Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in, and we will get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his advice to a reader below. If you have a question for our experts, email us at money@theipaper.com.
Question: We have a £1.2m house and are in our seventies. It is likely to attract an inheritance tax bill for our children, so we’re wondering whether to consider equity release to help them. We’ve heard of people doing this. Is it worth it?
Answer: Once property values reach this level, inheritance tax stops being abstract and becomes a practical planning issue.
On a £1.2m home, even after using the available nil-rate bands, part of the estate could face a 40 per cent charge, and it is entirely reasonable to look at whether or not something can be done in advance rather than leaving the problem to your executors.
Equity release is often suggested at that point because the logic appears straightforward. You borrow against the property, gift some of the proceeds, and in doing so reduce the size of the estate that may eventually be taxed.
The complication is that you are swapping one future liability for another, and the numbers do not always fall the way people expect.
Most equity release today is structured as a lifetime mortgage. You retain ownership of your home, there are usually no required monthly repayments, and the loan is repaid when the property is sold following death or a move into long-term care. The interest, however, rolls up over time.
At current rates, that compounding effect deserves careful attention. As a broad illustration, if you released £150,000 at around 6 per cent and made no repayments, the debt could roughly double over a 12-year period.
Extend that horizon further and the growth becomes more pronounced. While the borrowing may reduce the taxable value of the estate, it simultaneously increases the amount that will need to be repaid from it, and that can erode much of the perceived tax saving.
This is why using equity release purely as an inheritance tax mitigation tool can sometimes prove counterproductive, particularly if longevity works in your favour and the loan runs for many years.
The seven-year rule also needs to be factored in. Gifts generally fall outside the estate for inheritance tax if you survive seven years from the date they are made. If you do not, some or all of the gift may still be brought back into the calculation.
That timing uncertainty means the strategy tends to work best when it forms part of longer-term planning rather than a late response to rising property values.
Where equity release can be more compelling is when there is a clear and immediate purpose beyond tax reduction. Helping a child buy a home at a time when it materially improves their financial position, supporting grandchildren, or enhancing your own retirement while you are healthy enough to enjoy it are all different motivations from simply trying to trim a future tax bill.
In those circumstances, the benefit is tangible and personal, not just numerical.
Your own financial resilience should remain the priority. In your seventies, maintaining flexibility is important, particularly with the possibility of care costs or changing health needs later on.
Lifetime mortgages can carry early repayment charges, especially in the earlier years, so reversing course is not always straightforward. It would be unfortunate to reduce your own options in pursuit of a theoretical tax efficiency.
It is also worth stepping back and recognising that equity release is only one part of a broader inheritance tax planning conversation.
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Making use of annual gifting allowances, planning larger gifts earlier in retirement, reviewing how assets are structured between spouses, or using life insurance written in trust to cover a projected liability can all form part of a more measured approach. Often, a combination of steps produces a more balanced outcome than relying on a single borrowing decision.
Whether it is worth it ultimately comes down to detailed modelling rather than instinct. Looking at how much you might release, how the interest could accumulate over 10, 15 or 20 years, and whether the family is genuinely better off once the loan is repaid usually provides a clearer answer than focusing solely on the headline 40 per cent tax rate.
Equity release can play a role in estate planning, but it tends to work best when it supports both your own later-life security and your family’s wider plans, rather than being driven purely by the desire to reduce inheritance tax.
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