Gifts, growth or generational planning? Equity release in practice

The number of homeowners aged 55 or over who are using equity release to access the equity value in their home reached a record high last year. Around £2.57 billion was raised through equity release in 2025, an 11% increase on 2024.

Fears around the increasing burden of inheritance tax and care fees are acting as a driver for many homeowners to look into equity release, however there are many other uses for equity release that people may not have considered.

How does equity release work?

Equity release schemes fall into 2 broad camps:

Home reversion plans

The homeowner sells some or all of their home to the provider in return for a tax-free lump sum and/or income and a lifetime lease allowing them to continue to occupy the property rent-free (or for a nominal rent) for the rest of their life or until they need residential care. On moving into care or on death, the provider sells the property to realise the value of their share. Houses are typically sold at a forced sale value which could be significantly below market value. Any surplus sales proceeds are paid to the borrower, or their estate.

Lifetime mortgages

Lifetime mortgages are long-term loans secured against the property where, typically, the homeowner is not required to make any interest payments. Interest is rolled up to be repaid when the last borrower dies, moves into residential care or the property is sold. Interest rates are typically tied to long-term gilt yields and so can be higher than ‘standard’ mortgage rates. The rule of 72 shows the impact of rolling up interest – dividing an interest rate into 72 gives the approximate number of years it can take for the debt to double in value. So, a debt of £100,000 today with an interest rate of 7% p.a. will double in value approximately every 10 years, becoming £400,000 after 20 years and £800,000 after 30 years or so.

Retirement interest only (RIO) mortgages operate in a similar way to lifetime mortgages but the borrower is required to make monthly interest payments. The capital borrowed remains outstanding and is repaid when the property is sold.

Most modern equity release schemes offer other advantages including:

• Flexibility – funds can be taken as a lump sum or drawn down as needed and a proportion of the house’s value can be ring-fenced for inheritances.
• Access to funds whilst continuing to live in the house.
• A ‘no negative equity’ guarantee, but the effects of compounding interest can mean that possible inheritances are significantly reduced.
• The ability to make interest payments, if borrowers wish, to manage the debt, although the amounts that can be repaid may be limited if early repayment charges are to be avoided.

How equity release is being used today

	Funding for care and support in one’s home or for residential care, especially if only required for one partner.
	Home improvements or adapting a home for, say, loss of mobility.
	Augmenting retirement income, either by using the capital raised or by drawing down from a cash reserve. Where capital is raised, a purchased life annuity can provide an income for life.
	Travel and leisure – achieving lifetime goals and pursuing hobbies.
	Raising capital to pay off a maturing interest-only mortgage or for other debt consolidation.
	Reducing one’s taxable estate for inheritance tax purposes, especially in light of the introduction of inheritance tax on ‘unused’ pension funds where an individual dies after 5 April 2027. The inclusion of unused pension funds in a taxable estate from 6 April 2027 could cause many to lose the residence nil rate band (RNRB) – reducing the value of the estate may help retain some or all of the RNRB, leading to potential reductions in inheritance tax liabilities of up to £140,000.
	Silver splitters – ‘grey divorces’ have increased by around 75% over the last 20 years – raising equity from the family home may allow one of the couple to stay in the house while providing capital towards the divorce settlement for the other.
	Similarly, parents may wish to assist children who are divorcing with their settlement or to re-establish themselves post-divorce.
	Gifts to children or grandchildren to assist with education costs, childcare costs, house deposits, home improvements, car purchase, paying off debts etc.

Risks and planning implications

Where the funds raised through equity release are gifted, it must be remembered that the gift will continue to be treated as part of the donor’s estate for inheritance tax purposes should the donor die within 7 years of the date of the gift so any inheritance tax savings may be significantly reduced, especially when the costs of the equity release scheme are included.

Borrowers who may face a local authority assessment for care costs in the future should determine whether funds raised through equity release and subsequently gifted may be caught by the deliberate deprivation of assets provisions.

Borrowers should also avoid accumulating the funds raised within their estates, else any inheritance tax advantages may be negated.

Borrowers contemplating using funds raised through equity release for further inheritance tax mitigation, for example, by purchasing shares in EIS or business relief schemes, should proceed with caution. From 6 April 2026, business relief will generally apply at 100% on up to £2.5 million of qualifying assets once held for two years (or at 50% with no upper limit where the EIS comprises AIM-listed shares). However, anti-avoidance provisions can match the relief attributable to the debt against the business relief assets, often eliminating any inheritance tax advantage. Similar rules may apply to other arrangements intended to reduce inheritance tax.

How can we help?

We offer access to a wide range of equity release products from leading providers, ensuring that clients have the best possible options to choose from. We combine product expertise with broader financial planning, ensuring that equity release forms part of a carefully considered, holistic strategy for retirement, inheritance, and lifestyle needs.

If you would like to know more about equity release and how we could help, get in touch.

The Financial Conduct Authority does not regulate tax planning or estate planning.

This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.

The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The information in this article is correct as at 18/02/2026.