Equity Release and Inheritance Tax: What Actually Changes
Equity release debt is deducted from your estate's value before inheritance tax is calculated, since it's treated as a liability, not income. But borrowing £150,000 to save 40% tax on that amount (£60,000) only makes sense if the debt itself doesn't grow larger than the tax saved — and at typical rates, it usually will within 10-15 years.
Equity release is sometimes suggested as an inheritance tax planning tool, since the debt reduces your estate's taxable value. That's true — but it's rarely the whole picture, and using it purely for tax reasons can cost your estate more in compounding interest than it saves in tax. This guide explains exactly how the two interact, using current 2026 thresholds.
Current Inheritance Tax Thresholds (2026)
Understanding whether IHT applies to you at all comes first:
Standard nil-rate band: £325,000 per person, tax-free
Residence nil-rate band: an additional £175,000 if you leave your main home to children or grandchildren, giving £500,000 per person
Married couples/civil partners: unused allowances transfer to the survivor, potentially giving up to £1,000,000 combined tax-free
Anything above these thresholds is taxed at 40%
These thresholds are frozen until at least April 2031, meaning more estates are drawn into IHT each year as property values rise
The residence nil-rate band tapers away for estates over £2 million, and is lost entirely once an estate reaches £2,350,000 — worth checking if your total estate approaches this level.
How Equity Release Actually Affects Your IHT Bill
When you take out equity release, the loan becomes a debt secured against your property. On death, that debt is deducted from your estate's value before IHT is calculated — the same way an ordinary mortgage would be.
Worked example: a £600,000 estate with no debt, leaving £100,000 above the £500,000 threshold, taxed at 40% — an IHT bill of £40,000.
If £100,000 of equity release had been taken 10 years earlier at a typical rate of around 6.6%, the debt would have grown to roughly £190,000 by death — larger than the original estate value above the threshold. In this case, no IHT would be due at all.
But look at the trade-off: the estate has lost £190,000 in debt to save £40,000 in tax — a net cost of £150,000 to the estate.
When It Genuinely Makes Sense as a Strategy
Equity release is more likely to be a sound part of IHT planning when:
The money released is gifted to family during your lifetime, and you survive 7 years — the gift then falls outside your estate entirely
You need the money for genuine living costs or care regardless of the IHT angle
Your estate is well above the taper threshold (£2 million+), where the RNRB is already lost
Important caution on gifting: if you release equity and gift the cash but continue benefiting from the property without paying market rent, HMRC's "Gift with Reservation of Benefit" rules can still pull the value back into your estate. Always get professional advice before gifting released funds if IHT planning is the goal.
A Change Worth Knowing About: Pensions and IHT
From 6 April 2027, most unused pension funds and death benefits will count as part of your taxable estate for the first time — previously one of the most tax-efficient ways to pass on wealth.
If part of your later-life planning has relied on leaving pension wealth untouched specifically to pass it on IHT-free, this change is worth reviewing well before it takes effect.
Getting This Right
This is genuinely complex territory where the "right" answer depends on your total estate value, family circumstances, and how the released funds are used. A few principles worth holding onto:
Don't take out equity release purely to reduce an IHT bill without modelling the compounding cost against the tax saved
If gifting is the goal, get advice on structuring it to genuinely fall outside your estate
Review this alongside the wider comparison between equity release and downsizing, since downsizing has no compounding cost working against the IHT saving
A specialist estate planning adviser, not just a mortgage or equity release adviser, is worth involving if IHT is significant to your decision.
Related Reading
Equity Release Explained: How It Works, What It Costs
Downsizing Explained: Costs, Timing, and How Much You Could Release
Not sure which option fits your circumstances?