Equity Release for Inheritance Tax Planning: Reduce IHT and Support Your Family
If you’re a homeowner thinking about how best to pass on your wealth, inheritance tax (IHT) might already be on your radar.
With property values having surged over recent decades, many people now find their estates exceeding the tax-free threshold, bringing the issue of IHT into sharper focus.
One potential tool to consider in your planning is equity release. When used thoughtfully, it can help reduce your estate’s value and, in turn, the IHT payable, allowing you to enjoy your wealth today while also making things easier for your loved ones tomorrow. It is important to note though, this method is not suitable for everyone so professional IHT advice needs to be taken, in addition to speaking with a qualified equity release mortgage adviser.
What Is Inheritance Tax and When Is It Due?
Inheritance Tax is a levy applied to your estate when you pass away. At the time of writing in 2025, if your estate is valued above £325,000, anything over that threshold may be taxed at 40%. However, this can rise to a combined £1 million for couples who leave their home to direct descendants, thanks to additional allowances like the Residence Nil Rate Band.
Despite these allowances, rising house prices are pushing more families into the IHT net, often unintentionally. What’s more, your beneficiaries are usually required to pay the tax within six months of your passing, which can create unwanted financial stress during an already emotional time if assets need to be sold.
That’s where careful estate planning, and in some situations, equity release, can make a big difference.
How Equity Release Can Help Reduce Inheritance Tax
Equity release allows you to unlock the wealth tied up in your home without needing to sell it or move out. Typically available to homeowners over 55, the most common form is a Lifetime Mortgage.
This involves borrowing money against the value of your home, with interest added to the loan. It’s only repaid when you die or enter long-term care.
Because this borrowing becomes a debt against your estate, it reduces the total value of your estate for IHT calculations. In other words, the higher the loan amount (plus interest), the lower the taxable estate, potentially removing an IHT bill in some situations.
This makes equity release not just a retirement income solution, but also a strategic tool in your estate planning toolkit.
Find out Your Options
Gifting from Equity Release: Giving While Living
One of the most effective ways to reduce your estate’s value is by gifting money to your loved ones. Equity release can provide the funds to do this.
By giving a financial gift during your lifetime—especially if you survive more than seven years after the gift, it may fall entirely outside your estate for tax purposes. Even if you pass away within that seven-year period, taper relief could still reduce the IHT due on the gift.
The annual tax-free gift allowance is currently £3,000 per person. But larger gifts can also be made under the seven-year rule, as long as they’re made without reservation of benefit (you can’t continue to use or control the asset).
This approach lets you enjoy the benefits of giving, such as helping children onto the property ladder, while simultaneously reducing your tax liabilities.
To understand the IHT liability for your situation, speak with a professional tax adviser.
Example: Mr and Mrs Simpson – 2025 Figures
Mr and Mrs Simpson own a home worth £900,000 and have savings of £200,000, giving them a total estate of £1.1 million. With allowances, their IHT-free threshold could be £1 million.
That means £100,000 could be taxable, resulting in a £40,000 IHT bill.
Now, suppose they release £200,000 through a lifetime mortgage and gift it to their children. This reduces their estate to £900,000, which is now entirely within their joint IHT allowance—potentially saving their beneficiaries that £40,000 bill. And if they live for more than seven years, the gift will be fully exempt.
This is just one way equity release can be part of a larger, personalised strategy to preserve wealth. Speak with a tax adviser to explore how it could work for your situation.
Strategic Use of Drawdown Plans
Not all equity release plans require you to take a large lump sum upfront. Drawdown Lifetime Mortgages allow you to release an initial amount and keep the rest in a reserve facility, drawing down as needed.
This approach offers two key benefits:
- Interest is only charged on the money you’ve actually withdrawn, not on the full facility.
- You retain flexibility, releasing funds as your circumstances change or as gifting opportunities arise.
This strategy can help control how much equity is released and when, aligning with your estate planning milestones and goals.
Key Features to Look For
Modern equity release products offer features that can safeguard both you and your beneficiaries. These include:
- No Negative Equity Guarantee: Ensures your estate never owes more than your home’s value.
- Inheritance Protection: Allows you to ring-fence part of your home’s value for your loved ones.
- Downsizing Protection: Lets you repay the loan without penalties if your new home doesn’t meet lender criteria.
- Porting Flexibility: Enables you to move house and transfer your plan to a new property.
Understanding how these features align with your future plans is crucial—and that’s where expert advice from Kerr & Watson makes a real difference.
Pension Funds and IHT Changes
A growing consideration in estate planning is how pension legislation changes may impact IHT. From April 2027, some inherited pension funds will be included in the value of your estate for tax purposes.
This means there are many people looking to preserve their pension using equity release to fund retirement spending instead. Doing so could help keep more of their pension wealth outside of the estate and shielded from IHT.
It’s potentially a smart, forward-thinking move, but it needs careful planning to balance lifestyle needs with long-term estate goals, especially taking into account compounding interest and other costs that need consideration.
What to Watch Out For
Equity release isn’t a one-size-fits-all solution, and it’s not suitable for everyone. Potential downsides to be aware of include:
- Compound interest: If you don’t service the interest, your loan can grow significantly over time eroding all equity within the home in some situations.
- Impact on benefits: Receiving a lump sum may affect means-tested benefits so be sure to calculate these before signing up,
- Early repayment charges: These can apply if you repay the loan earlier than agreed, for instance, clearing the mortgage a few years into the agreement.
- Reduced inheritance: Taking equity from your home reduces the amount your beneficiaries receive so always best to speak with them in advance so they know your situation and there are no surprises later.
That’s why it’s vital to seek tailored advice from a trusted broker who understands your full financial picture, and an inheritance tax planner that can fully establish whether it’s the right move for you, taking into account your IHT objecvtives.
Why Choose Kerr & Watson?
At Kerr & Watson, we go beyond simple mortgage advice. By taking the time to understand your priorities, we can tailor solutions that consider your whole financial world. Whether you’re exploring equity release for lifestyle reasons, family support, or tax efficiency, we’ll ensure every the product fits into your bigger picture. We have access to the full equity release market.
Conclusion
Equity release can be a powerful tool for inheritance tax planning when used as part of a broader financial strategy.
It offers a way to access the wealth tied up in your home, support your family now, and reduce the IHT bill they may face in future.
But it’s not a decision to take lightly. Every situation is different, and the right approach depends on your goals, finances, and future plans. As a result, professional tax advice must be taken.
Our experienced mortgage and protection advisers will guide you through the mortgage process with clarity and care.
Contact Kerr & Watson today for expert, impartial advice tailored to your needs.
