Can equity release reduce inheritance tax? The loan is a debt that can lower the estate, but money you keep is still counted and the interest adds up.
People ask whether a lifetime mortgage can shrink the estate their family will be taxed on. The answer is that it can in some cases, and at a cost. This page follows the tax rules step by step and reaches no conclusion for anyone, because the outcome depends on the estate, the family and the plan, and a tax adviser is the person to ask. On the plan side, the form on this page puts a qualified equity release adviser on the line to you, with no fee.
How a lifetime mortgage appears in an estate
GOV.UK describes an estate as "all your money, property and possessions left when you die", and inheritance tax is charged on the part above the threshold. A home with a lifetime mortgage on it is still part of the estate. What changes is the debt secured against it.
HMRC's Inheritance Tax Manual gives the general rule that "you take into account all liabilities that are in existence at that time". Section 162(4) of the Inheritance Tax Act 1984 adds that a debt secured on a property is, so far as possible, taken off that property's value, except where section 162B applies instead, which is a point for a tax adviser. A lifetime mortgage is secured on the home, so these are the rules that usually apply.
There is a condition. Section 175A of the same Act lets a liability count only to the extent that "it is discharged on or after death, out of the estate or from excluded property owned by the person immediately before death, in money or money's worth", and is not barred by another provision of the Act, with further tests for any part left unpaid. The Equity Release Council describes a lifetime mortgage as repaid by the estate, which is the situation that first condition describes. Whether that holds for one estate is for the executor or a tax adviser.
The deduction is for what is owed, not what was lent. Interest compounds on a roll-up plan, so the figure at death can be well above the first loan (how the interest works), and the family receives less to match (how equity release affects inheritance).
Spent, kept or given away: what happens to the released cash
The loan lowers the estate on only one side of the ledger. The money released is an asset too, so what becomes of it matters as much as the debt. There are three broad routes.
- Spent. The cash is gone before death, the debt remains, and the net estate is smaller by about the amount owed.
- Kept. Cash in a bank account is part of the estate, and the debt cancels it out. The net value is unchanged.
- Given. The gift rules apply, covered in the next section.
The table shows the first two with a made-up estate. The numbers are our own arithmetic, not a lender's illustration. They assume a £100,000 loan, no interest, no fees, and the full £500,000 combined threshold (explained under thresholds, below). Interest would enlarge the debt and lower the net estate further, leaving the family with less still.
| Position at death | Net estate | Tax at 40% | Left for heirs |
|---|---|---|---|
| No equity release | £900,000 | £160,000 | £740,000 |
| £100,000 released and spent | £800,000 | £120,000 | £680,000 |
| £100,000 released and kept as cash | £900,000 | £160,000 | £740,000 |
Our arithmetic, dated 20 October 2026. In the middle row the tax falls by £40,000 while the heirs end up with £60,000 less, before any interest is counted. The tax saved is only a share of what was borrowed, and the spending is not recovered.
Giving the money away: the seven-year rule and the allowances
A gift moves released money out of the estate, which is why the question gets asked. GOV.UK's guidance on gifts sets the rules, and they turn on timing and size. "No tax is due on any gifts you give if you live for 7 years after giving them", unless the gift is part of a trust. Gifts given less than seven years before death may be taxed: those in the three years before are taxed at 40%, and those given three to seven years before fall on a sliding scale called taper relief, which applies only if gifts in the seven years before death total more than the £325,000 threshold.
Some gifts are covered by allowances. The annual exemption is £3,000 of gifts each tax year, and an unused amount can be carried forward for one tax year. Regular gifts can be exempt as "normal expenditure out of income" if the giver can afford them after usual living costs and pays them from regular monthly income. One of the conditions in HMRC's manual is that "the transferor should have made the gift out of their income", and it says "income becomes capital after a period of two years" absent evidence to the contrary. Whether a gift of money borrowed against a home could meet those conditions is for a tax adviser, not for assumption.
Legal & General's lifetime mortgage page also warns that a person handed released money could face an inheritance tax bill later on. Meanwhile the debt keeps growing, and if the giver dies inside the seven years, a gift that may still be taxed and a loan that must be repaid can both be live. The date of each gift, the total given, the size of the estate and who receives what all matter. For the borrowing half of the picture, a qualified equity release adviser rings back, free, once the enquiry form on this page has been filled; the tax half is for a tax adviser.
The thresholds the estate is measured against
Whether any of this matters depends on where the estate sits against the thresholds. GOV.UK's table (updated 6 April 2026) prints the nil-rate band as £325,000 from 6 April 2009 to 5 April 2031, and the residence nil-rate band as £175,000 from 6 April 2020 to 5 April 2030. The standard rate on the part above the threshold is 40%.
The residence nil-rate band is not automatic. GOV.UK's guide says the threshold can increase to £500,000 where you own the home (or a share in it), it is left to children or grandchildren (adopted, foster and stepchildren included) and the estate is worth less than £2 million. Above £2 million the band falls by £1 for every £2 over, and for that test the value of the estate is "the total of all the assets in the estate less any debts or liabilities". That is one place where a debt can matter for a larger estate. How a lifetime mortgage on the home interacts with the band is another question for a tax adviser.
Separately, GOV.UK says there is normally no inheritance tax to pay where everything above the £325,000 threshold goes to a spouse, civil partner, charity or community amateur sports club. For a couple, the Equity Release Council says the loan is not repaid until the last person living in the home dies or moves into care, and how the debt is treated on each death is a point for the executor or a tax adviser (what happens to the loan when someone dies).
Pensions are the other moving part. The Finance Act 2026 applies its inheritance tax changes to deaths on or after 6 April 2027, which can bring more unused pension money into an estate; pensions and inheritance tax covers the rules and pension death benefits the wider picture.
What the tax sums leave out
A lifetime mortgage carries costs that no inheritance tax calculation shows. The Equity Release Council says interest is "rolled up (compounded)" and repaid by the estate, and what reaches heirs is smaller; Legal & General says even its Inheritance Protection option leaves the inheritance reduced. Means-tested benefits can be affected (equity release and benefits), and an early repayment charge may apply if the loan is repaid early (repaying early). On a Scottish home the lender takes a standard security, Scotland's form of heritable security (Conveyancing and Feudal Reform (Scotland) Act 1970, s 9). Our equity release guide covers the whole plan.
The Council's standards also expect a member's adviser to explain the tax implications, and require independent legal advice for every customer. These are standards members follow, not rules for every firm. Other ways of raising money are in equity release alternatives, and is equity release taxable? deals with tax on the money itself.
Questions people ask
Does equity release avoid inheritance tax?
Not in itself. The debt can be deducted from the estate, but money kept stays in the estate and gifts are subject to the seven-year rule. Any saving also has to be set against what the interest costs the family.
Do my children pay inheritance tax on a home with a lifetime mortgage?
GOV.UK says funds from the estate are used to pay the tax, and that beneficiaries do not normally pay tax on things they inherit. The tax is worked out on the estate as a whole, after debts.
Can equity release pay an inheritance tax bill after a death?
A lifetime mortgage is arranged by a homeowner during their lifetime and, in the Equity Release Council's description, repaid by the estate when they die or move into long-term care. How an estate raises the money for the tax after a death is a question for the executor and a tax adviser. GOV.UK's inheritance tax guidance sets out the rules.
Is the money from a lifetime mortgage taxed when I receive it?
Legal & General describes the cash from its later life mortgages as "Tax-free cash". Inheritance tax is a separate question: the money is counted if it is still there when you die.
Next step
The answer for any estate turns on its size, the home, who inherits and what happens to the money released. Tax questions go to a tax adviser. For the plan itself, the form on this page takes little time, costs nothing and ends in a conversation with a qualified equity release adviser.
Sources (read 20 October 2026): GOV.UK, How Inheritance Tax works, Gifts and Passing on a home; HMRC, Inheritance Tax thresholds and interest rates (updated 6 April 2026); HMRC, Residence nil rate band; HMRC Inheritance Tax Manual IHTM28381 and IHTM14250; Inheritance Tax Act 1984 s162 and s175A; Finance Act 2026 s71; Conveyancing and Feudal Reform (Scotland) Act 1970 s9; Equity Release Council, What is equity release? and Standards; Legal & General, Lifetime mortgages.