Equity Release Tax 2026/27 | IHT, CGT & Benefit Implications

Equity release is usually a way of accessing capital rather than receiving employment or pension income, so the advance itself is not normally an income-tax receipt. The exact treatment still depends on the product: a lifetime mortgage is a loan, while a home reversion plan involves selling an interest in the property. Equity release also affects Inheritance Tax, means-tested benefits and the amount left for beneficiaries.

The value of the tax planning depends entirely on your estate size and benefit position. Model the estate with the IHT Calculator→, and check your retirement income position with the State Pension Calculator→.

Is Equity Release Taxable?

The advance from a lifetime mortgage is normally loan capital, not income. A home reversion plan is different because it involves selling all or part of an interest in the property. There may be no CGT where Private Residence Relief applies, but that depends on the property and how it was used. Later investment income or gains are taxed under the normal rules, and gifts are considered under the IHT gift rules. Equity release does not by itself make every later transaction tax-free or remove the need to report a separate taxable event.

How It Affects Inheritance Tax

Equity release can change your estate in two ways: money you spend or give away may no longer be held personally, and a lifetime-mortgage debt may reduce the net estate. Debt deductions are subject to IHT rules, including restrictions where borrowed money is used for certain gifts or other purposes. For 2026/27 the standard nil-rate band is £325,000 and the residence nil-rate band can be £175,000 where its conditions are met; a couple may have up to £1m of combined thresholds only where the relevant allowances and residence conditions qualify. Equity release is not automatically an IHT strategy, particularly if the cash is still held or may be needed for care.

This illustration assumes the £100,000 released is spent and is no longer held as cash, the full debt is deductible, and a £500,000 combined threshold is available. Real estates can differ because of transferable allowances, residence conditions, gifts, debt restrictions and other reliefs.

The Interest Roll-Up Effect

A lifetime mortgage may roll interest into the balance, but the rate, compounding method and voluntary-repayment terms depend on the plan. The following is only an illustration: at a 6% annual compound rate, a £100,000 balance would be about £134,000 after five years and £179,000 after ten. That is a financing cost, not a tax charge, and it can reduce what beneficiaries receive. Spending or gifting money can have different IHT and benefits consequences; the £3,000 annual exemption and normal-expenditure-from-income rule have conditions and require records.

Means-Tested Benefits: The Real Trap

The released money can count as capital for means-tested benefits, but the thresholds are not the same for every benefit. For Universal Credit, capital above £16,000 usually prevents entitlement, while £6,000 to £16,000 reduces the award by tariff income. Pension Credit has no upper capital cut-off: savings up to £10,000 are ignored and every £500 above that is normally treated as £1 a week of income. Housing Benefit rules depend on age, benefit combination and circumstances. Deliberately giving away or spending capital to increase benefit entitlement can be treated as deprivation of capital. A drawdown plan may delay when capital is received, but it does not guarantee eligibility.

CGT When You Sell or Move

Selling the family home to repay an equity release plan may qualify for Private Residence Relief, but the relief depends on the ownership and occupation history. The final period is normally 9 months; it can be 36 months for a disabled person or someone in long-term residential care who meets the conditions. If the home was let or used differently after the owner moved out, the gain may need to be apportioned. A home reversion plan involves disposing of an interest in the property, so its CGT treatment should be checked rather than assumed.

Equity Release vs Downsizing

The tax comparison between releasing equity and downsizing depends on the property, product and how the proceeds are used. Downsizing can convert home value into cash that remains capital and part of the estate unless spent or gifted. A qualifying main-home sale may receive Private Residence Relief, while a new purchase normally has its own SDLT assessment. Equity release avoids a new purchase but creates borrowing costs and can affect benefits, care funding and inheritance. Spending or gifting proceeds can have separate IHT and benefits consequences; neither option is automatically better for tax.

Drawdown vs Lump Sum

The structure of the plan affects both borrowing costs and benefit timing. A full lump sum may increase assessable capital immediately and, under the plan terms, interest may accrue on the amount drawn from day one. A drawdown lifetime mortgage can delay withdrawals and interest on amounts not yet taken, but the capital rules still apply to each withdrawal and entitlement depends on the specific benefit. Drawdown may preserve more equity for later care needs or inheritance, but it is not a guarantee of benefit protection.

Keep the Debt and Estate Evidence Together

At the point of death, the executor will need more than the latest property valuation. Keep the original equity-release offer, completion statement, current balance, interest history, redemption figure, charges and any later further advances. The IHT calculation should show the gross property value, the debt outstanding, how the borrowed funds were used and whether any part was connected with a gift or another transfer. A bank balance alone cannot show that released money has left the estate, and a loan balance alone does not prove that the whole debt is deductible.

If the money was used to help a child buy a home, record whether it was a gift, loan or co-ownership arrangement. The legal form, beneficial ownership, repayment expectation and evidence of the transfer can affect both IHT and CGT analysis. If money was placed into an investment account, the investment and later income remain part of the ordinary tax record. If it was used for living costs or care, retain invoices and bank statements so the estate can explain the reduction in assets.

Benefits, Gifts and Deprivation of Capital

Benefits decisions are based on the facts at the time of the claim and the relevant benefit's rules. A claimant should report the capital received, spent or transferred in the way the benefit service requires. Spending money on reasonable living costs or paying a genuine liability is not the same question as deliberately transferring capital to preserve entitlement. A gift that is acceptable for IHT planning can still raise a deprivation-of-capital question for a means-tested benefit. Take advice before making a large gift, especially if care or benefits may be needed.

Keep a dated schedule of withdrawals and use: amount received, date, account, purpose, recipient, whether it was a gift or loan, and supporting document. This helps the family answer benefit reviews and the executor answer IHT questions. Do not rely on the product provider to track how the cash was used; the provider's balance statement does not contain the complete tax or benefits history.

Product Terms Matter as Much as Tax

Compare the initial rate, fixed or variable interest, compounding, drawdown limits, early-repayment charge, inheritance protection, negative-equity protection, home-reversion share and effect on means-tested support. A tax saving that depends on spending the advance may be outweighed by a higher interest balance or loss of flexibility. Ask an equity-release adviser to explain the regulated product and a tax adviser to review gifts, investment income, IHT and CGT separately. This guide cannot decide whether releasing equity is suitable or affordable.

Reporting to HMRC

Taking a lifetime-mortgage advance does not normally create an income-tax return entry or tax-code change by itself. A home reversion, later investment income, a chargeable gain after non-residential use, or gifts that need IHT reporting can create separate obligations. At death, the executor deals with the loan and calculates the estate under the IHT debt rules; the debt is not automatically deductible in every circumstance. Keep the plan documents and gift records with the estate papers.

Frequently Asked Questions

Model your estate with the IHT Calculator→ and check retirement income with the State Pension Calculator→. Pair this guide with Inheritance Tax 2026/27 and Pension Drawdown vs Annuity 2026/27 for the wider retirement-finance picture.

Official sources

• MoneyHelper: How savings and lump-sum payments affect benefits
• MoneyHelper: Using equity release to fund care
• GOV.UK: Universal Credit — money, savings and investments
• GOV.UK: Pension Credit eligibility
• GOV.UK: Inheritance Tax
• HMRC Inheritance Tax Manual: debts and liabilities
• HMRC: Private Residence Relief HS283