Equity Release & Inheritance Tax Guide

By Ailsa Hesketh, Founder & Managing Partner, Tivoli Legal, Cheltenham

Last updated: 12/09/2026

 Key Takeaways:

• More people are using equity release to make living gifts to support loved ones and to reduce their taxable estate.
• Current IHT thresholds remain frozen, meaning rising property values are pushing more families into the tax net without realising it.
• Equity release can be used to gift money tax‑efficiently, provided the homeowner survives seven years, and it can help with education costs, deposits, or other family support.
• Professional advice is essential: you need financial advice first to assess suitability, and legal advice to complete the equity release process safely.

What are the current rules for lifetime gifting and inheritance tax? 

Equity release lets you make living gifts to your family and reduce your estate’s value, which could lower a future inheritance tax bill. 

Many families are now using equity release to support loved ones sooner while also planning ahead for inheritance tax. With uncertainty around future IHT and gifting rules, we’re seeing a clear shift: people want to help their children and grandchildren now, not “one day,” and do it in a way that protects their long‑term financial position.

Equity release is becoming a key part of that conversation. It offers a flexible way to gift money during your lifetime, enjoy the impact of that support together, and potentially reduce your taxable estate.

In this blog, we break down the current inheritance tax and gifting rules and share facts, figures, and real-life case studies.

Why are families considering gifting now?

For families considering lifetime gifts, the key issue is not simply whether the seven-year rule might change. Current inheritance tax thresholds remain relatively low compared with the value of many homes and estates, while the government has confirmed that the nil-rate bands will remain frozen.

The table below outlines how the rate of inheritance tax (IHT) on gifts decreases over time, and shows potential tax liabilities:

This means some families are considering whether gifting wealth during their lifetime could help them support children or grandchildren now while potentially reducing the value of their estate for inheritance tax purposes.

However, gifting is not suitable for everyone. The tax treatment depends on the circumstances of the gift, the donor’s financial position and how long they survive after making it. Anyone considering using equity release to fund a substantial gift should obtain appropriate financial and legal advice before proceeding.

What’s changing with inheritance tax, and what could change in future?

Inheritance tax rules have changed in recent years, and further changes have been discussed. However, it is important to distinguish between confirmed changes to the law and speculation about possible future reforms.

Confirmed inheritance tax changes

The government has confirmed that the current £325,000 nil-rate band and £175,000 residence nil-rate band will remain frozen for the time being. The nil-rate band is currently set at £325,000, while the residence nil-rate band can provide an additional £175,000 when a qualifying home is passed to direct descendants.

Another confirmed change is that, from 6 April 2027, most unused pension funds and death benefits will be included within a person’s estate for inheritance tax purposes.

What about lifetime gifting?

Some have suggested the government could change the rules around lifetime gifts, including introducing a lifetime gifting cap or changing the current seven-year rules.

However, these should not be presented as confirmed government policy.

In October 2025, the Treasury was asked specifically about a potential lifetime gift cap. Its response said there is no lifetime cap on gifts for inheritance tax purposes and that the government does not comment on speculation about future tax policy.

Under the current rules, the seven-year rule therefore remains in place. If you survive seven years after making a gift, it will generally fall outside your estate for inheritance tax purposes, subject to the relevant rules and exemptions.

Current UK inheritance tax limits 

Inheritance Tax (IHT) is a levy charged on the estate (property, money, and possessions) of someone who has died when their assets exceed a specified threshold.

These thresholds have been frozen for years, and look like this:

Anything above these thresholds is taxed at 40%, but estates that donate 10% or more to charities qualify for a 36% rate.

But here’s the problem. With property prices rising and thresholds frozen until 2028, more families are being drawn into the IHT net unwittingly (and often without realising it).

To put the numbers into perspective, Ailsa Hesketh explains:

“Let’s say your estate is worth £1.4 million. After allowances, £400,000 could be taxed at 40%; that’s £160,000 to the taxman. To reduce this liability, many clients are ‘doing the maths’ with their financial adviser to explore strategic options.  

For example, their calculations might show that gifting the taxable part of their estate, say, to help their children buy a home reduces the value of their estate and the tax payable on it. 

Whilst the interest payable on the equity release may be more than the IHT potential liability (interest rate dependent), the gifted asset, like a home, could also grow in value as property prices increase over time. Plus, there’s the added benefit of seeing family settled and being there to enjoy it with them.”

What are the current rules for living gifts? 

Gifting during your lifetime can reduce your estate for IHT purposes, but the rules can be confusing. Here is the current guidance on gifting, as provided on the UK Government website.

If you have questions, your financial adviser can clarify how these rules apply to your unique situation and provide tailored guidance.  They will also help you with the calculations around potential IHT liability and Lifetime mortgage interest.

What counts as a gift?

Money, property, shares, or even selling something to a loved one for less than it’s worth can be considered a gift for IHT purposes.

Annual exemptions:

• You can give up to £3,000 each tax year without it being added to your estate, and carry over any unused exemption to the following tax year.
• Small gifts of up to £250 per person are also exempt from tax.
• Wedding or civil partnership gifts have their own limits: £5,000 from a parent and £2,500 from a grandparent.

Gifts out of surplus income:

If you have more income than you need, you can make regular gifts (like paying school fees for grandchildren) that are exempt, provided they don’t affect your standard of living.

Gifts with reservation of benefits:

If you give away an asset but continue to benefit from it (like gifting your home but still living there rent-free), HMRC will treat it as still part of your estate.

The seven-year rule:

Most larger gifts are “potentially exempt transfers” (PETs). If you survive seven years after making the gift, it falls outside your estate for IHT. If you die within seven years, taper relief may reduce the tax owed; however, any amount within three years is taxed at the full 40%.

How can equity release help reduce inheritance tax?

Equity release (lifetime mortgage) enables you to unlock some of the value in your home, tax-free and without having to move. Increasingly, people are choosing this option to help family members with living gifts, such as:

• supporting grandchildren’s education
• helping children onto the property ladder
• experiencing the joy of sharing wealth with loved ones during your lifetime

Here is a recent case study that shows the real-life impact of this approach:

After her son’s divorce, Mrs C used equity release to help him and her grandchildren buy a home nearby. This meant she could support her family when they needed it most and enjoy seeing them settled and happy. The emotional impact was front and centre, but there was a practical benefit too: reducing the size of their estate may mean a lower inheritance tax bill in the future. Read the full story below.

Why do you need financial advice when considering equity release? 

Before seeking legal advice from an equity release solicitor, it’s essential to speak to a financial adviser. This regulatory requirement protects your family’s best interests and ensures every decision is made with clarity and confidence.

Here are a few key questions to discuss with your financial adviser:

• Will releasing equity to gift affect my long-term financial security?
• Are there any potential tax implications for my family or me?
• Should interest be paid?
• Are there any risks or downsides I should be aware of?
• How much flexibility is there if my circumstances change?

What to watch out for:

Equity release mortgages accrue interest over time (unless you make monthly payments), which can reduce the value of your remaining estate. Read our guide for a detailed explanation of compound interest.

Gifting large sums may affect your entitlement to means-tested benefits.

Gifts must also be properly documented, and you can’t continue to benefit from the gifted asset, or HMRC may still count it as part of your estate.

Why do you need legal advice after choosing an equity release product? 

Once you’ve worked with your financial adviser to create a plan and choose a product from a lender, you then need to instruct a specialist equity release solicitor to independently ensure you understand the terms. This solicitor will also manage the conveyancing, culminating in the transfer of funds. See the process here.

Why choose Tivoli Legal for equity release legal support? 

Tivoli Legal is an independent equity release solicitor and conveyancing specialist. With a perfect 5.0 score on Google Reviews (the highest rating available), we take pride in delivering outstanding client service, particularly in complex and sensitive equity release cases.

Our reputation is built on expertise and consistently exceeding our clients’ expectations. Our holistic, empathetic approach means we:

• Collaborate closely with all parties involved to ensure a seamless process.
• Offer personalised, expert legal guidance.
• Listen carefully to your concerns, respond quickly to questions, and keep you fully informed about your case’s progress.

Whatever your circumstances, we are committed to making the equity release and conveyancing process as efficient and stress-free as possible.

For tips on finding trusted equity release experts, see our guide on choosing the right financial and legal adviser for your needs.

FAQs about Inheritance tax, equity release & living gifts

Conclusion: How equity release and gifting can help you support your family 

When it comes to gifting and inheritance tax, equity release can help you support your loved ones now and potentially reduce future tax bills. However, with rules changing and every family’s situation being unique, expert financial advice is essential before deciding whether to proceed with equity release.

Considering equity release?

Are you ready to unlock the value in your home? If you’ve already appointed a financial adviser and are ready to take the next step, Tivoli Legal is here to help.

Based in Cheltenham, we cover the whole of England and Wales with our home visit solicitors. We are dedicated equity release specialists who act on behalf of homeowners.  We’ll support and guide you through every stage of your equity release journey with warmth, clarity, and genuine care.

Contact us online or call our friendly team on 01242 500860 with any questions. We’re happy to help!