Equity release and inheritance tax: what actually changes
Equity release and inheritance tax (IHT) are linked because a lifetime mortgage is a debt, and debts are deducted from your estate before IHT is calculated. That can reduce a future IHT bill. But interest usually rolls up over time, so the debt can grow by more than the tax it saves.
This guide covers thresholds, gifting and protecting part of your home's value. It is general information, not tax or financial advice. For the basics, see our equity release guide.
Inheritance tax thresholds in 2026
Whether IHT applies at all depends on the value of your estate and who inherits it.
- Nil-rate band: the first £325,000 (2026/27) of an estate is usually tax-free.
- Residence nil-rate band: up to an extra £175,000 (2026/27) may apply if you leave your main home to children or grandchildren.
- Spouses and civil partners: unused allowances can usually pass to the survivor, so a couple may be able to leave up to £1 million without IHT.
- The rate: IHT is normally charged at 40% on the value above the available allowances.
- The taper: the residence nil-rate band is reduced by £1 for every £2 an estate is worth over £2 million (2026/27).
These bands are currently frozen until April 2031, so rising house prices may bring more estates into IHT.
How equity release affects inheritance tax
On death, the amount owed on a lifetime mortgage, including rolled-up interest, is deducted from the estate before IHT is worked out, just like an ordinary mortgage. Two points are easy to miss:
- Unspent money still counts. Released cash kept in savings is still part of your estate.
- The debt grows. With no monthly repayments, interest is added to the loan and compounds, reducing what your beneficiaries receive.
A simple worked example
Take a single homeowner with a £600,000 estate and £500,000 of allowances. The £100,000 above the allowances is taxed at 40%, a £40,000 bill, so beneficiaries receive £560,000.
Now suppose they had released £100,000 ten years earlier and spent it, with interest rolling up at an illustrative 7% a year. The debt would be around £200,000. Ignoring house price changes, the estate after the debt is about £400,000, below the allowances, so no IHT would be due. But beneficiaries would receive around £400,000 rather than £560,000.
Here the interest outweighs the tax saved. Results depend on the rate, amount, term and how the money is used; our article does equity release affect your inheritance? explores this further.
Gifting released money and the seven-year rule
A gift of released money may fall outside your estate if you live for seven years after making it. If you die within that time, IHT may still be due, sometimes at a reduced rate.
You can also give up to £3,000 a year under the annual exemption, and carry any unused amount forward for one tax year.
Gifting has downsides. You cannot take the money back, you may need it later for care, and if you keep benefiting from a gift, "gift with reservation of benefit" rules may still count it as yours. Our guide to gifting money to family explains more.
Inheritance protection guarantees
Some lifetime mortgages let you ring-fence a percentage of your home's value, so that share passes to your beneficiaries whatever the loan grows to. The trade-off is that you can usually borrow less, and not every plan offers it.
Talking to your family
Because equity release changes what your family may inherit, many people discuss it with them first, and some invite them to adviser meetings. Our article on equity release and inheritance covers what to talk about.
Pensions and inheritance tax from April 2027
From 6 April 2027, most unused pension funds and death benefits are due to count towards an estate for IHT, which may affect wider estate plans.
Getting advice on equity release and inheritance tax
IHT rules are complex and can change at any Budget. Equity release requires advice from an FCA-regulated adviser, who may not give tax advice, so many people also speak to a tax adviser or estate planning solicitor. Comparing equity release with downsizing, which has no compounding interest, can also help. We do not provide financial advice.
Not sure which option fits your circumstances?
Written and reviewed by the Later Life editorial team. Last updated .
Frequently asked questions
Does equity release reduce inheritance tax?
It can. The amount owed on a lifetime mortgage, including rolled-up interest, is deducted from your estate before inheritance tax is worked out. But released money only leaves your estate if it is spent or given away, and the interest can cost your family more than the tax saved. The rules are complex and can change.
Is money I release from my home still part of my estate?
Yes, if you still have it when you die. Released cash kept in a savings account counts towards your estate like any other savings. The debt is deducted, but the cash is added back, so the inheritance tax position may barely change. Money spent or given away is treated differently.
Can I give money from equity release to my children?
You can. Gifts may fall outside your estate for inheritance tax if you live for seven years after making them, and some smaller gifts are exempt straight away. Once given, the money cannot be taken back. Our guide to gifting money to family explains the rules, and a tax adviser or solicitor can help with your situation.
What is an inheritance protection guarantee?
It is an optional feature on some lifetime mortgages that ring-fences a percentage of your home's value for your beneficiaries, whatever the loan grows to. In return, you can usually borrow less. Not every lender offers it and terms vary, so an FCA-regulated adviser can explain how it would work on a plan you are considering.
Do my family have to repay the lifetime mortgage when I die?
Not from their own money. The loan and interest are normally repaid from the sale of your home, within a period the lender sets, and anything left passes to your estate. Family can repay from other funds to keep the property. With a no negative equity guarantee, the estate never owes more than the home sells for.