Equity Release and Inheritance Tax UK: How Lifetime Mortgages and Home Reversion Affect Your IHT Estate (2026)
Equity release can legitimately reduce the IHT estate: a lifetime mortgage creates a growing liability deducted from the estate; a home reversion plan removes the sold percentage from the estate entirely. Gifting the proceeds to children starts the 7-year PET clock. But the family receives less from the property — the IHT saving comes at the cost of reduced inheritance.
| Product | IHT Effect | RNRB Impact | Notes |
|---|---|---|---|
| Lifetime mortgage | Debt deducted from estate (s5 IHTA) — grows over time as interest rolls up | None — property still in estate; RNRB unaffected | Property stays in estate; loan balance deducted as liability; no negative equity guarantee (FCA regulated) |
| Home reversion plan | Sold % removed from estate entirely | RNRB on remaining % only — may limit RNRB if remaining share < £175k | Sale proceeds received at significant discount (20–60% below market value). Remainder still in estate. |
| Equity release proceeds gifted (PET) | Exempt after 7yr from estate; taper from yr 3 | N/A (cash gift, not property) | Annual exemption £3k immediately. Normal expenditure from income (s21) uncapped and immediate. |
Equity Release and IHT: Complete Guide
How a lifetime mortgage reduces the IHT estate
A lifetime mortgage is a loan secured on the main home where no repayments are required during life — the interest rolls up and is repaid (with the capital) from the sale of the property on death or when the homeowner moves into care. For IHT purposes: (1) The property remains in the estate at its market value (the homeowner retains legal ownership of the full property); (2) The outstanding loan amount (capital plus rolled-up interest) is a liability of the estate under s5 IHTA 1984 — it is deducted from the gross estate to arrive at the net (taxable) estate; (3) As the loan balance grows over time (due to compound rolled-up interest), the net estate value falls — and the IHT liability falls with it. Example: house worth £500,000; NRB £325,000; no RNRB (no children). IHT without mortgage: (£500,000 - £325,000) × 40% = £70,000. If a lifetime mortgage of £150,000 is taken out, and the balance (including rolled-up interest at 5.5%) grows to £250,000 after 10 years: taxable estate: £500,000 (house) - £250,000 (mortgage) = £250,000 net estate; below NRB £325,000; IHT = £0. The IHT saving is real and significant — but the family receives less from the property sale (as the mortgage is repaid first). The IHT saving is funded by the family receiving a smaller net inheritance from the property.
Using equity release proceeds to make IHT-exempt gifts
A significant IHT planning approach is to take equity release proceeds and give them to children or other beneficiaries: (1) Gifts from equity release proceeds are Potentially Exempt Transfers (PETs — s3A IHTA 1984) if given to individuals — they are exempt after 7 years (with taper relief from year 3); (2) Up to £3,000 per year can be given from any source (including equity release proceeds) as the annual exemption (s19 IHTA 1984) — immediately IHT-exempt; (3) Where the equity release proceeds fund regular gifts, and the homeowner has sufficient other income to maintain their standard of living, the gifts from income may qualify as normal expenditure from income (s21 IHTA 1984) — immediately IHT-exempt and uncapped; (4) Giving equity release proceeds to children to invest in AIM BPR-qualifying shares starts the 2-year BPR clock in the children's hands. The combined effect: the equity release creates a liability reducing the estate (the mortgage balance); the gifted proceeds reduce the estate further (if made as PETs or from income); the family receives the equity release amount during life as gifts. However, the family also receives less from the property sale on death (the mortgage is deducted first). The net position depends on the interest rate on the mortgage vs the IHT rate (40%) on the proceeds if not given away.
Home reversion plans: the equity transferred is outside the estate
A home reversion plan involves selling a percentage of the property to a reversion provider in exchange for a lump sum (typically at a significant discount to market value — 20–60% of current market value, depending on age). The homeowner retains the right to live in the property rent-free for life. For IHT purposes: the portion sold to the reversion provider is no longer the homeowner's property — it has been transferred and is NOT in the estate at death. The homeowner's estate includes only their remaining share (the percentage not sold to the provider). Example: property worth £600,000; sell 50% to a reversion provider for £120,000 (40% of £300,000 — 60% discount). The homeowner retains 50% share = £300,000 in estate. At death: IHT estate includes £300,000 (homeowner's 50%) — not £600,000. IHT saving (assuming NRB used, no RNRB): 40% × £300,000 = £120,000 IHT saved. Key difference from lifetime mortgage: the home reversion is a sale, not a loan — there is no debt rolling up, but the family receives less from the property because the provider's share goes to the provider (not the estate) on death.
The RNRB and equity release: an important consideration
Both lifetime mortgages and home reversion plans interact with the Residence Nil-Rate Band (RNRB — s8D IHTA 1984): (1) Lifetime mortgage: the property remains in the estate (the mortgage is a liability deducted from the estate value). If the property passes to direct descendants, the full RNRB (£175,000) is still potentially available — but the RNRB is based on the estate value of the property interest, not its gross value. Where the lifetime mortgage exceeds the property value (unlikely in practice due to 'no negative equity' guarantees), the RNRB is limited to the equity in the property. In practice, the lifetime mortgage does not impair the RNRB — the property still passes to children and the RNRB applies. (2) Home reversion: the homeowner's remaining share of the property is in the estate. If the homeowner's share passes to direct descendants, the RNRB applies to the value of the remaining share (not the full property). If the homeowner sells 50% via home reversion, the RNRB applies to the 50% share value — potentially reducing the RNRB benefit by 50%. Example: £600,000 property; 50% home reversion; RNRB based on 50% = £300,000. The RNRB of £175,000 is fully available (as the share value exceeds £175,000).
s103 Finance Act 1986: the anti-avoidance trap
Where a debt (such as a lifetime mortgage) is 'derived from' a gift of property, s103 Finance Act 1986 can disallow the deduction of the debt from the estate. The mechanism: if a person gives away an asset (making a PET) and then borrows against the same asset or a connected asset, HMRC may argue that the debt was 'derived from' the gift and should not reduce the estate. This is the 'Ingram scheme' or 'double deduction' issue. However, s103 FA1986 applies specifically where the debt is 'derived from' the gift — the typical equity release situation (borrowing against a home that the homeowner still owns and lives in) is NOT a gift-with-reservation situation and does not directly trigger s103. Where the primary motivation is IHT avoidance rather than genuine financial need: HMRC may scrutinise uncommercial arrangements more carefully. Commercial equity release from an FCA-regulated provider is generally straightforward — the debt is genuine, the terms are commercial, and the deduction from the estate is legitimate. The s103 risk is primarily in bespoke or non-commercial arrangements (e.g. borrowing from family at nil interest to fund a PET).
Equity release, the will, and care home planning
Equity release has important will-planning interactions: (1) Will update: after taking equity release, the will should be reviewed. If a specific legacy includes the property, the equity release provider has a prior claim — the beneficiary receives the net equity after the mortgage. The will should be updated to reflect the equity release; (2) Care home: if the homeowner moves into a local authority-funded care home after equity release, the local authority will assess the property — but the lifetime mortgage balance reduces the net property value for means-testing purposes; (3) Portability: most FCA-regulated lifetime mortgages are portable — the mortgage can be transferred to a new property if the homeowner moves. Check the specific product terms; (4) No negative equity guarantee: all FCA-regulated equity release products include a no negative equity guarantee — the estate will never owe more than the property's sale value. This protects the estate from the mortgage balance exceeding the property value; (5) Early repayment charges: lifetime mortgages typically have early repayment charges if repaid before death or moving into care. These should be considered in the overall estate planning.
Frequently Asked Questions
Does equity release reduce inheritance tax?
Yes — in two ways: (1) A lifetime mortgage creates a liability (the outstanding loan balance including rolled-up interest) that is deducted from the estate under s5 IHTA 1984. As interest rolls up over time, the estate value and IHT liability fall; (2) Equity release proceeds can be gifted to children as PETs (IHT-exempt after 7 years), as annual exemption gifts (£3,000/yr — immediately exempt), or as normal expenditure from income (s21 IHTA — uncapped, immediately exempt). The combination of a growing mortgage liability AND gifting the proceeds can significantly reduce the IHT estate over time.
What is the difference between a lifetime mortgage and a home reversion plan for IHT?
A lifetime mortgage creates a debt secured on the property — the property stays in the estate; the debt is deducted as a liability. The IHT estate reduces as the mortgage balance grows (rolled-up interest). A home reversion plan sells a percentage of the property outright — the sold percentage is no longer in the estate at all. Home reversion typically produces a larger IHT reduction (the sold % is simply not in the estate) but at the cost of receiving significantly below market value for the percentage sold (30–60% of market value discount, depending on age).
Does equity release affect the Residence Nil-Rate Band?
A lifetime mortgage does not impair the RNRB — the property (including any share encumbered by the mortgage) still passes to direct descendants, and the RNRB applies. A home reversion plan may reduce the RNRB: the RNRB applies to the homeowner's remaining share of the property. If 50% is sold via home reversion, the RNRB applies to the value of the 50% remaining share. In most cases, the remaining share still exceeds the £175,000 RNRB, so the full RNRB is still available.
Can I give away equity release money to my children to reduce IHT?
Yes — gifts from equity release proceeds are treated the same as any other gift: Potentially Exempt Transfers (PETs) if made to individuals, exempt after 7 years (taper relief from year 3). Use the annual exemption (£3,000/yr) first — immediately IHT-exempt. If the equity release income is regular and the gifts are from surplus income (i.e. you maintain your standard of living), the gifts may qualify as normal expenditure from income (s21 IHTA 1984) — uncapped and immediately exempt. Keep records of the source of the funds and the purpose of the gifts.
Should I update my will after taking out equity release?
Yes — immediately. A lifetime mortgage gives the lender a prior charge on the property — any specific legacy of the property in your will leaves the beneficiary with the net equity after the mortgage is repaid. If you intended to leave the full property value to a child, the will should be reviewed to: (a) Acknowledge the lifetime mortgage and clarify what the beneficiary receives; (b) Consider whether other estate assets should be added to compensate for the reduced property equity; (c) Review the overall estate distribution in light of the changed asset values.
Update Your Will After Equity Release
Equity release changes your estate — the property value your beneficiaries will receive is reduced by the outstanding mortgage. Review and update your will to reflect the new asset position. WillSafe will kits for England and Wales make updating your will straightforward.
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