Equity Release Inheritance Tax
- Adil Akhtar
- Sep 11
- 17 min read
Equity Release and Inheritance Tax in the UK: What Every Taxpayer Needs to Know in 2025
Picture this: You’re staring at your home’s soaring value and wondering how to tap into that wealth without triggering an anxiety-inducing tax bill for your loved ones. Equity release has been on many minds, especially with inheritance tax (IHT) rules evolving in 2025. So, what’s the real story with equity release and IHT in the UK? Is your retirement plan robbing your family of their inheritance?
Let’s unpack the nitty-gritty, based on up-to-date 2025 tax rules, seasoned insights from real client experiences across London, Manchester, and beyond, and practical tips that go beyond the usual gloss.
What is Equity Release and Why Does it Matter for Tax?
Simply put, equity release lets you unlock cash tied up in your home without selling it. For many older homeowners, it offers a lifeline — whether to supplement pension income, fund care, or help family buy a home.
The government and lenders offer two common types:
● Lifetime mortgage: Borrow money secured against your home, repayable when you die or move into long-term care. Interest may roll up over time.
● Home reversion plan: Sell a percentage of your property now in exchange for a lump sum or income.
The key takeaway? The money you get from equity release is not counted as income by HMRC. It’s treated as a loan or an advance on your estate, so no income tax or capital gains tax is due when you receive the funds.
This has a direct implication for inheritance tax: by releasing equity and spending the cash on gifts or investments outside your estate, you may reduce the value of your estate liable to IHT.
Current Inheritance Tax Rules in 2025/26
Before exploring the IHT implications, let’s recap the key figures and rules as of the 2025/26 tax year. These figures are set by the Treasury and remain frozen until at least 2030.
● The Nil Rate Band (NRB) is £325,000 — the portion of your estate exempt from IHT.
● The Residence Nil Rate Band (RNRB) adds up to £175,000 if you leave your main residence to direct descendants (children, grandchildren).
● Combined, this means many taxpayers can pass on up to £500,000 tax-free per individual, and potentially £1 million tax-free for a married couple.
● The standard IHT rate on the estate value above these thresholds is 40%.
● The RNRB starts tapering off for estates worth over £2 million (reducing by £1 for every £2 above the threshold).
How Equity Release Can Help Reduce Your IHT Bill
In my years advising clients in London and the South East, I’ve seen many use equity release strategically to pass more wealth on tax efficiently. The logic often goes like this:
● You release £200,000 equity from your home.
● You use that money to gift amounts to your children, fund trusts, or invest in assets outside your estate.
● After seven years, these gifts are exempt from your estate for IHT due to the "7-year rule" on potentially exempt transfers (PETs).
● Since your estate is now smaller by the gifted amount, your eventual IHT bill shrinks.
Take the case of Mrs Jones (not her real name) from Surrey. She owned a property worth £1.9 million but couldn’t afford to make large gifts to her children outright. By taking out a lifetime mortgage of £600,000 and gifting equal parts of £200,000 to each child, Mrs Jones reduced the value of her taxable estate substantially over the next decade. Consequently, her children owed significantly less inheritance tax, saving potentially hundreds of thousands of pounds.
Important Caveats: Equity Release Is Not a Tax Shield on Its Own
Be careful here, because many assume equity release automatically cancels out inheritance tax. It does not.
● Equity release is a loan secured on your home and will need to be repaid after death or move to long-term care, so the net inheritance may reduce accordingly.
● The outstanding loan value adds to the estate value at death — not deducted before calculating IHT — so keeping track of loan growth is essential.
● If the released funds are spent within seven years on non-exempt items or gifts, they may still be counted in your estate for IHT purposes.
No Capital Gains or Income Tax to Worry About on Equity Release
Another commonly asked question: Does taking out equity release trigger capital gains tax?
No. Since you’re not selling the property but borrowing against it, there’s no CGT liability on the released amount. And since funds received are loan proceeds, you don’t owe income tax on equity release money received.
If you invest released funds and generate income, then those returns may be taxable. So it pays to plan how the cash is deployed.
What About Scottish and Welsh Homeowners?
Scotland and Wales have devolved aspects of tax, especially on income tax, but the inheritance tax system remains broadly consistent across the UK. However, property values and thresholds may vary, affecting IHT calculations indirectly.
I’ve worked with clients up and down the UK, and the biggest variation tends to be in land and property value growth, which influences whether their estates breach the IHT thresholds.
Inheritance Tax Changes Coming Up
One major upcoming change is the impact of pensions in IHT from April 2027 onward. Previously, pensions were largely outside the IHT net, but this shift will mean more estates will face tax on those assets. Many clients are now proactively using equity release and other estate planning tools to mitigate this future liability.
Verifying Your Inheritance Tax Position with Equity Release: A Practical Guide for 2025
None of us loves tax surprises, but here’s how to avoid them when dealing with equity release and inheritance tax (IHT). After understanding the basics of equity release and how it can affect your estate’s value, the next step is to precisely check your inheritance tax position. This section is a hands-on guide, drawn from detailed client cases and professional experience advising both individuals and business owners across the UK, including Scotland and Wales.
How to Calculate Your Inheritance Tax with Equity Release Involved
So, the big question on your mind might be: how do I actually calculate my IHT bill when I have an equity release plan? Here’s a step-by-step method that you can follow — whether you’re a wage-earner with PAYE, self-employed, or running a business.
Step 1: Determine the Gross Value of Your Estate
Start by tallying all your assets at the date of death, including:
● Property and land (current market value)
● Savings, investments, cash
● Business interests
● Pensions (note new rules from April 2027 bring most pensions into IHT charge)
● Personal possessions (jewellery, antiques, cars)
For homeowners using equity release, don’t forget that:
● The property’s market value is included gross, regardless of how much is owed on the equity release loan.
Step 2: Deduct Liabilities, Including Equity Release Loan
From this total, subtract:
● Outstanding mortgage and loans secured on property, including the equity release balance plus accrued interest.
● Other debts like credit cards or personal loans.
This adjustment is key. The equity release loan reduces your estate value because it is a liability owed on death or move to care.
Take the example of “Robert” from Birmingham, who used a £300,000 lifetime mortgage. When he passed away, the outstanding loan had grown to £340,000 due to rolled-up interest. The current market value of his home was £800,000. So, for IHT:
● Gross property value: £800,000
● Less equity release loan: £340,000
● Net value for IHT: £460,000
This net value will then be included in his estate calculation, not the full £800,000.
Step 3: Apply Allowances and Reliefs
In 2025/26, the key allowances you need to apply are:
● Nil Rate Band (NRB): £325,000
● Residence Nil Rate Band (RNRB) for main residence left to direct descendants: up to £175,000
● Spouse or civil partner exemption (if applicable)
Using Robert’s case again, if he passed his home to his children, the estate would apply both NRB and RNRB:
● Total allowances: £325,000 + £175,000 = £500,000
● Net estate value from property: £460,000
Since £460,000 is below the £500,000 combined allowance, Robert’s property would not be subject to IHT.
Step 4: Calculate IHT Due
Once net estate value exceeds allowances, the excess is taxed at 40%, or potentially reduced to 36% if 10% or more of the estate is left to charity.
Common Scenarios and Pitfalls in Equity Release and IHT Calculations
Be careful here, because I’ve seen clients trip up in these areas:
● Not accounting for accrued interest on lifetime mortgages: This can cause underestimating the loan deduction in Step 2 and overstating estate value.
● Ignoring the 7-year rule for gifts: If you gift equity release funds to family but pass away within 7 years, gifts may be added back for IHT.
● Overvaluing property without professional valuation: Market values fluctuate; an accurate survey is critical.
● Failing to factor in pensions post-2027: Many clients mistakenly assume pensions remain outside IHT — not true after April 2027. It can push estates over thresholds unexpectedly.
Checking Your Position if You Have Multiple Income Sources
Now, let’s think about your situation — if you’re self-employed or have multiple income streams, you might wonder how that interacts with your equity release and estate plan.
While income tax and inheritance tax operate separately, managing them together matters for overall tax efficiency:
● Side incomes, dividends, and rental earnings add to your liquid estate but do not change the property value minus loan for IHT.
● Accurate reporting of all income sources in your Self Assessment ensures you don’t overpay tax and frees up funds that might be used for lifetime gifts or pension top-ups to reduce IHT exposure.
One client I advised in Leeds, who combined freelance work with rental income, found an overpayment of tax due to incomplete declarations, which once corrected gave him more cash flow to gift to his children—potentially shrinking his IHT exposure.
Scottish and Welsh Variations
Inheritance Tax is UK-wide and based on domicile, so Scotland and Wales operate under the same rules, but with crucial differences in other tax bands affecting overall finances.
● Scottish income tax rates vary but do not influence inheritance tax bands or rates.
● Welsh rates also do not affect inheritance tax but impact overall tax planning.
The key for estate planning is to focus on UK-wide IHT rules, but integrate regional income tax nuances when optimising finances during your lifetime.
How to Use Your HMRC Personal Tax Account to Check IHT
HMRC’s “personal tax account” is a handy online tool to manage tax matters, but when it comes to inheritance tax, the information is limited until death.
However, you can use it to:
● Review your current income tax situation and check for overpayments.
● Access details about income sources that impact your estate planning.
For a deeper IHT estimation:
● Use professional estate valuation services.
● Consult your solicitor or tax advisor to factor equity release and other liabilities.
Summary Checklist: Verifying Your Inheritance Tax with Equity Release
Assess total value of all estate assets including property at current market value.
Deduct all debts, particularly outstanding equity release loan and accrued interest.
Apply personal allowances: NRB and RNRB if home goes to direct descendants.
Calculate taxable estate: estate value minus allowances.
Tax the excess at 40% (or 36% with charitable donations).
Consider the 7-year rule for any gifts made using equity release funds.
Factor in pensions from 2027 onward in your estate valuation.
Use professional property valuations to avoid over/under-estimating estate value.
Check income tax overpayments or deductions using HMRC’s personal tax account to free up cash for gifting.
Consult an expert for complex estates, particularly with business or rental properties.
Advanced Equity Release and Inheritance Tax Planning for Business Owners and Taxpayers
So, you’ve mastered the basics and calculated your inheritance tax position with equity release in mind. Now, let’s delve into the intricate world faced by business owners and advanced taxpayers navigating the 2025/26 IHT landscape. This part brings you seasoned, professional insights drawn from complex client situations, recent legislative changes, and practical strategies that can genuinely save you tax and headaches.
How Business Owners Are Uniquely Affected by Inheritance Tax and Equity Release
Running a business is already demanding, so it’s easy to overlook how equity release interacts with your business assets and inheritance tax position. Business assets can either exacerbate or relieve inheritance tax pressure, depending on several factors.
Business Property Relief: The Game Changer (and Its Changes)
Business Property Relief (BPR) has traditionally been the saviour for many family business owners facing IHT. It can offer up to 100% relief on qualifying business assets, effectively shielding them from inheritance tax. This includes:
● Sole trader businesses
● Shares in unlisted companies
● Certain agricultural and forestry property
However, the Autumn Budget 2024 and subsequent July 2025 updates have introduced significant reforms to BPR, effective from 6 April 2026:
● A £1 million cap applies to the combined value of assets eligible for 100% Business Property Relief and Agricultural Property Relief.
● Any value above £1 million qualifies only for 50% relief (meaning a 20% effective tax rate instead of nil).
● Shares traded on AIM or similar exchanges get only 50% relief instead of 100%.
This means that if your business or property interests exceed £1 million, you could face a substantially larger IHT bill from April 2026 onwards.
Real Client Insight: Navigating BPR Reform in a Family Business
Take the example of "Sarah," a manufacturing company owner near Manchester. Her business was valued at £2.5 million, fully qualifying for 100% BPR under previous rules. Her accountant advised that under the new rules, only the first £1 million of value will qualify for full relief, with the remaining £1.5 million attracting only 50% relief.
● Before reform: No IHT on business assets.
● After reform: £1.5 million x 50% = £750,000 taxable value.
● Potential IHT at 40% = £300,000 due.
Sarah used equity release to access funds to pay down some of the business debt and invest in tax-efficient pension contributions, easing future IHT exposure and cash flow pressure, illustrating how equity release and planning can work hand in hand effectively.
Equity Release vs. Business Asset Value: What You Need to Know
Many business owners think equity release is solely about their home, but your entire estate value matters, including business assets. Equity release can help create liquidity to:
● Pay IHT bills that arise on business assets or other parts of your estate.
● Fund pensions, which from April 2027 will be taxable on death, making pension planning critical.
● Gift money to family or trusts to reduce your net estate over time.
Beware, though — leveraging equity release without a clear business strategy might lead to:
● Increased loan balances reducing net inheritance available to heirs.
● Misjudging timing, especially with the 7-year PET rule for gifts made after equity release.
● Overestimating reliefs available on business assets post-2026 reform.
Practical Tax Planning Around Equity Release for High Net-Worth Business Owners
If you’re a business owner, consider the following practical steps:
● Regularly review your Will and estate plans in light of new BPR thresholds and equity release loan growth.
● Consider paying down equity release loans early or making planned repayments to preserve inheritance value.
● Use released equity to fund trusts or lifetime gifts, but be mindful of the seven-year survival rule.
● Explore pension planning to mitigate the new IHT charges on pension funds starting April 2027.
● Take expert advice on valuing business assets accurately — overvaluing can lead to unexpected IHT bills; undervaluing risks disputes with HMRC.
Advanced Checks: Avoiding Hidden Tax Traps
Based on years of working with complex client estates:
● Watch out for emergency tax codes on any additional income from equity release investments, which can inflate tax bills unnecessarily.
● For self-employed taxpayers combining equity release proceeds with fluctuating incomes, review your tax code annually to avoid under- or overpayment.
● Check whether you’re affected by the High-Income Child Benefit Charge if equity release funds boost your investment income to higher tax brackets.
● If you hold equity release plans jointly with spouses, coordinate tax and estate planning carefully to maximise transferable allowances.
● Stay alert to possible non-resident domicile implications if you’ve lived abroad but retain UK property or business interests, as IHT rules can differ.
Quick Guide: Using Equity Release Responsibly for Estate and Tax Planning
Step | Action Item | Why It Matters |
1 | Get professional valuations of all assets | Accurate estate valuations prevent surprises. |
2 | Calculate net estate post equity release loan | Know exactly what HMRC will tax on death. |
3 | Review BPR and APR eligibility carefully | Changes from 6 Apr 2026 could erode reliefs. |
4 | Use equity release funds for gifts or trusts | Gifts outside estate reduce IHT if survival period met. |
5 | Plan pension contributions to reduce future IHT | Pensions taxable post-April 2027 need special attention. |
6 | Update your Will regularly | Ensure your wishes align with tax planning strategies. |
7 | Monitor tax codes and income tax liabilities | Avoid emergency tax pitfalls and overpaying. |
8 | Seek regular financial and tax advice | Legislation and personal circumstances change. |
Understanding the intersection between equity release and inheritance tax, especially with ongoing legislative changes, is complex but manageable with the right approach. Business owners and taxpayers who plan proactively using these tools can preserve wealth, avoid liquidity crunches, and reduce the tax paid by their heirs — turning tax law to their advantage rather than their detriment.
If you’re considering equity release or worried about IHT implications this year and beyond, now’s the time to take action with trusted advisers who understand these nuances deeply.
For official guidance and tools, you can visit:
FAQs
Q1: Can someone with multiple jobs have their tax code adjusted if equity release income affects their overall tax position?
A1: Well, it’s worth noting that equity release payments themselves aren’t taxed as income, so they don’t directly change your tax code. However, if equity release funds are invested and generate extra income from dividends or interest, that can push you into a higher tax bracket across jobs. I’ve seen clients with multiple part-time jobs trip over emergency tax codes when this unexpected income wasn’t factored in. The key is to inform HMRC promptly so they combine all your income streams in one tax code, avoiding overpayment or underpayment.
Q2: How does equity release impact inheritance tax for self-employed clients with fluctuating business incomes?
A2: In my experience with self-employed clients, the main challenge is separating business assets from personal ones. Equity release reduces your estate’s property value but doesn’t affect business profits directly. If you’ve ploughed equity release funds into business assets, those might qualify for Business Property Relief, reducing IHT on them. But profits fluctuating year to year can mislead clients about disposable cash for gifting or repaying loans. Regular cash flow reviews ensure you don’t overestimate what’s safe to gift without hitting tax pitfalls.
Q3: What should business owners watch out for when using equity release to pay potential inheritance tax bills?
A3: Business owners, take care! While equity release can provide vital liquidity to cover large IHT bills, you must factor in the growing loan balance on your home. For example, I advised a family firm owner who released equity but didn’t account for rolled-up interest, reducing the net inheritance significantly. So, consider planned repayments or partial loan settlements where possible, and don’t rely on your home’s market value alone when planning tax payments.
Q4: Are there any regional differences in inheritance tax treatment of equity release between Scotland, Wales, and England?
A4: Good question. Income tax rates differ across those regions, but inheritance tax and equity release rules remain consistent UK-wide regarding allowances and tax rates. So, whether you’re based in Edinburgh, Cardiff, or London, the same £325,000 Nil Rate Band and £175,000 Residence Nil Rate Band apply. That said, property values and market conditions vary regionally, affecting estate values and thus IHT indirectly.
Q5: Can equity release funds gifted to family members within seven years be clawed back for inheritance tax?
A5: Yes, that’s the tricky ‘seven-year rule’. If you gift money from equity release and pass away within seven years, those gifts might count back into your estate for IHT calculations, potentially triggering tax charges for recipients. I’ve seen families caught unaware, especially when close to deadlines, so stagger gifts carefully and keep detailed records. Planning gifts alongside professional advice is crucial to avoid nasty surprises.
Q6: How does the 2027 pension inheritance tax reform interact with equity release planning?
A6: Starting April 2027, unused defined contribution pensions become subject to inheritance tax, increasing the overall tax burden. Releasing equity can create liquidity to boost pension contributions before then, helping reduce taxable pension funds on death. Some clients use equity release proceeds strategically to maximise tax-efficient pension top-ups, smoothing future IHT liabilities across assets.
Q7: If someone has rental income and equity release funds, does the rental income affect their inheritance tax?
A7: Rental income itself isn’t part of the estate value for IHT, but the property and any accumulated funds from rental profits potentially are. Equity release lowers your property’s net value by factoring in outstanding loans, which can reduce the IHT bill on the property. Just remember, if rental income is saved and forms part of cash assets in your estate, it will be considered for IHT.
Q8: What happens if a taxpayer underpays tax due to equity release-related income invested elsewhere?
A8: This is a common UK tax refund scenario. If someone releases equity, invests it, and generates taxable income without adjusting their tax code or submitting Self Assessment, HMRC may under-collect tax. Such underpayments cause interest and penalties if not corrected. I advise clients to review income sources annually and file Self Assessment if needed to balance the books and claim overpaid tax if applicable.
Q9: Are emergency tax codes applied to equity release income?
A9: No, since equity release funds aren’t income but loan proceeds, emergency tax codes don’t apply. However, income generated from investing those funds could trigger emergency tax codes on PAYE income if HMRC isn’t informed in time. This is why keeping HMRC updated about new income sources is essential to avoid surprise deductions or payments later on.
Q10: Can equity release reduce National Insurance contributions for self-employed individuals?
A10: Directly? No. Equity release doesn’t affect NICs because it’s not taxable income. But indirectly, accessing equity release funds may reduce the need for additional drawdowns from the business, potentially affecting reported profits and NICs in future years. Some clients find it eases the cash flow crunch, enabling them to smooth their contributions over time.
Q11: How does remote working affect the inheritance tax position when combined with equity release?
A11: Since IHT focuses on your estate rather than income, remote working per se has limited direct impact. However, remote workers often buy additional properties or move home, altering property values and equity release options. I’ve seen clients relocate and unintentionally increase estate values, pushing them closer to IHT thresholds despite equity release efforts. Staying aware of how lifestyle changes shift your asset profile is key.
Q12: If a taxpayer dies within a few months of making an equity release gift, who pays the tax?
A12: This situation triggers the gift being included in the estate under the seven-year rule. The recipient of the gift becomes liable for any IHT due on it if the estate exceeds the thresholds. Executors often seek ways to manage this, like spreading payments or negotiating with HMRC, but avoiding last-minute gifting is best practice.
Q13: Can equity release be used to gift funds into a trust to mitigate inheritance tax?
A13: Absolutely, but it requires foresight. Equity release funds gifted into certain trusts can remove them from your estate, reducing IHT. However, trust creation has its own tax rules and potential charges (entry, ten-year and exit charges). One client set up a discretionary trust funded by equity release proceeds to protect family assets over generations while maximising IHT efficiency.
Q14: How do multiple properties impact inheritance tax calculation with equity release on one home?
A14: Equity release only affects the property it’s taken out on, but the total estate includes all properties' full market values minus mortgages and loans on each. If you have multiple properties without equity release, the unrelieved values can push your estate into higher IHT liability. Coordinating equity release across properties can be complicated but may offer overall estate tax benefits.
Q15: Are gifted equity release funds considered income for child benefit or other means-tested benefits?
A15: Equity release funds themselves aren’t income, so don’t directly affect child benefit or benefits. But if gifted funds generate taxable income or uplift your savings, this might reduce means-tested benefits. One client had unexpected child benefit withdrawal because gifted money was invested in shares, increasing their income footprint.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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