With pensions set to be included in estates for Inheritance Tax purposes from 20271, more people are exploring equity release as a way to reduce potential IHT bills, support family members during their lifetime, and bring greater flexibility to later‑life financial planning.
Why more people are reviewing their estates
Following the announcement that most unused private pensions will form part of an individual’s estate from 20272, interest in estate planning has risen sharply. For many, this change could significantly increase the value of their estate – and, in turn, the Inheritance Tax bill passed on to loved ones.
Homeowners, in particular, are now reassessing how their assets are structured. As property often makes up the largest share of an estate, equity release has become part of the conversation for those seeking to use wealth more effectively during their lifetime.
In this article, we look at how equity release works, where it may help, and what to consider before including it in an estate plan.
How Inheritance Tax (IHT) comes into play
Your estate includes everything you own, minus any debts – property, savings, investments, possessions and, from 2027, pensions. Any value above the Inheritance Tax threshold can be taxed at 40%.
The standard Inheritance Tax allowance is £325,0003. This can rise to up to £500,000 if you leave your main home to children or grandchildren, if you meet the rules.
If you’re married or in a civil partnership, you can usually combine your allowances. This means up to £1 million could pass on without Inheritance Tax, depending on your situation.
As estates grow, more families are being drawn into the IHT net. This has prompted many people to seek advice on how allowances can be used more efficiently – and whether steps such as gifting or equity release might help reduce future tax liabilities.
Using equity release to reduce estate value
Equity release allows you to unlock money from your home while continuing to live there. The funds released can be used in several ways – as additional retirement income, to clear debt, or to make gifts to family members.
Where money is gifted, it may fall outside of your estate after seven years. If death occurs sooner, Inheritance Tax may still be due, with taper relief potentially reducing the amount payable after three years. For larger gifts, it’s important to consider the risks of equity release carefully – including early repayment charges, downsizing protection, the impact on means‑tested benefits and the effect on inheritance. In some cases, insurance may help manage these risks.
Equity release funds can usually be taken as a one‑off lump sum, or as a smaller initial amount with a reserve facility that can be accessed later. Interest is only charged on the money you’ve actually drawn.
Most modern equity release plans include a ‘no negative equity guarantee’. This means you’ll never owe more than the value of your home, regardless of how long you live or how property prices move.
The loan is typically repaid when you move permanently into long‑term care or when you pass away, with the sale of the property covering the balance.
A simplified example
Let’s look at a straightforward illustration.
Imagine someone owns a property worth £2m, with other assets totalling £1.325m. This gives an overall estate value of £3.325m.
For Inheritance Tax purposes, the nil‑rate band of £325,000 offsets part of the non‑property assets. That leaves an estate valued at £3m subject to IHT.
At the standard rate of 40%, the resulting Inheritance Tax bill would be £1.2m.
Now, suppose this individual released £1m from their property using equity release and gifted that money to their children – and crucially, survived for at least seven years after making the gift. In that case, the gift would fall outside their estate for IHT purposes.
The estate value would reduce to £2.325m. After applying the £325,000 nil‑rate band, IHT would be charged on £2m, resulting in a tax bill of £800,000.
That’s a potential reduction of £400,000 in Inheritance Tax.
That said, equity release isn’t free money. Interest either needs to be paid or it’ll roll up – meaning it’s added to the loan each year. And the borrowing must eventually be repaid, usually when the property is sold. These costs reduce the estate over time and will eat into the overall tax saving, so they need to be carefully factored into any decision.
Understanding lifetime mortgages
The most common form of equity release is a lifetime mortgage. These work in a similar way to a standard mortgage, but are designed specifically for later life.
Typically, interest rates are fixed for life and tend to be linked to longer‑term indicators such as gilts, rather than the Bank of England base rate. There’s no fixed repayment date.
Like traditional fixed‑rate mortgages, lifetime mortgages often include early repayment charges for a set period – usually five to 15 years. These are often waived if you downsize – best check your T&Cs.
Borrowers usually have several options when it comes to interest – paying it in full, paying part of it, or allowing it to ‘roll up’. Most plans also allow limited overpayments each year without penalty.
Weighing up the pros and cons
Equity release can be a useful estate‑planning tool – but it isn’t right for everyone. Releasing too much equity may limit future options, reduce flexibility, or affect the ability to fund long‑term care later on. It may also affect your entitlement to certain state benefits and reduce the value of your estate.
But it’s worth noting that interest rates are typically higher than those on standard mortgages. If interest is allowed to roll up, the amount owed can grow quickly over time – and may become a large part of the overall debt. The long-term impact should always be modelled carefully.
That’s why advice matters. Any decision should start with a clear understanding of your goals, priorities and wider financial position.
Let us help you plan with confidence
We know good estate planning starts with listening. We take the time to understand what matters to you – then build a financial plan that supports those aims at every stage of life.
Equity release may form part of that plan, or it may not. What matters is that the strategy fits your objectives, protects your independence, and gives you confidence in the future.
If you’d like to explore how your property could play a role in your wider financial plan, we’re here to help. Get in touch with us at Lync Wealth Management.
This article is for general information only and isn’t intended as personal investment advice. Tax rules can change and the way you’re taxed will depend on your individual circumstances. The value of investments can fall as well as rise, so you may get back less than you invest. Investments won’t be right for everyone, and it’s important to understand the risks before you proceed. If you’re unsure, we strongly recommend taking professional advice. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate inheritance tax.
Sources
1 Inheritance Tax on unused pension funds and death benefits – GOV.UK
2 Inheritance Tax: unused pension funds and death benefits – GOV.UK
3 Inheritance Tax — thresholds – GOV.UK
