How Does Equity Release Affect Inheritance Tax?

man working out his inheritance tax

A common concern when releasing equity is whether there will be an Inheritance Tax liability or if Equity Release can affect Inheritance Tax. The short answer is yes, Equity Release can affect Inheritance Tax, but it depends how you use the money.

This guide explains Inheritance Tax and Equity Release products to help you understand to what extent Equity Release can affect your Inheritance Tax.

Let’s explore Inheritance Tax and Equity Release in detail.

What is Inheritance Tax?

Inheritance Tax is a tax applied when you pass away in some circumstances. The rate of tax you pay depends on the size of your estate and some estates will have no Inheritance Tax liability at all.
The Inheritance Tax thresholds for 2023 are:

If your estate is valued under £325,000Nil
If your estate is valued under £325,00040% of anything over £325,000

Your unused Inheritance Tax threshold can be passed to your spouse if you are married or in a civil partnership. This means for married couples the total tax-free allowance is £650,000. Your next of kin will need to report your estate’s value regardless of its value. Even if your total estate is less than the threshold and no tax is due, your next of kin must file a declaration.

You can reduce your Inheritance Tax liability in several ways. The two most common ways to do so are to gift your inheritance before you die or donate at least 10% to charity.

Donating 10% of your estate to charity will allow the qualifying tax rate to drop to 36% instead of 40% on any value over the £325,000 threshold.
Gifting your inheritance before you die can eliminate tax altogether providing you do not die within 7 years of making the gift. If you are confused about your Inheritance Tax liability you should consult a tax specialist who can provide advice and recommendations.

What is Equity Release?

Equity Release allows you to borrow money tied up in the equity you hold in your property. An Equity Release product is a mortgage product, without the monthly repayments (unless you opt to make them). When you take an Equity Release product the money can be paid in full, as regular payments or a combination of both.

There are two types of Equity Release product in the UK, Lifetime Mortgages and Home Reversion Plans.

Lifetime Mortgages

A Lifetime Mortgage is the most popular Equity Release product and accounts for over 99% of Equity Release products taken each year. This is because it offers most borrowers better value for money compared to Home Reversion Plans.

With a Lifetime Mortgage you borrow the amount from a lender and the balance is repaid when you pass away or go into long term care. You still own 100% of the property with a Lifetime Mortgage, you just have a charge on the property that must be redeemed in the future.

Typically, a property is sold or refinanced by the borrower’s beneficiaries in order to repay the loan. If the beneficiaries fail to do this within a set period of time (typically 12 months), the lender can repossess and sell it themselves.

Home Reversion Plans

Home Reversion Plans are different as you sell the equity up front to a provider, and they allow you to live in the property until you pass away or go into long term care.

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How Does Equity Release Affect Inheritance Tax?

Taking an Equity Release product can reduce your Inheritance Tax liability, or it could leave the liability unchanged. Taking an Equity Release product will never increase your Inheritance Tax liability.

The money paid to you from an Equity Release is normally tax free and you will be free to use it as you choose.

If you choose to personally spend this money before you die, the money won’t go into your estate and you will have reduced your Inheritance Tax liability by the value of the Equity Release.

Things can get complicated if you choose to gift the money and it is here you may find your Inheritance Tax liability remains unchanged.

Can You Release Equity for Gifting?

As mentioned, you can choose to gift the money you receive from Equity Release. When you gift money, there are rules that apply in relation to Inheritance Tax. This is commonly known as the 7-year rule.

Time Elapsed Since Gift and Death DateAmount of Inheritance Tax Due
0-3 years40%
3-4 years32%
4-5 years24%
5-6 years16%
6-7 years
7+ yearsNil

There are tax free gifting allowances as well which can complicate matters if you are unsure about your tax affairs in general.

You are allowed:

  • to gift tax free £5000 a year per child
  • to gift tax free £2500 a year per grandchild
  • to gift tax free £1000 a year to anyone else

It is a good idea to discuss gifting with a tax specialist if you are expecting an Inheritance Tax liability. Your Equity Release provider will not thoroughly investigate what you do with the money and once it is in your account, it is entirely up to you how you spend it or when you spend it. However, prior to release of funds, the Equity Release provider will want to know roughly what the money is being spent on for compliance purposes.

What Our Clients Have To Say

Speak to an Equity Release Specialist

Equity Release is a major financial commitment that can be complicated if you are unsure of the tax liabilities you may face. To take an Equity Release product in the UK you must seek professional advice and you should take this opportunity to ask any questions you may have.

The Equity Release Council is an organisation that oversees its members and holds them to high standards of conduct. Unfortunately, around 10% of the UK Equity Release market does not subscribe to the Equity Release Council and do not have to meet their high code of conduct.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers is a proud member of the Equity Release Council and offers fee free Equity Release advice.

Contact Boon Brokers to book your Equity Release consultation and discuss any concerns you may have about Inheritance Tax today.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.