Inheriting a house with equity release

Equity release can help homeowners aged 55 or over make the most of the value in their home. Many people use it to enjoy later life with a little more freedom and peace of mind.

If you’re thinking about equity release, it’s also natural to wonder how it might affect your estate. You may want to understand what this could mean for the people you leave behind.

You might also be reading this because you expect to inherit a property that already has equity release in place. If so, understanding how it works can make things feel clearer at what can be a difficult time.

This guide explains, in straightforward terms, how equity release and inheritance tax can interact. It’s general information, not personal or professional tax advice. We always recommend speaking to a professional before making any decisions.
 

How equity release can affect inheritance

When equity release is in place, it affects the value of an estate. This can influence how much is left to beneficiaries and whether inheritance tax is due.

When a homeowner passes away, any outstanding equity release loan (including compound interest) is usually repaid from their estate. This often happens through the sale of the property. Beneficiaries are not personally responsible for the debt.

With a lifetime mortgage, which is a loan secured against your home. Interest builds up over time, which means the amount owed can increase the longer the plan runs. Inheritance tax is worked out using the value of the estate after any debts have been settled.

According to the UK government’s current criteria no inheritance tax is usually due if:

• The total value of the estate is below the £325,000 nil-rate band
• Anything above this amount is left to a spouse or civil partner, or to a registered charity.

Some people may also qualify for an extra allowance when a home is passed to children or grandchildren. This can increase the threshold to up to £500,000. This depends on individual circumstances and doesn’t apply in every case.

If inheritance tax is due, it’s usually charged at 40% on the value above the available allowances. The example below shows how this might look.

Equity release and inheritance tax

Equity release does not reduce inheritance tax directly.

However, because the loan and interest is typically repaid from the estate, it can reduce the estate’s overall value. This may affect whether inheritance tax is due.

A lifetime mortgage is usually repaid when the homeowner passes away or moves into long-term care. Repayment normally comes from the estate.

The examples below are for illustration only. They show how equity release could affect the value of an estate in different situations.

In this example, the equity release loan reduces the value of the estate. Inheritance tax is then calculated using the remaining value and the available thresholds.

In some cases, the loan may reduce the estate below the inheritance tax threshold. Where this happens, inheritance tax is not usually due.

It’s important to remember that any impact on inheritance tax needs to be weighed against the cost of the equity release loan, including interest. Inheritance tax rules and thresholds can also change in the future.

Whether inheritance tax applies will always depend on individual circumstances. Allowances and exemptions vary, so professional advice is important.

Equity release is a significant financial decision and may not be right for everyone. If you’d like to learn more about how equity release works, you can read our free equity release guide.
 

What happens when you inherit a home with equity release?

If a property has equity release in place and the homeowner passes away, there are some steps that usually follow. The exact process can vary depending on the lender and the situation.

The executor of the Will will need to inform the equity release provider of the death and provide the necessary documentation. They can then request an up-to-date statement showing the outstanding loan balance.

Most equity release providers allow time for the loan to be repaid. This is often up to 12 months. During this time, interest will usually continue to build.

The loan normally needs to be repaid before the property or remaining equity can be passed on to beneficiaries.

This is usually done in one of three ways:

• Selling the property: The home is sold and the loan is repaid from the sale proceeds. Any remaining money is passed to the beneficiaries in line with the will.
• Repaying the loan from the estate: Depending on the terms of the will, the executor may choose to repay the loan using other assets held within the estate, such as savings or investments.
• Repaying the loan personally: In some cases, a beneficiary may choose to repay the loan themselves to keep the property.

All equity release plans that meet Equity Release Council standards include a no negative equity guarantee. This means that, as long as the property is sold for its fair market value, the estate or beneficiaries will never have to repay more than the home is worth.

Dealing with equity release as part of an estate can feel complicated. Professional advice can help make things clearer and guide you through the options.
 

Planning ahead with equity release

Equity release and inheritance tax can feel complex. How they affect each other depends on your personal situation.

Key does not provide tax advice. A qualified tax specialist, alongside an equity release adviser, can help you whether you’re planning ahead or dealing with an estate that includes equity release.

They can help you understand how the value of the estate may be affected. They can also help manage expectations around what beneficiaries might receive once everything has been settled.

They’ll make sure any decisions are made with a clear understanding of the long-term impact.
 

Equity release with Key

Key is a specialist equity release adviser. We help homeowners aged 55 and over understand whether equity release could be right for them.

A Key adviser will take the time to explain how equity release works. They’ll talk you through your options and help you understand the possible impact on your estate and your loved ones.

All advice from Key is tailored to you. Our aim is to help you make an informed decision, with a clear view of the risks and the long-term implications.

All our equity release advice relates to lifetime mortgages only. Our fixed advice fee of £1,699 is only payable on completion.

If you’d like to talk things through, you can request a callback and speak to a Key adviser at a time that suits you.


Be financially aware
Lifetime mortgages are secured loans. Compound interest means the amount you owe can grow quickly. Equity release reduces your estate's value and may impact means-tested benefits. It may leave little or no property equity, reducing future financial options.
 

Equity release and inheritance tax – FAQs

What happens if you inherit a house with equity release?

The outstanding loan usually needs to be repaid from the estate. This often happens when the property is sold.

The executor arranges this with the lender. Beneficiaries are not personally responsible for the debt. Any remaining value is passed on according to the will.

What are the disadvantages of inheriting a house with equity release?

The loan and interest reduce the value of the estate. This can affect how much beneficiaries receive.

It can also add complexity to the probate process. The executor will usually be responsible for deciding whether the property is sold or whether the loan is repaid in another way.

Does equity release reduce inheritance tax?

Equity release does not directly reduce inheritance tax.

However, because the loan is typically repaid from the estate, it can reduce the estate value used to calculate tax. Whether inheritance tax is due depends on individual circumstances and available allowances.

Professional advice can help you understand the impact.