Does equity release affect IHT? | Saga Equity Release

What is inheritance tax (IHT)?

IHT is a tax paid on a person’s estate when they die. The amount owed depends on the total value of the property, money and assets left behind. The standard Inheritance Tax rate is 40%.

There normally isn't any inheritance tax to pay if the estate value is less than the £325,000 threshold.
IHT doesn't apply to the remaining value of the estate if you leave everything to your spouse, civil partner, a charity or community amateur sports club.
Married couples or civil partners can pass on any unused tax-free threshold to their surviving partner.
If you give away your home to your children or grandkids, your threshold can increase to £500,000. This includes adopted, foster and step children.

This is for 2026/27 tax year. Tax treatment depends on individual circumstances and may be subject to
change in the future.

The gov.uk website has more info.

How does equity release affect inheritance tax?

Equity release will reduce the amount you can pass on to your loved ones when you die. With equity release, you can release a one-off lump sum or release smaller amounts, as and when you need them, from a pre-agreed cash facility. The provider is usually repaid when you (or the last borrower on a joint plan) die or enter long-term care.

This tends to involve selling your home, which means your loved ones won't inherit it. But they may be able to settle the debt from other funds – so the house might not be sold. If the house is sold, anything left after the debt’s cleared will form part of your estate.

So, what steps can you take to protect your estate?

Types of equity release and their IHT impact

The type of equity release you take out can affect your inheritance.

Lifetime mortgage and inheritance tax

With a lifetime mortgage, you borrow money through a loan that’s secured against your home. The loan is usually repaid when you (or the last borrower on a joint plan), die or enter long-term care. You can choose to make ad hoc payments up to a certain amount each year without having to pay an early repayment charge. This can help to reduce the overall cost of the loan.
Providers who are part of the Equity Release Council offer a ‘no negative equity’ guarantee. This means the total needing to be repaid will never exceed the value of your home when it's sold. This is when you pass away or enter long-term care.
If your loan runs for many years, compound interest could increase the loan to the full value of your home.
If the home sells for more than the outstanding loan amount, any remaining funds can be left to your loved ones. This could be subject to IHT, depending on the size of the estate.

Home reversion plans and inheritance tax

With a home reversion plan, you sell part or all of your home to the provider. You retain the right to live in your home for the rest of your life.
When you (or the last borrower on a joint plan), die or enter long-term care, the provider is paid using funds from the sale of your home.
If you only sell a share of your home, you'll know that the remaining share of the property when it's sold will form part of your estate.

The money you get from a home reversion plan is less than the current value of the share you sell. For example, if your home is worth £200,000 and you sell a 40% share, that share is worth £80,000. However, you will receive less than £80,000 because the provider may not get their money back for many years.

Can you reduce interest bills to boost inheritance on a lifetime mortgage?

A drawdown lifetime mortgage allows you to release tax-free cash from your home in smaller amounts from a pre-agreed cash facility as needed. Interest is only charged on the funds you take, which can help reduce overall costs.

The total amount to repay depends on interest rates at the time of each drawdown from the pre-agreed cash facility and for how long the lifetime mortgage runs. But there's no guarantee you can leave an inheritance.

Some lifetime mortgages allow you to pay interest monthly as you go. If you can pay the monthly interest in full, you’ll owe the original capital sum that you borrowed plus any charges. This is without interest being added from the start. As a result, it’s more likely you can leave an inheritance. With most lifetime mortgage providers You can usually choose to make ad hoc payments to reduce the overall cost of the loan.

Does equity release reduce inheritance tax?

Equity release can be used to reduce IHT. If you release equity from your home and gift it to others, this may help.

Each tax year you can give away a total of £3,000 worth of gifts without them being added to the value of your estate. This is known as your annual exemption. It can be carried over for one tax year if you don't use it.
For gifts over £3,000, the amount you gift will be exempt from inheritance tax if you live for seven years after the gift and if you don't get any direct or indirect benefit in return.
If you die within seven years, the gifted amount will be used with the rest of your estate when working out tax owed.
If you die between three and seven years after the gift, taper relief will be applied to the IHT paid. This means less is owed the longer you survive.

You can also make any number of gifts every year of up to £250 to as many people as you want. But this can’t be to anyone who has already received a gift of your whole £3,000 annual exemption.

You may also make a higher tax-free gift to someone getting married or starting a civil partnership. These vary from £1,000 to £5,000 depending on their relationship to you. You can find out more on the gov.uk website.

How do I decide if equity release will help reduce inheritance tax for me?

Getting professional advice can help you find out how equity release could affect your IHT. Saga Equity Release is provided by HUB Financial Solutions Ltd and is for those aged 55 or over with a UK home worth at least £70,000.

As part of the service, you'll have access to a UK-based qualified adviser and support team. They can advise you on your options and outline solutions tailored to your needs. Equity release will reduce the value of your estate and may affect your access to means-tested state benefits. If you do decide to take out a Saga Lifetime Mortgage, you'll need to pay an advice fee of £799.

Tax treatment depends on individual circumstances and may be subject to change in the future. You should get expert advice from a professional tax adviser to fully understand inheritance tax implications. HUB Financial Solutions are not tax advisers.