Equity release can reduce the inheritance tax due on an estate, because the loan and the interest that builds up on it are debts that are deducted from the estate’s value before tax is worked out. It is not an inheritance tax shelter on its own, though: money that simply sits in the estate as cash stays taxable, and giving it away brings the seven-year gifting rules into play.
Equity release is a way for homeowners, usually aged 55 or over, to take money out of the value of their home without moving. Because inheritance tax is charged on the net value of what you leave behind, the debt you create reduces that value, while the cash you receive can add value back unless it is spent or given away in a way that qualifies for an exemption. The rest of this guide explains that balance in plain terms. Figures are current as at August 2026 and are subject to change.
Does equity release reduce inheritance tax?
In many cases it reduces the taxable estate, but the effect depends on what happens to the money. Inheritance tax is charged on the value of an estate after debts are deducted, and a lifetime mortgage is a debt secured on the home (gov.uk, how Inheritance Tax works, as at August 2026, subject to change). As interest rolls up over the years, the debt grows, so the amount deducted from the estate grows with it. That can lower a future tax bill where an estate would otherwise be above the tax-free thresholds. The standard rate is 40%, or 36% where at least 10% of the net estate passes to charity (gov.uk, as at August 2026, subject to change).
The important point is that reducing the value of the home is only half of the calculation. Whatever you release has to go somewhere, and where it goes decides whether the overall estate falls.
How equity release affects the value of your estate
It helps to think of two moving parts: the debt you create, which lowers the estate, and the cash you receive, which raises it until you use it. The table below shows how different outcomes land for inheritance tax.
| What happens to the released money | Effect on the taxable estate |
|---|---|
| Kept in a bank account or investments | Broadly neutral. The debt reduces the home value, but the cash adds roughly the same amount back. |
| Spent on living costs, home improvements or care | Reduces the estate, because the cash leaves the estate and the debt remains. |
| Given away as a gift | Potentially reduces the estate, but only if you survive the gift by seven years (see below). |
| Used to buy an asset that keeps its value | Broadly neutral, as one asset is swapped for another of similar value. |
General illustration of the principle in gov.uk/inheritance-tax, as at August 2026, subject to change. Every estate is different.
The two types of equity release
There are two products, and they sit slightly differently for inheritance tax. Both are regulated by the Financial Conduct Authority.
| Type | How it works | Estate effect |
|---|---|---|
| Lifetime mortgage | A loan secured on the home. You keep ownership; interest usually rolls up and is repaid when the home is sold, normally on death or a move into long-term care. | The outstanding loan plus rolled-up interest is a debt deducted from the estate. |
| Home reversion | You sell all or part of the home to a provider for a lump sum or income, and stay as a tenant, often rent-free. | The share you sold is no longer in your estate; the cash you received is, until spent or gifted. |
How the released money is treated
Cash you release and hold on to remains part of your estate and is counted in full for inheritance tax. Spending it on things that do not leave a lasting asset, such as day-to-day costs, travel, home repairs or care fees, reduces the estate over time. Planning for, limiting or mitigating the impact of care fees is one common reason people look at releasing equity, and our guide on care home fees covers that in more detail.
Because a lifetime mortgage lasts for the rest of your life, decisions about it can span the years when someone else may need to manage your affairs. Many people who release equity also put a lasting power of attorney in place so a trusted person can act if they lose mental capacity.
Equity release and the seven-year gift rule
Giving released money away is where the biggest misunderstandings arise. A gift to another person is usually a “potentially exempt transfer”. It falls out of your estate only if you live for seven years after making it (gov.uk, rules on giving gifts, as at August 2026, subject to change). Die within seven years and the gift is added back when tax is calculated, though taper relief may reduce the tax on gifts made three to seven years before death. Taper relief reduces the tax on the gift, not its value.
| Exemption or rule | Amount / effect |
|---|---|
| Annual exemption | £3,000 of gifts each tax year (one year’s unused amount can carry forward) |
| Small gifts | Up to £250 per person, per tax year |
| Wedding or civil partnership gifts | £5,000 to a child; £2,500 to a grandchild; £1,000 to anyone else |
| Normal expenditure out of surplus income | Regular gifts from income that do not affect your standard of living |
| Seven-year rule | Larger gifts are free of tax if you survive them by seven years |
Source: gov.uk/inheritance-tax/gifts, as at August 2026, subject to change.
Taper relief applies to the tax due where gifts within seven years exceed the nil-rate band. The rates run from 32% of the full charge for gifts made three to four years before death, down to 8% for gifts made six to seven years before death (gov.uk, as at August 2026, subject to change). A gift funded by equity release is treated the same way as any other gift.
Equity release and the residence nil-rate band
Two thresholds sit behind most estates. The nil-rate band is £325,000, and the residence nil-rate band adds up to £175,000 where a home is left to direct descendants such as children or grandchildren (gov.uk/inheritance-tax, as at August 2026, subject to change). Combined, a single person leaving a home to descendants can pass on up to £500,000, and a married couple or civil partners up to £1,000,000, because unused thresholds can transfer to the survivor. These allowances, and the £2,000,000 taper threshold, are frozen until the end of the 2030 to 2031 tax year, that is 5 April 2031, following the one-year extension announced at Budget 2025 (gov.uk, Inheritance Tax thresholds, Budget 2025, as at August 2026, subject to change).
Equity release interacts with the residence band in a way that is easy to miss. The residence nil-rate band is limited to the net value of the home passing to descendants, that is, the value after deducting any loan secured on it. A large lifetime mortgage can therefore reduce the amount of residence nil-rate band an estate can use, because it lowers the net value of the property. The taper applies as well: the residence nil-rate band is withdrawn by £1 for every £2 by which the estate is above £2,000,000 (gov.uk, residence nil-rate band, as at August 2026, subject to change). Reducing an estate below that level can, in some cases, restore residence band that taper would otherwise remove. This is general information, and the right answer for any household depends on its own figures.
| Item | Figure | Source |
|---|---|---|
| Nil-rate band | £325,000 | gov.uk |
| Residence nil-rate band | Up to £175,000 | gov.uk |
| Standard IHT rate | 40% (36% if 10%+ to charity) | gov.uk |
| Taper threshold for the residence band | £2,000,000 (withdrawn £1 for every £2 above) | gov.uk |
| Thresholds frozen until | 5 April 2031 (end of 2030 to 2031 tax year; extended at Budget 2025) | gov.uk |
| Annual gift exemption | £3,000 per tax year | gov.uk |
Equity release is one option among several, and it is not right for everyone: it reduces what your family inherits, and rolled-up interest can grow quickly over a long period. It sits within the wider picture covered in our estate planning guide and our detailed guide to inheritance tax. Because both the product and the tax rules are involved, most people take regulated financial advice on the equity release itself alongside estate planning input.
Frequently asked questions
Does equity release avoid inheritance tax?
No. It can reduce the taxable value of an estate, because the loan and its interest are debts deducted before tax, but it does not remove inheritance tax and money kept as cash stays taxable. Any figures here are general information, current as at August 2026 and subject to change (gov.uk).
Is money from equity release subject to inheritance tax?
The cash itself is not taxed when you receive it, but it stays part of your estate for inheritance tax until it is spent or given away in a way that qualifies for an exemption. If it is still in the estate on death, it counts in full (gov.uk, as at August 2026, subject to change).
Can I gift money from equity release to my children?
Yes, and a gift can eventually leave your estate, but usually only if you survive it by seven years. Gifts within seven years of death are added back when tax is worked out, with taper relief possibly reducing the tax on gifts made three to seven years before death (gov.uk, as at August 2026, subject to change).
Does equity release affect the residence nil-rate band?
It can. The residence nil-rate band, up to £175,000, is limited to the net value of the home passing to direct descendants after deducting any loan secured on it, so a large lifetime mortgage may reduce the band available (gov.uk, as at August 2026, subject to change).
Do beneficiaries pay the equity release loan?
The loan is normally repaid from the sale of the home, usually after death or a move into long-term care, before the estate is distributed. Beneficiaries inherit what remains once the debt and any tax are settled. Most plans meeting Equity Release Council standards include a no-negative-equity guarantee, so the debt does not exceed the sale value.
Is equity release better than gifting a home to reduce inheritance tax?
They are different tools with different risks, and neither suits everyone. Giving away a home you continue to live in can be caught by the “gift with reservation” rules and may not reduce inheritance tax at all. Because the stakes are high, this is an area where many people take regulated advice before acting (gov.uk, as at August 2026, subject to change).