What happens to Inheritance tax when you release equity from your home?

Talking about money and inheritance is definitely not considered something ‘very British’. Adult children find it particularly difficult to talk with their older parents about inheritance. The topic is often seen as a taboo. Yet, having an honest conversation about family finance can make a real difference for both parents and adult children’s financial future. It has been estimated that this taboo costs £80,000 in unnecessary taxes as well as destroyed relationships. Not having these conversations poses a number of serious risks. First of all, families could be overpaying inheritance tax while also risking later disputes over inheritance.

The standard inheritance tax rate in the UK is 40% unless the value of your estate is below the £325,000 threshold. According to data, out of £5.2B paid in inheritance tax in the 2017/18 tax year, a total of £2B could have been saved by taxpayers if they had been given the right financial advice. A very little known tip for lowering your inheritance tax is equity release. Releasing equity from your home does indeed reduce the value of the property which leads to less inheritance tax paid upon death. There is a second case scenario in which your estate can fall under the mentioned above threshold of £325,000 which means you pay no inheritance tax (as long as the equity released is spent and not invested). The way it works is that when the property is sold, the money is used to repay the equity release loan, thus it is deducted from the inheritance making it not liable for inheritance tax.

There is another tip for reducing your inheritance tax by taking out equity from your home. If the borrowed money from the equity release is gifted to children or grandchildren after seven years pass, they will not be liable to pay inheritance tax on it. However, if the person who has gifted the money to their loved ones dies before seven years of making the gift, then inheritance tax might have to be paid.

As discussed above, releasing equity could indeed lower your inheritance tax bill. That is why it is important that families don’t shy away from having these frank conversations about personal finance and also do enough research to better understand their options.