Equity Release and Inheritance Tax UK 2026: Lifetime Mortgage IHT Impact, s162B IHTA Liability Deductibility, RNRB Interaction, and Home Reversion Schemes
A lifetime mortgage reduces your IHT estate by the outstanding loan at death — including all rolled-up interest. But using equity release to fund gifts risks an HMRC challenge under s162B IHTA, and large balances can erode the RNRB.
£1 of Equity Release = £1 Deducted from IHT Estate — But Watch the RNRB Trap
The outstanding lifetime mortgage balance is deductible under s162 IHTA — reducing the taxable estate by the full loan amount (including rolled-up interest). IHT saving: 40p for every £1 of outstanding balance (above the NRB). WATCH: if the equity release balance reduces the net property value below £175k, the RNRB is capped at the net value — costing additional IHT. Plan carefully to avoid over-eroding the RNRB.
| Scenario | IHT Impact | Deductible? | RNRB Impact |
|---|---|---|---|
| Lifetime mortgage — standard drawdown (proceeds spent on living costs) | Lifetime mortgage outstanding at death: £250k. Property gross value: £700k. Net property value in estate: £700k − £250k = £450k. IHT on the £250k debt deduction (saving, compared to no equity release): £250k × 40% = £100k IHT saving. The full outstanding balance (principal + all rolled-up interest accrued since inception) is deductible under s162 IHTA as a liability incurred for full consideration (the cash received) used for the deceased's benefit. The interest roll-up: each year the interest is added to the principal; the accumulating balance is the deductible liability at death. For a £150k equity release taken at age 70 with 5% rolled-up interest: after 15yr (to age 85): outstanding balance ≈ £311k (compound growth at 5%). The s162 deduction grows each year with the interest roll-up — the IHT benefit of the equity release increases over time as the debt compounds. | YES — fully deductible under s162 IHTA where the proceeds were used for the deceased's personal benefit (living expenses, home improvements, holidays, care costs). HMRC IHTM28382: HMRC accepts the deduction in these circumstances. No s162B challenge expected. | Gross property value £700k; equity release £250k; net property value £450k. RNRB: lower of £450k (net property) or £175k (RNRB limit) = £175k. Full RNRB available — equity release has not reduced the net property below the RNRB threshold. |
| Lifetime mortgage — large balance reducing property below RNRB threshold | Property value: £500k. Lifetime mortgage outstanding: £350k. Net property value: £500k − £350k = £150k. IHT saving from £350k debt deduction: £350k × 40% = £140k IHT saved. But RNRB impact: RNRB = lower of £150k (net property) OR £175k = £150k. RNRB reduced by £25k vs the full £175k RNRB. IHT cost of lost RNRB: £25k × 40% = £10k additional IHT. Net: IHT saved on equity release = £140k; IHT cost of reduced RNRB = £10k. Net saving: £130k. The RNRB reduction is minor compared to the IHT saving from the liability deduction in most cases. However: for couples using both RNRB and tRNRB (total £350k), a large equity release affecting the net property value could reduce the tRNRB too — the tRNRB transfer is capped at the deceased's actual RNRB used. | YES — deductible under s162 IHTA; the proceeds were spent. The RNRB restriction is a CONSEQUENCE (not a disallowance of the deduction). The debt is still deducted; only the RNRB calculation is affected by the lower net property value. | RNRB reduced to £150k (net property value). If tRNRB was also available: tRNRB transferred = the unused RNRB of the first spouse; but if the first spouse also had equity release, both RNRBs could be reduced. Planning: for couples close to using full RNRB and tRNRB, consider whether the equity release balance might erode these thresholds. |
| Lifetime mortgage — proceeds gifted to children (PET strategy) | Homeowner takes out £200k lifetime mortgage; immediately gifts £200k cash to children (PET — s3A IHTA). If homeowner lives 7yr: PET is fully exempt; £200k is outside the estate. The £200k loan is a deductible liability (s162 IHTA). Net IHT saving if homeowner survives 7yr: £200k PET exempt + £200k debt deduction = up to £400k outside estate vs normal position; IHT saving = £400k × 40% = £160k. RISK — s162B IHTA: HMRC may argue that if the sole purpose of the mortgage was to fund gifts (not for the homeowner's own use), the liability deduction should be restricted. s162B IHTA (Finance Act 2013) restricts deductibility where the liability was incurred in connection with a scheme to reduce IHT artificially. HMRC IHTM28382 warns: a lifetime mortgage taken out to fund gifts is a higher-risk strategy. If challenged: HMRC may disallow the £200k liability deduction — leaving only the PET benefit. | DISPUTED — higher risk. Deductibility of the liability may be challenged by HMRC under s162B IHTA if the loan was taken out primarily to fund gifts. PET is unaffected (the gift is still a PET regardless of s162B). HMRC may allow partial deduction if some proceeds were used for personal benefit. | RNRB: the lifetime mortgage reduces the net property value; if it erodes the net value below £175k, RNRB is capped. In the gift strategy: the homeowner has ALSO made a PET reducing their estate — combined benefit if s162B does not apply; risk if it does. |
| Home reversion scheme — partial property sale | Homeowner sells 40% of the property to a reversion provider for £60k (fair market value of 40% = £200k — the provider buys at a £140k discount because they cannot take possession until death/sale). At death: only 60% of the property is in the estate. Property value at death: £700k; estate's 60% = £420k. RNRB: available on the estate's share (£420k) — limited to £175k (RNRB cap — not limited to the 60% share). IHT on £420k (assuming above NRB). Gift element (PET at inception): £200k (market value) − £60k (consideration received) = £140k PET (s3A IHTA) — starts 7yr clock from the date of the reversion. If homeowner dies within 7yr: the £140k PET becomes chargeable (taper relief from year 3); IHT may be due on the gift element. If homeowner lives 7yr: the £140k PET is fully exempt. | No debt to deduct (the home reversion is a SALE not a loan — no outstanding liability on death). The IHT benefit is from the 40% of the property no longer being in the estate (the provider owns that percentage outright). The PET on the gift element is a SEPARATE IHT consideration. | RNRB on home reversion: the RNRB is calculated on the value of the deceased's SHARE of the property (60% × £700k = £420k) — RNRB = £175k (full — not capped because 60% > £175k). If only a small fraction remains in the estate: RNRB could be capped at the estate's percentage value. |
| Equity release — interest-only lifetime mortgage (rolled-up interest contained) | Some newer lifetime mortgage products offer an INTEREST-ONLY option: the borrower pays the monthly interest (so the balance does not compound). At death: only the original principal is outstanding (no rolled-up interest). Example: £100k equity release at 4% interest-only; borrower pays £4,000 pa interest from income; after 20yr: outstanding balance = £100k (no compounding). IHT deduction: £100k liability on death. Compare rolled-up interest: same £100k at 4% compound (not paying interest) → after 20yr: ~£219k outstanding. Rolled-up balance is deductible; interest-only balance is £100k. Interest-only: less IHT benefit (smaller deductible liability); but better for protecting the estate value for beneficiaries; monthly interest is s21 IHTA-eligible (if paid from income, regular, not reducing standard of living: the interest payments themselves could qualify as normal expenditure from income — further reducing the estate indirectly). | YES — the outstanding principal is deductible under s162 IHTA. The monthly interest payments are not a liability at death (they have been paid); only the outstanding principal at death is deducted from the estate. | RNRB: interest-only lifetime mortgage reduces net property by only the principal (smaller than rolled-up interest product). RNRB is less likely to be eroded below £175k. The interest-only product preserves more of the net property value for the RNRB calculation. |
Equity release IHT UK 2026. s5 IHTA 1984: estate for IHT purposes = all property to which the deceased was beneficially entitled immediately before death. s162 IHTA: liability deduction — the estate is reduced by liabilities of the deceased incurred for a consideration in money or money's worth; the lifetime mortgage is secured on the property and creates a liability for the outstanding balance (principal + rolled-up interest) on death. s162A IHTA (Finance Act 2013): restrictions on liabilities used to acquire excluded property. s162B IHTA (Finance Act 2013): liability deductibility limited where the liability was incurred, or the proceeds used, in connection with: (a) an excluded property transaction; OR (b) a transaction that increases the value of excluded property. HMRC interpretation IHTM28382: 'HMRC does not consider that s162B applies just because the deceased borrowed money and made a gift with it — the gift itself is a separate transaction; however, if there is a direct link between the liability and the acquisition of excluded property, or if the scheme has no commercial purpose other than to reduce IHT (GAAR — Finance Act 2013, Part 5), HMRC may challenge both the liability deductibility and the PET.' GAAR: Finance Act 2013 Part 5 — General Anti-Abuse Rule applies to IHT avoidance schemes from 17 July 2013; equity release to fund gifts that are 'abusive' arrangements may be within GAAR scope. RNRB (s8D-8M IHTA): RNRB = lower of (a) net value of property that qualifies (QRI — qualifying residential interest = property that was the deceased's residence at some time) or (b) maximum RNRB (£175k per individual; £350k combined tNRB for couple). Net value = gross value minus secured liabilities (s8H IHTA). The lifetime mortgage reduces the net value of the QRI. s8G: RNRB tapering — the RNRB reduces by £1 for every £2 above the taper threshold (£2m for 2026/27). A large equity release reducing the estate below £2m could recover the full RNRB (beneficial for very large estates). Home reversion: regulated product (Financial Services and Markets Act 2000 as amended by Mortgage Credit Directive Order 2016 — since 6 April 2007, home reversion plans require FCA authorisation — MCOB rules); FCA register; Equity Release Council standards. The Equity Release Council (ERC) sets minimum standards for member providers: no negative equity guarantee (borrower or estate can never owe more than the property value); right to remain in property for life; interest rates must be fixed or capped. Key providers: Aviva, Legal & General, More2Life, Canada Life, LV=. Equity Release Council no-negative-equity guarantee: on a lifetime mortgage with compounding interest, if the property value falls below the outstanding loan, the ERC guarantee means the estate owes no more than the property proceeds — important protection for estate planning. IHT400 Schedule IHT418 (business liabilities) and Form IHT400 Schedule IHT406 (interest in land): executors deduct the secured lifetime mortgage balance from the property value on IHT400; evidence: outstanding redemption statement from the equity release provider at the date of death. Probate: executors need a valuation of the property AND a final redemption statement from the equity release provider to calculate the net property value for both IHT and probate purposes.
Frequently Asked Questions
Does equity release reduce inheritance tax?
Yes — a lifetime mortgage (the most common form of equity release) creates a debt secured on the property. This debt is a deductible liability of the estate (s162 IHTA 1984) — it is deducted from the gross estate value before calculating IHT. Every £1 of outstanding equity release balance reduces the IHT estate by £1, saving 40p in IHT (where the estate is above the NRB). Example: £250k equity release outstanding at death; IHT saving = £250k × 40% = £100k. The rolled-up interest is also deductible (the total outstanding balance at death = principal + all compounded interest). IMPORTANT LIMITATIONS: (1) s162B IHTA (Finance Act 2013): HMRC may challenge the deductibility if the equity release proceeds were used to fund gifts to children rather than for the deceased's own benefit. (2) RNRB interaction: if the equity release reduces the net property value below £175k, the Residence Nil-Rate Band is capped at the net property value (reducing the RNRB available). For most equity release cases where proceeds were spent on normal living costs: the liability deduction is accepted by HMRC.
What is the s162B IHTA risk for equity release and inheritance tax?
Section 162B IHTA (Finance Act 2013) is an anti-avoidance rule that restricts the deductibility of certain liabilities for IHT purposes. It applies where: (a) a liability is incurred; and (b) the proceeds were used in a way connected with the avoidance of IHT (e.g., to make gifts). Risk scenario: a homeowner takes out a £200k lifetime mortgage and immediately gifts the £200k to their children (PET — s3A IHTA). The strategy aims for both: the PET to fall outside the estate (after 7yr) AND the £200k debt to reduce the estate via s162 deduction. HMRC may argue that the mortgage was taken out in connection with creating a tax-avoidance arrangement (the gift), and restrict the s162 liability deduction. HMRC guidance (IHTM28382) warns that this strategy carries a higher risk of challenge. Where equity release proceeds are spent on living costs, care fees, or home improvements: s162B is unlikely to be relevant — the proceeds were used for genuine personal benefit, not to fund IHT-avoidance gifts. Seek specialist IHT advice before using equity release as a gifting strategy.
Does equity release affect the Residence Nil-Rate Band (RNRB)?
Yes — potentially. The RNRB (s8D IHTA) is calculated as the LOWER of: (a) the net value of the residential property in the estate; OR (b) £175k (or the available RNRB including tRNRB if widowed). The net value of the property = gross property value minus the outstanding equity release loan. If the equity release loan is large enough to reduce the net property value below £175k: the RNRB is capped at the net property value. Example: property £500k; equity release £360k; net property value £140k; RNRB = £140k (not £175k). IHT cost of reduced RNRB: £35k × 40% = £14k additional IHT. For couples: if the equity release also reduces the transferred RNRB (tRNRB), the impact can be doubled. Practical note: the RNRB reduction is generally smaller than the IHT saving from the liability deduction — but it should be factored into the full estate planning calculation. RNRB tapering (s8G IHTA): the RNRB is also tapered by £1 for every £2 the estate exceeds £2m — large equity release loans, by reducing the estate, can reduce the tapering and recover RNRB for large estates above £2m (beneficial side effect for high-value estates).
What is the inheritance tax treatment of a home reversion scheme?
A home reversion scheme involves selling a percentage of the property to a provider at a discounted price. IHT implications: (1) PROPERTY IN ESTATE: at death, only the deceased's REMAINING percentage of the property is in the estate. If 40% was sold to the provider, only 60% of the property value is included in the estate. (2) GIFT ELEMENT (PET): at the time of the reversion, the difference between the fair market value of the percentage sold (e.g., £200k for 40%) and the actual price received (e.g., £60k) is a potentially exempt transfer (PET — s3A IHTA). This £140k PET starts the 7yr clock. If the homeowner dies within 7yr: the £140k (adjusted for taper relief) becomes chargeable. If the homeowner survives 7yr: the £140k PET is fully exempt. (3) RNRB: the RNRB is calculated on the deceased's share of the property at death. If the estate's percentage is still above £175k: full RNRB available. If the estate's percentage is below £175k: RNRB capped. (4) NO DEBT: unlike a lifetime mortgage, a home reversion scheme creates no outstanding loan — there is no s162 IHTA deductible liability on death.
How does rolled-up interest on a lifetime mortgage affect inheritance tax?
Rolled-up interest is compound interest that is added to the lifetime mortgage balance (not paid monthly). The total outstanding balance at death = original loan + all rolled-up interest. The FULL outstanding balance (including all rolled-up interest) is deductible as a liability of the estate under s162 IHTA. Because interest compounds, the outstanding balance grows over time — meaning the IHT deductible liability increases each year. Example: £100k equity release at 5% rolled-up interest: after 15yr: ~£208k outstanding; IHT deductible liability at death = £208k; IHT saving = £208k × 40% = £83k (compared to nil if no equity release). Compare: the same £100k equity release with interest-only payments: outstanding balance at death = £100k; IHT deductible liability = £100k; IHT saving = £40k. The rolled-up interest product provides a larger IHT deduction but results in a much larger total debt, leaving less for beneficiaries from the property sale. Which is better depends on whether the deceased needs the monthly income (interest-only) or whether maximising the IHT saving is the priority.
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