How does equity release affect inheritance tax?
Inheritance Tax (IHT) is often an overlooked aspect of financial planning. However, with rising property values*, more families could find themselves facing substantial tax bills on their estates.
If you are 60 or older, it is important to know how IHT works. You should understand how it can affect your loved ones. Strategies to reduce its impact, such as Equity Release, also exist.
This guide will help you understand Inheritance Tax. It covers recent changes and how Equity Release can help. Using Equity Release can be a smart way to manage your estate. It also offers financial flexibility during retirement.
Understanding Inheritance Tax
What is Inheritance Tax?
Inheritance Tax is a tax on the value of an estate (property, money, and possessions) when someone passes away.
Standard IHT Threshold: £325,000
Residence Nil Rate Band (RNRB): If you leave your home to direct descendants (children or grandchildren), the threshold increases to £500,000.
Married couples and civil partners can transfer any unused allowance to each other. This can double the inheritance tax-free allowance to £1,000,000.
Tax Rate: 40% on the portion of the estate above the threshold.
Example: How IHT is Calculated (based on standard IHT rules and thresholds)
If your estate is worth £600,000 and your IHT-free threshold is £325,000, you will be taxed on £275,000 (600,000 – 325,000) at 40%, resulting in a tax bill of £110,000.
Did you know? You can lower your tax bill a lot by using financial planning strategies. These include gifts, trusts, and Business Relief (BR) investments.
Recent Changes in Inheritance Tax Rules
With the government’s continued focus on tax reforms, recent updates have affected how inheritance tax applies to estates. The latest adjustments include:
Changes to Business Relief (BR) mean AIM-listed shares will now get only 50% relief. This is down from the previous 100%. This change will affect many high-net-worth estates.
Pension IHT Liabilities: Starting in April 2027, most undrawn private pensions will count in IHT calculations. This makes retirement planning more important.
Threshold Adjustments: The main threshold stays the same. However, changes in valuation methods mean more estates are now taxable.
Understanding these changes is vital in shaping your financial plan to mitigate unnecessary tax burdens.
How Equity Release Can Help Reduce IHT
Many homeowners use Equity Release to access the value in their homes. This also helps reduce their IHT liability.
What is Equity Release?
Equity Release allows homeowners over 55 to unlock tax-free cash from their property without selling it. Two main types exist:
- Lifetime Mortgages – The most popular option. You borrow against your home’s value and repay when you pass away or move into long-term care.
- Home Reversion Plans let you sell part or all of your home. In return, you get a lump sum or regular payments. You can still live in your home.
Equity Release as an IHT Strategy
Reducing the Value of Your Estate
Money released from your home reduces the estate’s taxable value.
If used for spending or gifting, it further decreases the estate’s value.
Gifting the Money to Loved Ones
You can gift the funds to your children or grandchildren.
If you live for seven years after gifting, the money is exempt from IHT.
Taper relief applies to gifts made within 3-7 years of passing.
Please remember that gifting through Equity Release will still effect future inheritance of your beneficiaries
Funding Tax-Efficient Investments
Invest in Business Relief (BR)-qualifying assets, which can become IHT-free after two years.
Consider trusts and other tax-efficient investment strategies.
Always remember that investments carry an element of risk.
Paying for Long-Term Care
Instead of selling your home, you can use Equity Release to fund care costs while preserving family wealth.
Discussing Equity Release Issues
While Equity Release can be a powerful tool, it’s essential to weigh the pros and cons:
✅ Pros:
✔ Frees up tax-free cash for gifting, investment, or spending. ✔ Reduces the taxable value of your estate.
✔ No monthly repayments required (for Lifetime Mortgages).
✔ You retain the right to live in your home.
✔ Provides financial flexibility without needing to downsize.
❌ Cons:
✖ Accrued interest can grow over time, reducing inheritance
✖ May affect eligibility for means-tested benefits.
✖ Early repayment fees if you decide to settle the loan sooner.
✖ Not all Equity Release providers offer flexible repayment options.
Is Equity Release Suitable for You?
Equity Release is not for everyone, but it can be a powerful estate planning tool when used strategically. If you:
✅ Own a high-value property. ✅ Want to pass on wealth while reducing IHT liability.
✅ Need additional funds for retirement or care costs. ✅ Want to remain in your home while accessing its value.
Then it may be worth exploring with a qualified financial adviser.
Next Steps
If you’re considering Equity Release:
Speak to a Specialist Adviser – They can assess your situation and recommend the best option.
Consider Your Long-Term Plans – Think about how much you want to leave behind and how best to manage your estate.
Compare Providers & Products – Look for competitive rates and features.
Ensure Family Involvement – Discuss plans with your loved ones to ensure alignment with their expectations.
Fully consider the risks and benefits of taking out equity release
Review Your Options Regularly – Watch for changes in rules and new financial products that may fit your needs better.
Please always consider all potential options as equity release isn’t right for everyone, options such as downsizing or a residential mortgage may be a better option.
Final Thoughts
Inheritance Tax can be a significant financial burden. However, with careful planning and smart choices, you can reduce its impact.
Equity Release is a tool that could help you enjoy retirement. It can potentially help secure your family’s financial future. Want to learn more? Contact Retirement Solutions today!
*Nationwide house price index
