Lifetime Mortgages, Equity Release and the Effect on Inheritance Tax

How Equity Release Works

Equity release allows homeowners aged 55 or over to access the value tied up in their property without selling it or moving out. The two main products are:

1. **Lifetime mortgage** — A loan secured against the property, typically with rolled-up interest. The loan plus accumulated interest is repaid when the property is sold after the owner dies or moves into long-term care.

2. **Home reversion plan** — The homeowner sells a percentage share of the property to a provider in exchange for a lump sum or regular income. On death, the provider takes their percentage of the sale proceeds.

The IHT Effect — Debt Reduces the Estate

For IHT purposes, the value of an estate is assessed on a **net basis** — assets minus liabilities. A lifetime mortgage creates a genuine legal debt secured on the property. When calculating IHT, the outstanding loan balance (including rolled-up interest at the date of death) is deducted from the property's gross value.

Example

A property is worth £600,000. There is an outstanding lifetime mortgage of £200,000. The net property value included in the estate is **£400,000** — reducing the IHT liability compared to an unmortgaged property.

If the deceased had no other assets, and assuming a single person with no RNRB for simplicity:

• Without equity release: IHT = (£600,000 − £325,000) × 40% = £110,000
• With lifetime mortgage: IHT = (£400,000 − £325,000) × 40% = **£30,000**

The saving of £80,000 is real — but so is the £200,000 reduction in the estate that beneficiaries will inherit.

Is Equity Release a Good IHT Strategy?

Equity release is primarily a **retirement income tool**, not an IHT planning tool. Using it solely to reduce IHT is rarely the most cost-effective approach because the funds released typically remain in the estate (reducing the IHT saving) unless they are spent or gifted away.

If the released funds are gifted to family members, the gift is a potentially exempt transfer (PET) — and the donor must survive seven years for it to fall outside the estate. If they do survive, both the debt against the property and the gift reduce the estate's IHT exposure, which can be a genuinely effective strategy.

However, the compound interest on lifetime mortgages can erode the estate considerably over time. A mortgage taken at 6% per annum will double the loan balance in approximately 12 years. Families considering equity release should model the long-term impact carefully.

The RNRB Interaction

An important consideration: the **residence nil rate band (£175,000)** applies to the net value of the property after the mortgage. If the lifetime mortgage is large relative to the property value, the net value available to set against the RNRB may be reduced.

Regulated Advice Is Mandatory

Equity release products regulated by the Financial Conduct Authority (FCA) require the homeowner to take **independent financial advice** before proceeding. Products from Equity Release Council members offer a no-negative-equity guarantee, ensuring the debt can never exceed the property's sale value.

Before making any decision, use our [Inheritance Tax Calculator](/inheritance-tax-calculator) to understand the current IHT position of the estate, then discuss the equity release option with a regulated financial adviser.