Equity Release and Inheritance Tax
Equity release and inheritance tax (IHT) are closely linked. The money you release is tax-free, and because it becomes a debt against your home it reduces the value of your estate which can lower a future IHT bill. But it is not that simple once you start giving the money away.
Last reviewed August 2026 · ~5 min read. That’s Family Finance holds protection permissions only, so equity release goes to a separately authorised firm we have vetted
- The cash you release is tax-free because it is borrowing, not income.
- Equity release reduces your estate, so it can reduce the inheritance tax eventually due, but it also reduces what your heirs inherit.
- Gifting released cash can be a ‘potentially exempt transfer’. It usually only falls fully outside your estate if you survive 7 years.
- IHT and estate planning are specialist areas. A qualified tax adviser or solicitor should confirm your position.
Is equity release money taxed?
No. Because you are borrowing against your own home, the cash you receive is not treated as income and is not taxed. You can take it as a lump sum, or as a drawdown facility you dip into over time. The tax questions only arise around your estate and what you do with the money.
How equity release affects inheritance tax
Inheritance tax is charged on the value of your estate above the available thresholds (currently a £325,000 nil-rate band, plus up to a £175,000 residence nil-rate band in many cases, both frozen until 5 April 2031, both frozen until 5 April 2031). Equity release adds a debt secured on your home, so the debt, including the interest that rolls up, is deducted from your estate. Any released cash you keep still counts as part of your estate, so the net value falls by the rolled-up interest and by whatever you spend or give away. In effect the borrowing is deducted before tax is calculated.
Gifting the cash: the 7-year rule
Some people release equity specifically to gift money to children or grandchildren (a ‘living inheritance’). A gift like this is usually a potentially exempt transfer it only falls completely outside your estate for IHT if you survive seven years. Die within that window and some tax may apply on a sliding scale. There are also annual gift allowances that are immediately exempt.
- Keep clear records of any gifts and their dates.
- Consider whether the released cash could affect your own future care funding or means-tested benefits.
- Take advice before gifting large sums, the interplay of IHT, care fees and benefits is complex.
Get the right advice
Equity release decisions with an IHT angle should involve two kinds of specialist a regulated equity-release adviser for the plan itself, and a tax adviser or solicitor for the estate planning. We introduce you to a carefully selected, FCA-regulated equity-release adviser; for tax we'd suggest a solicitor or accountant who specialises in estate planning.
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Common questions
Do you pay tax on money from equity release?
No. The cash released is tax-free because it is a loan secured against your home, not income. Tax questions arise only around your estate (inheritance tax) and what you do with the money, such as gifting it.
Can equity release reduce inheritance tax?
It can. Equity release creates a debt against your home, which is deducted from your estate, although any released cash you keep still counts as part of it. But it also reduces what your heirs receive, so it should never be done for tax reasons alone.
What happens if I gift the money and die within 7 years?
A gift of released cash is usually a potentially exempt transfer. If you die within seven years it can be brought back into your estate for inheritance tax, potentially taxed on a sliding scale. Survive seven years and it normally falls outside your estate.
Is this tax advice?
No. Inheritance tax and estate planning are specialist areas. You should confirm your own position with a qualified tax adviser or solicitor, and take regulated advice on any equity-release plan.
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We do not provide equity-release advice; we are an introducer. Where equity release may be right for you we introduce you to a carefully selected, FCA-regulated equity-release adviser. A lifetime mortgage is a loan secured against your home; to understand the features and risks ask for a personalised illustration. Equity release will reduce the value of your estate and can affect means-tested benefits.