Home Reversion Plan and IHT: Gift With Reservation Rules, Section 102B FA 1986, and the IHT on Equity Release
A home reversion looks like it removes the property from the estate — but a partial reversion is caught by the gift with reservation rules under section 102B Finance Act 1986. If the homeowner continues to occupy the whole property after selling a share, the sold share is treated as still in the estate. Full reversions do remove the property from the estate, but the lump sum received (at a deep discount) replaces it.
Home Reversion Plans and Inheritance Tax
What is a home reversion plan?
A home reversion plan is an equity release product regulated by the FCA since 6 April 2007 (under the Mortgage: Conduct of Business sourcebook). The homeowner sells all or part of their property to a home reversion provider — typically at below market value, because the provider is purchasing a right to the property subject to the homeowner's continuing right of occupation. In return, the homeowner receives: (1) a tax-free lump sum (or instalments); and (2) a guaranteed right to live in the property rent-free for life (or for a nominal rent of around £1 per month). On the homeowner's death, the property passes to the provider (or the provider's share passes to them). The homeowner (or their estate) receives the value of any retained share of the property. Key difference from a lifetime mortgage: a lifetime mortgage is a loan secured on the property (a debt in the estate); a home reversion is a sale (part of the asset is immediately outside the estate, but no debt).
IHT on a full home reversion (100% sale)
Where the homeowner sells 100% of the property to the home reversion provider, the full property is outside the estate immediately — the homeowner retains only the right to continue living there. The right to occupy has no market value for IHT (it cannot be transferred or sold — it terminates on the homeowner's death). The result: the property is completely outside the estate. The lump sum received is added to the estate (and is subject to IHT as part of the remaining estate) — but the property itself is not in the estate. A 100% home reversion can be an effective IHT planning tool: a high-value property is replaced by a smaller cash sum (which may have been partially spent or gifted), reducing the estate significantly. However, the lump sum received is typically 20–60% of the property's value (the provider discounts for the guaranteed right to occupy) — the effective sale price is well below market value.
Section 102B FA 1986: GWR on a partial home reversion
Where the homeowner sells only part of the property (e.g. 50%) and retains the other 50% themselves, the IHT position is more complex. Section 102B Finance Act 1986 was introduced specifically to catch 'shearing arrangements' where a property is split into parts and the donor gives away one part while continuing to share the use and enjoyment of the whole. Under s102B, where a donor gives an undivided share of land and continues to occupy the land (including the part they did not give away), the given share is treated as a GWR — it remains in the donor's estate as if no gift was made. Applied to a home reversion: the provider purchases a 50% share; the homeowner continues to live in and share the property. The homeowner's 50% retained share qualifies under s102B: the homeowner is sharing occupation with the provider (or the provider's interest) — so the 50% retained share is not GWR. However, the 50% sold to the provider: the homeowner continues to use and occupy the sold share (they live in the whole property, including the sold share). Under s102B, the sold 50% is a GWR — it remains in the homeowner's estate as if not sold.
The practical effect of s102B on partial home reversions
The s102B GWR analysis means that a partial home reversion does not achieve the IHT saving expected: the sold share (which the homeowner expected to have transferred outside their estate) is treated as still in the estate, because the homeowner continues to occupy it. The net IHT position may be no better than before the reversion — or even worse (the homeowner has sold part of the property at below market value, reducing the estate asset, but the lump sum received is also in the estate — and the sold share is GWR so it notionally remains in the estate too). HMRC has confirmed this analysis in its guidance on equity release and IHT. The key exception: if the homeowner genuinely occupies only the retained share of the property (e.g. a clearly physically separated wing or floor), s102B does not apply — but for a typical home reversion of an undivided share, shared occupation of the whole triggers s102B.
Home reversion vs lifetime mortgage: IHT comparison
A lifetime mortgage is a loan secured on the property — it is a debt in the estate and is deductible from the estate value for IHT. The property remains in the estate at full value; the mortgage reduces the estate. A home reversion is a sale — part (or all) of the property leaves the estate. For IHT purposes: (1) Lifetime mortgage: property in estate (full value), debt deductible — net IHT position depends on how the borrowed funds are used (if spent, estate reduces; if retained as cash, estate unchanged). (2) Full home reversion: property out of estate immediately — lump sum in estate (partially offset by spending). (3) Partial home reversion: GWR analysis under s102B means the sold portion may not actually leave the estate — limited IHT benefit. For pure IHT planning, a lifetime mortgage where the borrowed funds are gifted (as PETs, running the 7-year clock) may be more IHT-efficient than a partial home reversion.
Frequently Asked Questions
Does a home reversion plan save inheritance tax?
A full home reversion (selling 100% of the property) does reduce the estate — the property passes to the provider and only the lump sum received (and remaining unspent) is in the estate. However, the lump sum received is typically 20–60% of the property value, so only part of the property's value is released (much of the value goes to the provider in exchange for the guaranteed lifetime tenancy). For a partial home reversion (selling only 50%), the section 102B GWR rules may negate the IHT saving entirely — the sold portion may be treated as still in the estate. For most people, a home reversion is not used primarily for IHT planning — it is used for releasing cash from the property for living costs or care. Life insurance written in trust is a simpler and potentially cheaper way to fund the IHT on a property-heavy estate.
Is there Stamp Duty Land Tax when a home reversion provider sells the property after the homeowner's death?
No — SDLT is triggered by the original sale from the homeowner to the home reversion provider (the homeowner's solicitors handle SDLT at the time of the reversion). On the homeowner's death, the provider already owns the property (or the relevant share) — there is no further transfer and no further SDLT. Where the provider then sells the property on the open market after the homeowner's death, the purchaser pays SDLT on the purchase price in the ordinary way.
Can a home reversion be used alongside a will for estate planning?
Yes — where a full home reversion has been completed, the homeowner's estate no longer contains the property. The will directs the remaining estate (cash from the lump sum, investments, personal possessions). Where a partial reversion has been used, the retained share of the property passes under the will to the named beneficiaries. The will should clearly identify the nature of the homeowner's interest (retained share under a home reversion) so the executors understand what they are dealing with. A copy of the home reversion agreement should be kept with the will for the executors' reference.
What happens to the home reversion when the homeowner goes into a care home?
If the homeowner enters a care home permanently and the home reversion agreement includes a care home exit clause (standard in most FCA-regulated plans), the homeowner (or their personal representative) can terminate the lifetime tenancy and the provider returns a portion of the sale proceeds (or nothing, depending on the plan). The IHT implications depend on what the homeowner receives: any returned proceeds are in the estate. For the RNRB: once the homeowner has vacated the property permanently, the property may no longer be their main residence — but the RNRB continues to apply for a defined period (up to 2 years) where the homeowner vacated for care reasons under s8H(1)(b) IHTA 1984.
Does a home reversion affect the Residence Nil Rate Band?
Where a full home reversion has been completed, the homeowner no longer owns the property — the RNRB is not available (the property is not in the estate). The homeowner's right to occupy has no estate value and does not constitute 'ownership' of the property for RNRB purposes. For a partial reversion where the homeowner retains a share: the retained share, if included in the estate (including if the sold portion is a GWR under s102B), may qualify for the RNRB where the property was the homeowner's main residence and passes to a direct descendant. Specialist advice should be sought on the RNRB position for any home reversion arrangement, as the IHT treatment of the sold vs retained shares is complex.
Equity Release and IHT: Get Your Will Right First
Before entering a home reversion or any equity release product, your will must be up to date — it determines who receives the retained share, the lump sum, and any remaining estate assets. WillSafe will kits give you the will foundation to complement your equity release advice.
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