Equity Release and Inheritance Tax Planning


HMRC collected £6.1billion in inheritance tax (IHT) during the financial year 2021-22, an increase of 14% (£729 million) versus the previous year, and the largest single-year rise since 2015-16. With property prices continuing to rise and the IHT thresholds frozen until at least April 2026, there will be an increase in the number of estates liable for IHT. As a result, more and more people are looking to equity release as a solution to reduce their IHT.

What is Inheritance Tax (IHT)?

IHT is a tax on the estate (including all property, possessions and money) of someone who has died. It’s also applied on any lifetime gifts made in the 7 years before death. Everyone has the same basic tax-free allowance before they must pay IHT (also known as the nil rate band or NRB), which currently stands at £325,000. If your estate includes a property, you may also be able to use an extra allowance – the Main Residence Nil Rate Band.

Main Residence Nil Rate Band (MRNRB)

If you leave your home to a direct descendant – either a child or grandchild – you can benefit from an additional tax-free allowance, which currently stands at £175,000, assuming your estate is worth up to £2m.

Spouse Exemption

Transfers between married couples and civil partners are not subject to IHT. In this scenario, if the first partner to die leaves their entire estate to the other, no tax will be payable. In addition to this, the remaining spouse can apply any unused IHT allowance to their own estate. I.e. Increase their existing £325,000 NRB + £175,000 MRNRB allowance by a further £325,000 NRB + £175,000 MRNRB to give a total tax-free allowance of £1,000,000 when they die.

Estates Worth Over £2m

If your total estate is worth more than £2m, the MRNRB tapers off. Falling by £1 for each £2 above the threshold. Put simply, if your estate is worth £2.4 or above in the 2022-23 tax year, you’ll lose the entire MRNRB.

Lifetime Mortgage and Inheritance Tax Planning

Releasing money from an estate lowers the value and therefore reduces IHT to be applied. A lifetime mortgage is a form of Equity Release which could be used to release money tied up in your home that would naturally contribute towards your estate and IHT.   There is  no set term or repayment dates for a lifetime mortgage, the loan plus interest continues until the equity release plan comes to an end in later life which is usually when you pass away or move into long-term care. At this point, the debt has to be repaid, the original sum borrowed plus any interest accrued and fees added. This is usually from the sale of the property.   In a recent case study, read how one of our customers used a Lifetime mortgage to fund their grandchildren’s private education and potentially reduced their Inheritance Tax liability.

The 7 Year Rule or Potentially Exempt Transfer (PET)

No tax is due on any gifts you give if you live for 7 or more years after giving them – unless the gift is part of a trust. This is known as the 7 year rule or Potentially Exempt Transfer (PET). If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.

Taper Relief

If someone dies within 7 years of giving a gift (including property, possessions and money) that is over the tax-free threshold, the amount of tax due after their death depends on when it was gifted. Gifts given in the 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’:

Years between gift and deathRate of tax on gift above NRB

Careful IHT planning could help you to pass as much of your estate to loved ones as possible, whilst maintaining flexibility and control over any arrangements made. If you’re thinking about releasing equity from your home then contact us today.

All figures and calculations are based on the tax rules at the time of publishing and are subject to change. The above article does not constitute advice and must not be taken as such. Please consult your financial adviser for details of the latest Nil Rate Bands, limits and other personal tax considerations as they may differ dependent on your situation. Bower is not authorised to give tax planning advice and does not give advice on Inheritance Tax planning. However we will work closely with your professional adviser regarding your financial planning requirements. Please seek professional advice on the most tax efficient solution for your own personal circumstances.