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Navigating the Complexities: Understanding the Impact of UK Equity Release on Inheritance Tax Obligations

Equity release has become an increasingly popular option among homeowners aged 55 and above in the United Kingdom (UK). This form of finance allows individuals to access a portion of the property’s value without having to sell the home or take out a traditional mortgage. While equity release can provide numerous benefits, one significant concern is its impact on inheritance tax (IHT). In this article, we will explore the complex relationship between equity release and inheritance tax in the context of UK law.

Understanding Inheritance Tax

Before diving into the connection between equity release and IHT, it’s essential first to understand what inheritance tax is. In simple terms, IHT is a levy imposed by Her Majesty’s Revenue and Customs (HMRC) when an individual passes away, leaving behind assets worth more than £325,00 ($468,497 USD) in England, Wales, Scotland, and Northern Ireland combined. IHT applies only to estates valued at or exceeding this threshold, known as the ‘nil-rate band.’ However, from April 2021, there are plans to increase the nil-rate band to £500,00 for married couples or civil partners dying after 2020/21, meaning fewer families will have to pay IHT.

The IHT liability depends on the net value of the deceased’s possessions. Net value refers to the asset’s worth minus liabilities, debts, funeral expenses, and administrative costs. Any IHT levied must be paid before probate, which authorizes the executor or administrator to distribute the remaining wealth to beneficiaries.

How Does Equity Release Impact Inheritance Tax?

When taking out an equity release scheme, it’s vital to comprehend the possible effects on the estate’s value and subsequent IHT liability. There are two main types of equity release schemes – home reversion plans and lifetime mortgages.

Home Reversions Plans

A home reversion plan involves selling all or a proportion of the home in exchange for a cash lump sum, a regular income stream, or a combination of both. When the homeowner dies or goes into long-term care, the sale agreement comes into force. At that point, the new owner takes possession of the property, and the original occupier is entitled to remain living in the house until death or moving into care.

In the case of home reversions, the inheritance tax base cost decreases significantly because the value of the inherited estate is lessened by the cash received from the seller. Let us say John, who lives alone, owns his own property worth £350,00, and he decides to sell 50% of the home to a provider through a reversionary deal. Afterward, John receives £175,00 and continues residing in half the house. When John eventually dies, the property will be sold, and the proceeds will be distributed accordingly. Because John sold 50% of the house, his children stand to inherit less, causing a lower IHT bill.

However, the downside is that the recipient loses ownership rights of the share of the property ceded to the company. Moreover, some providers may impose additional conditions, such as reducing the inheritance further if the house is left vacant following the homeowner’s passing. Due to these circumstances, the use of home reversions in estate planning should be considered carefully.

Lifetime Mortgages

Unlike home reversion plans, where the borrower surrenders partial ownership of the residence, a lifetime mortgage keeps complete control over the home. With a lifetime mortgage, the borrower does not need to make monthly payments but rather pays back the debt, along with accumulated interest, upon death, going into permanent residential care, or moving elsewhere permanently. As mentioned previously, lifetime mortgages accrue compound interest, making it essential to estimate accurately how much interest will be added onto the principal amount during the loan period.

One way in which lifetime mortgages differ from traditional mortgages is that interest is typically deducted from the estate after the holder passes away. This subtraction reduces the residual value of the property, leading to a smaller inheritance being passed on to family members. Nevertheless, most lifetime mortgage agreements enable the borrower to ring-fence a percentage of the property’s value to guarantee that loved ones continue receiving a predetermined inheritance regardless of outstanding debt balances.

Factors Affecting Equity Release & IHT

Numerous factors influence how equity release affects IHT, including the type of scheme selected, the age and health condition of the applicant(s), and the size of the estate prior to applying for the equity release product. For instance, older people, particularly those in poor health or with particular medical conditions, may qualify for enhanced annuity rates, providing them with higher levels of funds for their retirement years while also potentially minimizing IHT bills due to reduced life expectancy.

Another consideration is the overall size of the estate. If the homeowner has other assets worth considerable amounts, then they could still face paying high IHT taxes despite releasing equity from their homes. To avoid substantial IHT obligations, many individuals consider gifting strategies. Gifts made seven years before death aren’t subject to IHT, allowing recipients to receive considerable portions without attracting charges. Of course, any gifts given within three years of demise might trigger a tapered rate of tax based on how soon the gift was provided.

Additionally, it’s crucial to examine whether the person intends to leave their whole estate to their spouse or registered partner. Since spouses or civil partners are exempt from paying IHT, their estate will not suffer from an initial reduction caused by the equity release product. Instead, the surviving husband or wife will keep the total value of the shared estate intact.


Equity release products offer several advantages to homeowners seeking financial support in later stages of life. The ability to unlock capital without relinquishing ownership of the premises provides retirees with options to maintain their lifestyle or pass assets directly to inheritors, thereby circumventing potential inheritance tax burdens. Nonetheless, the specific method chosen determines the outcome regarding IHT, requiring careful evaluation before deciding which route to pursue. It’s always recommended to seek professional advice from qualified experts before committing to either home reversion schemes or lifetime mortgages. They can help clients weigh up the various possibilities presented and determine the best strategy according to personal circumstances.