Use Equity Release for Inheritance Tax Planning

Published / Last Updated on 04/02/2021

The usual starting point for most people should be that equity release is the last option as they are difficult or expensive to redeem early i.e. buy your way out of with large penalties. 

If you have no savings or not enough income but you have significant equity in your home and have made a decision that you want to stay in your home and not downsize, then equity release may, and we only mean ‘may’ be a suitable solution.

Two thoughts:

  1. Your home may be included in means testing for care fees
  2. Your home may be subject to inheritance tax on death

Consider equity release to create a debt on your main home, this will reduce the value of your estate on death for inheritance tax or indeed, any care fees mean test.

Typical equity release interest rates are around 3%/3.5%pa for fixed rate lifetime mortgage schemes.

You then gift the equity released funds to loved ones.  Gift that money and the 7 year clock starts ticking for inheritance tax.  In addition, from 2000 to 2020, house prices have increased on average by around 5%pa (source various property indices).  So, if loved ones accept the gift from you and invest/upsize/improve their own property, they may benefit from 5%pa tax free growth on their main residence.


You have a debt rolling up at say 3.5%pa compound.  This is reducing your inheritance tax liability.

Your own property may grow at 5%pa compound, meaning equity in your property is maintained or grows marginally given debt increasing at 3.5%pa compound.

Your loved ones invest the funds in their own property and their property grows by 5%pa compound and tax free (if their main residence).


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