Scott Nelson, has a decade of financial industry experience, including 6 years in FCA regulated loan and credit card companies. Troubled by a lack of conscience in the industry, he founded MoneyNerd to give genuine advice to those in debt and struggling financially.

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Janine
Janine Marsh Profile Picture

Janine Marsh

Financial Expert

Janine Marsh is an award-winning presenter and a valuable member of the MoneyNerd team. With a wealth of experience as a financial expert, she's been featured on BBC Radio 4, BBC Local Radio, and BBC Five Live, and is a regular on Co-op Radio.

Learn more about Janine
· Jan 19th, 2024
Find out how much equity you could release by answering below.
25000

In partnership with Age Partnership.

Our preferred equity release adviser is Age Partnership. For free and impartial money advice you can visit MoneyHelper.

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equity release affect inheritance tax

Our preferred equity release adviser is Age Partnership. For free and impartial money advice you can visit MoneyHelper.

Are you keen to understand how equity release might affect inheritance tax? You’re not alone. Every month, more than 7,000 people come to our website for guidance on equity release.

In this article, we’ll explain:

  • The basics of equity release.
  • How to get a fair quote.
  • Why people choose to release equity.
  • The effect of equity release on inheritance.
  • The tax side of equity release.

We know that the process of equity release can seem tricky, which is why we’re here to make things clear for you. With our helpful advice, you’ll have a better grasp of how equity release works and how it might change the amount of inheritance tax to pay.

Remember, in the UK, equity release isn’t linked to income tax or Capital Gains Tax. Yet, it can lower the value of your estate, which might reduce the inheritance tax due. We’ll walk you through each step, making sure you have all the facts you need to make the right choice for your situation.

Let’s get started.

Find out how much equity you could release by answering below.

Find out how much equity you could release by answering below.

25000

In partnership with Age Partnership.

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. 

» TAKE ACTION NOW: Find out how much equity you could release

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! 

How equity release could help

More than 2 million people have used Age Partnership to release equity since 2004.

How your money is up to you, but here’s what their customers do…



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In partnership with Age Partnership.

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. 

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Age Partnership have helped over 2 million people release equity from their home.

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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. 

» TAKE ACTION NOW: Find out how much equity you could 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. 

Find out how much equity you could release by answering below.

Find out how much equity you could release by answering below.

25000

In partnership with Age Partnership.

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The authors
Scott Nelson Profile Picture
Author
MoneyNerd’s founder, Scott Nelson, has a decade of financial industry experience, including 6 years in FCA regulated loan and credit card companies. Troubled by a lack of conscience in the industry, he founded MoneyNerd to give genuine advice to those in debt and struggling financially.
Janine Marsh Profile Picture
Financial Expert
Janine Marsh is an award-winning presenter and a valuable member of the MoneyNerd team. With a wealth of experience as a financial expert, she's been featured on BBC Radio 4, BBC Local Radio, and BBC Five Live, and is a regular on Co-op Radio.