Inheritance Tax on Equity Release in Jan 2022

Are You Charged in Inheritance Tax on Equity Release? What You Must Know

Contributors: Nicola Date, Katherine Read. Reviewed by Francis Hui

How Much Inheritance Tax Will You Have to Pay on Your Inheritance? While You Can avoid it, Most Find Themselves Paying Inheritance Tax When They Inherit Property. We've Got the Inside Scoop!

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Surprising Implications of Inheritance Tax on Your Equity Release Mortgage

Did you know that you may have to pay tax on your new asset if you inherit a property?

However, we do have some news!

But, before we reveal the latest scoop, we’ll help you discover:

  • Additional inheritance related costs.
  • How to plan for these expenses.
  • The implications of inheritance taxes on your equity release plans.

As leaders in the field of equity release mortgages, we’ve combed the market and continuously keep up to date on the latest news, and we’re here to share.

So, what’s the latest inheritance tax news? Discover this now!

What’s Inheritance Tax?

Not sure if you know exactly what inheritance tax is? Let’s first quickly define the term.

Simply put, inheritance tax is a percentage taken from the inheritance you receive from someone who has died. It’s usually paid to the government as your contribution towards national services or other public spendings, such as social security1 and roads.

The amount which is added on top of your equity release plan depends on the type of inheritance received:

  • If the inheritance was left to more than one person, then each of these individual will have different inheritance tax rates applied to their share.
  • If only one person is left the entire estate, but is not married, then there are no additional taxes because it doesn’t affect their spouse’s income, etc.
  • If a married person is left the inheritance, then inheritance tax is calculated based on the recipient’s income.
What's Inheritance

Can I Use Equity Release to Avoid Inheritance Tax?

Inheritance taxes are usually added to inheritance after being processed into cash, and before equity release plan repayments. This means that as you’re paying off your monthly mortgage repayment, you may need to pay inheritance tax on top of this too.

Some lenders will allow for inheritance tax payments2 in advance. Still, others won’t, so ask them about their policies upfront if you want to make sure that there’s no chance of inheritance taxes affecting your equity release plans.

Additionally, inheritance taxes are not tax-deductible (even if paid in advance), so you may have to pay more inheritance tax than the originally received amount.

Affect My Equity Release Plan

Your Inheritance Tax Obligations

When inheritance tax isn’t paid in advance, it will remain a liability3 on your inheritance until it is repaid. And, if your equity release plan provider goes bankrupt before these taxes are reimbursed, you may lose any money that has already been deducted for inheritance tax.

Additionally, while inheritance taxes may not be eligible to be claimed as a deduction4 against income or corporation taxation – this doesn’t mean that you’re off the hook from paying them at all.

If someone inherited their house and there was an inheritance tax owed of £15000, but they only sold their property for £10000 – they would still owe the original amount because they’ve never received anything else back yet (this also applies when estate duty is charged).

Tax Obligations

How to Calculate Inheritance Tax

If inheritance tax is not deducted automatically, then you will need to calculate this yourself. You can use the inheritance calculator on the HMRC5 website to determine how much inheritance tax needs to be paid before equity release plan repayments have begun.

Keep in mind that if you’re using an inheritance that a life insurance company has purchased, they may deduct part of their commission from your inheritance before calculating and paying any taxes owed.

This means that it’s important to determine what percentage of your total inheritance was used up as commission during inheritance tax planning for your equity release mortgage plans.

calculate tax

When Is Inheritance Tax Due?

Inheritance tax is due as soon as your kids receive their inheritance. This means that inheritance taxes may need to be paid before equity release plan repayments have begun, when part of the inheritance was used up for commission and inheritance tax hasn’t yet been deducted automatically.

Typically inheritance tax is due within six months of receiving the inheritance, but this period may vary depending on your circumstances, inheritance type, and inheritance tax rates.

Inheritance Tax Due

Inheritance Tax Planning for Your Equity Release Mortgage & Equity release to reduce inheritance tax

The inheritance tax implications for your equity release mortgage need you to implement plans to ensure everything goes smoothly. This includes:

  • Making an inheritance tax repayment plan before the process begins, so that inheritance taxes are paid when they’re due and not left until later on, after which it will be too late for any refunds if there is a bankruptcy.6
  • Planning your monthly mortgage repayments to factor in inheritance taxes (in some cases, this will include setting up an additional savings account).
  • Asking about inheritance tax policies upfront with different lenders, as their requirements may vary depending on whether or not inheritance has been deducted automatically by life insurance companies etc.
  • Knowing what percentage of your total inheritance has been used up in inheritance tax (you may need to factor this into your equity release plan repayments).
  • Contacting HMRC if you have any questions about inheritance tax, as they will be able to provide advice for inheritance planning.
Equity Release Plans

Inheritance Tax and Your Estate Plan

If inheritance has been deducted automatically, then you can use the inheritance calculator on HMRC’s website to work out how much inheritance tax needs to be paid before estate duty repayments have begun.

In addition, you will also need an estimate of when inheritance is due, to know what percentage will go towards paying off any taxes owed, and if this falls within a repayment period or not. This could impact your choice between different types of equity release plans.

If there is no guarantee that all taxes owing will be repaid by estate duty payments at the end (especially given recent changes), you should always do more research to ensure everything goes smoothly.

estate plan

Inheritance Tax When Gifting Equity Release Funds

If you’re thinking of gifting your kids with an early inheritance, you must know the following:

If you pass away within 3 years of giving the gift, a 40% tax rate will apply. Any gifts made 3 to 7 years before you die will be taxed on a “taper relief”. The sliding scale descends as there becomes more time between the gift and your death.

Gifting Equity Release

Common Questions

Do I Need a New Inheritance Tax Return if I Get an Inheritance?

Do Inheritance Taxes Affect Equity Release Plans?

Do I Need a Solicitor to Review Inheritance Tax?

Is There a Way to Reduce Inheritance Tax?

In Conclusion

When unlocking an equity release mortgage, it’s vital that you really consider all the impacts it will have on your family, including what it means to use equity release to avoid IHT. Furthermore, be sure to discover exactly what will happen when you die.

In addition, be sure to speak to your family about your decision and seek counsel from a professional financial adviser.

Editorial Note: This content has been independently collected by the SovereignBoss advisor team and is offered on a non-advised basis. Sovereignboss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.

rachel w

Rachel Wait
Personal Finance Journalist

Rachel is an experienced finance journalist and editor with a particular interest in personal finance and consumer affairs. She has vast experience writing about money issues, property, insurance, and consumer affairs, and you’ll find her articles regularly featured in top media and newspaper publications.
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Written by
John Lawson
Founder SovereignBoss

John is passionate about education and has made it his life-long mission to assist UK citizens on their future financial options, with a specialist interest in equity release, and SovereignBoss is the natural extension of this passion.

Reviewed by
Francis Hui
Senior Risk Manager

Having held various high-level roles across the industry, Francis is truly an expert in aiding UK citizens in their financial decisions and risk analysis. His unique insight and statistical knowledge make him the perfect person to help you take your financial future to the next level.
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Katherine Read
Consumer Affairs Writer

Since joining the editorial team at SovereignBoss, Katherine has become focused on bringing transparency to finances and opportunities for those approaching retirement age. She writes on the topics of equity release, home reversion, and mortgages.

Nicola Date
Writer & Journalist

Nicola is a financial writer for SovereignBoss and is passionate about the opportunities that equity release can open up for homeowners. Her extensive business experience and deep understanding of the industry means that she’s always up-to-date with the latest developments.

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