Does Equity Release Reduce Inheritance Tax?

In the UK, 3 out of 4 parents intend to leave an inheritance for their children one day. The fact that house prices are continuing to rise is good news then as the inheritances yet to be received will rise too.

How Is Inheritance Tax Affected?

There is a concern however that as house prices rise many family’s legacies are being pushed over the lower Inheritance tax (IHT) threshold of £325,000. This is the case for 35,600 families who will this year be subject to a 40% tax averaging at £166,000 on their received inheritance.

The lower IHT limit will be frozen at £325,000 for another year in the UK, meaning another year of house price growth before the threshold is raised; consider just how many more families this could affect and if you could be one of them.

Make some plans and preserve your legacy

It is good practice to have a long-term financial plan in place and to factor in the inheritance you may leave behind as a part of that. There are some measures you can take from small to large to preserve as much of your family’s inheritance as possible, including:

Monitor your House Value

Starting at the small end, keeping an eye on your home’s value will tell you whether or not you need to prepare for such a tax. Also bear in mind any other assets which are inheritable such as savings, cash, cars and heirlooms, as they all count collectively as part of your estate.

Cash Gifts

You can gift up to £3000 per year tax free which can help reduce your estate over time, bear in mind though that any amount gifted above this can be taxed at the IHT rate if you die within a 7 year period of giving the gift.

You can also gift cash as a ‘regular expenditure’ meaning it regularly comes out of your current account without affecting your standard of living, like a surplus income. A financial adviser will be able to provide more details on this.


At the larger end of the scale there is downsizing. This is moving to a cheaper property to unlock the equity stored in your home. By downsizing and spending the money, you are reducing the size of your estate so there is less tax to pay on it.

Important factors to consider here are the stresses of leaving a long-term home, friends and family behind and the cost of moving.    

Lifetime Mortgage

A Lifetime Mortgage, a form of equity release, enables you to access you the value that has built up in your property without having to move or sell your home to release the funds. Instead the amount you release can be gifted to your family and heirs to enjoy now and is repayable with interest from the sale of your property when you pass away.

A Lifetime Mortgage can therefore be used as part of a long term financial strategy to reduce IHT. Specialist advice is required to set this up which can be provided by a specialist equity release company.

The Early Inheritance

As life expectancy increases in the UK, inheritances are received later and later. In this theme of estate planning, there are two points to consider:

  • Factor in when you may receive your inheritance. Will those additional assets or funds push the size of your estate over the IHT threshold and then be taxed at 40%?
  • Consider if your family would find their inheritance more useful now at their current stage in life rather than later. Do they have life events such as weddings, starting a family or buying their first home for which they could use a financial support?

To find out if you are eligible to use equity release as a form of inheritance tax planning, free phone 0808 231 1968 to speak with a specialist adviser who can answer any questions you may have.