Equity Release and Inheritance Tax UK (2026): How It Reduces Your Estate & IHT Implications
Quick answer
A lifetime mortgage reduces your estate value — and therefore your potential IHT bill — because the loan is repaid from the property before anything passes to beneficiaries. If you gift the released funds and survive 7 years, those amounts also fall outside your estate. The trade-off: a smaller IHT bill and a smaller inheritance. Equity release combined with gifting can be an effective IHT strategy — but needs to be reflected in an updated will.
How equity release affects your estate — an example
| Scenario | Estate value | IHT threshold | Taxable amount | IHT bill | Net to heirs |
|---|---|---|---|---|---|
| No equity release | £1,000,000 | £500,000 | £500,000 | £200,000 | £800,000 |
| £200k equity release (not gifted) | £800,000 | £500,000 | £300,000 | £120,000 | £680,000 |
| £200k equity release + gifted (survived 7yr) | £800,000 | £500,000 | £300,000 | £120,000 | £880,000* |
*Children received £200k gift + £680k estate = £880k total, vs £800k without equity release. IHT saved: £80k.
The equity release + gifting strategy
Releasing equity and gifting the funds to children combines two IHT reduction techniques:
- The loan reduces your estate value immediately. The outstanding debt (loan plus accrued interest) is a liability that comes off the gross estate before IHT is calculated.
- The gift falls outside your estate after 7 years. If you gift the released funds as a potentially exempt transfer (PET) and survive 7 years, the amount is fully exempt from IHT. Taper relief applies if you die between 3 and 7 years after the gift.
The critical caveat: this strategy works best for people who are in reasonable health and likely to survive 7 years. For older or less healthy individuals, the risk of dying within 7 years may make the PET route unreliable. Alternative strategies — such as gifts into trust, life insurance in trust, or using the annual allowance — may be more appropriate.
Interest roll-up — the long-term cost
Most lifetime mortgages roll up interest — meaning you do not make monthly repayments; instead, interest is added to the loan each year. At current equity release rates (typically 5–8% fixed), a £100,000 loan can grow to £200,000–£300,000 over 15–20 years. This means:
- The IHT reduction grows over time (as the debt grows, the taxable estate shrinks)
- The total inheritance shrinks over time for the same reason
- Early release for long periods creates larger debt growth than late release
Equity Release Council members must provide a no-negative-equity guarantee — the loan can never exceed the property sale value. But this guarantee means the worst case is that the property value entirely covers the loan, leaving nothing for the estate from that asset.
Updating your will after equity release
Equity release does not invalidate your existing will — but it changes the context significantly. Review your will to check:
- Whether specific cash gifts can still be funded after the loan is repaid
- Whether the release of equity to one child should be treated as an advance of their inheritance
- Whether your residuary beneficiaries understand that the property will be used to repay the loan first
- Whether your letter of wishes explains your reasoning for taking equity release
Tell your executors
Your executors must contact the equity release provider on your death and declare the outstanding balance on the IHT400 return. If they do not know about the loan, they cannot do this — and may submit an inaccurate return, leading to HMRC penalties. Keep a record of your equity release provider and plan reference in a secure place known to your executors.
Frequently asked questions
Does equity release reduce inheritance tax?▼
Yes — a lifetime mortgage reduces the value of your estate on death because the loan (plus rolled-up interest) is repaid from the property proceeds before anything is distributed to beneficiaries. A smaller estate means a smaller potential IHT bill. For example, if your estate is worth £1.2m (including your home) and you release £200,000 of equity, your estate value falls to approximately £1m — reducing IHT by £80,000 (40% of £200,000). However, the total inheritance your beneficiaries receive is also reduced — so equity release is a trade-off, not free IHT planning.
How does a lifetime mortgage work for IHT purposes?▼
A lifetime mortgage is a loan secured against your home. You receive a lump sum or regular payments; the interest rolls up and is added to the debt each year. When you die (or move into long-term care), the property is sold, the outstanding loan (original amount plus accumulated interest) is repaid to the lender, and the remainder is distributed per your will. For IHT purposes, the outstanding loan is a liability of the estate — it reduces the gross estate value just like any other debt. The key variable is the interest roll-up: a loan taken early with high interest can grow significantly before repayment.
Can I gift equity release funds to reduce IHT?▼
Yes — but the 7-year rule applies. If you release equity and immediately gift the cash to your children (or a trust), the gift is a potentially exempt transfer (PET). If you survive 7 years from the date of the gift, the amount falls outside your estate entirely. If you die within 7 years, the gift is brought back into the estate and taxed (with taper relief applying for gifts made 3–7 years before death). The equity release loan itself also reduces your estate. So equity release + immediate gifting can deliver a double IHT benefit if you survive 7 years — but it requires careful planning and good health prospects.
Does equity release affect the Residence Nil Rate Band?▼
Not directly — the RNRB is available as long as you leave a qualifying home (or downsizing proceeds) to a direct descendant. An equity release mortgage does not disqualify the property from RNRB treatment. However, if the loan has grown to the point where the net value of the home (property value minus loan) is small, the estate may not benefit much from the RNRB in practice. For estates near the £2m RNRB taper threshold, equity release can also reduce the estate below the threshold, reinstating the full RNRB.
Do I need to update my will after taking out equity release?▼
Yes — or at least review it. Equity release significantly changes the expected value of your estate. If you have made specific cash gifts in your will, check whether the estate will still have enough to fund them after the loan is repaid. If you have used the equity to fund gifts to one child, consider whether this creates an unequal distribution with other beneficiaries. Update your letter of wishes to explain your reasoning. Also ensure your executors know about the equity release — the loan provider will need to be notified and the debt registered with the estate's liabilities on the IHT return.
What is the no-negative-equity guarantee with equity release?▼
Members of the Equity Release Council are required to offer a no-negative-equity guarantee. This means that when the property is sold on death or entry into care, the total amount repayable (loan plus rolled-up interest) can never exceed the sale proceeds of the property. Your beneficiaries will never inherit a debt from equity release — the worst outcome is that the property covers the loan but leaves nothing for the estate. This guarantee does not prevent the loan from consuming the entire property value, however — if house prices fall or interest rolls up for many years, there may be little left.
How should equity release be shown in a will and IHT return?▼
Equity release does not need to be mentioned in the will itself — it is a liability of the estate, not an asset that needs to be bequeathed. However, executors must declare the outstanding loan (and all rolled-up interest as at the date of death) as a liability on form IHT400 when submitting the inheritance tax return. The loan reduces the net taxable estate. Executors should contact the equity release provider as soon as possible after death to obtain the outstanding balance figure and begin the redemption process.
Keep your will up to date as your finances change
Equity release changes the shape of your estate. A quick will review — or a new will if the change is significant — ensures your wishes are reflected. WillSafe UK will kits from £29.99.
Review your will nowRelated guides
This article is for general information only and does not constitute financial or tax advice. Equity release is a significant financial decision — always seek regulated financial advice before proceeding. Rules are correct for England & Wales as at May 2026.