Equity release is the process of freeing up the cash held in your home in exchange for a lump sum or regular payments. These payments can be used for any purpose, such as home renovations, extended holidays, or general living costs.
By gifting money previously tied up in your home, you can use equity release as a way to reduce the Inheritance Tax (IHT) due on your estate after you die.
Canada Life data from the first half of 2025 shows that 22% of homeowners applying for lifetime mortgages were gifting equity to friends and family, up from 13% the previous year.
Despite its popularity, gifting equity can be a complex process. Continue reading to learn more about equity release, whether it’s right for you, and the rules and potential pitfalls of using it to lower an IHT liability.
Equity release exchanges part of your home’s value for funds you can spend as you see fit
Every time you pay off a portion of your mortgage, you are building up equity.
You can release this equity for any reason you choose. Canada Life found that most people releasing home equity in the first half of 2025 (43%) did so to fund home adaptations or improvements, while others used the funds to give gifts to loved ones.
Lifetime mortgages and home reversions are the two main avenues for equity release, providing a lump sum either as a loan (lifetime mortgage) or in exchange for part of your home (home reversion).
Whether you qualify for either type of equity release depends on a variety of factors, such as:
- Age
- Location
- Property condition
- Property type
- Market value.
Every lender will have their own set of application criteria, so be sure to speak to us to help you decide which lender and application type are right for you.
Gifting equity from your home can reduce the value of your estate and mitigate Inheritance Tax
Canada Life found a 9% year-on-year increase in equity release used to fund gifts to family and friends.
Releasing home equity may reduce the value of your estate for IHT purposes, which could lower the tax liability you leave behind. IHT is payable on the value of your estate that exceeds certain thresholds:
- The nil-rate band, currently frozen at £325,000 until 2031.
- The residence nil-rate band, fixed at £175,000 until 2031 – applicable when you pass your main residence to a direct descendant.
You can use equity release to give gifts to your friends and family. Provided you stick to HMRC’s strict gifting rules, these transfers are usually tax-free if you live for seven years after making the gift, meaning more of your estate could remain with your loved ones.
Equity release can also help you pass on tax-efficient wealth to your beneficiaries at a time when they need it most. If you have children, for example, you could release equity from your home to help them with their own home-buying costs. There are some risks to this strategy, though, so consider taking advice before you proceed.
6 important gifting rules to be aware of
1. Gifts to a spouse or civil partner are 100% IHT-free
If you pass on gifts to your spouse or civil partner during your lifetime, those gifts are completely IHT-free. To qualify, the beneficiary must legally be your spouse or civil partner and live in the UK permanently.
2.You have a £3,000 annual exemption
Every tax year, you can give a total of £3,000 worth of gifts, known as the “annual exemption”.
Your annual exemption can be given to one person or split across several recipients. If you don’t use your annual exemption, it can be carried forward, but only to the next tax year.
3. Remember your small gift allowance
You can give as many gifts as you like each tax year up to £250 per person. However, it doesn’t apply if you have used another allowance – such as the annual exemption – for the same individual during that tax year.
4. You can give more substantial gifts to family members for weddings or civil partnerships
Wedding gifts are IHT-free up to certain limits:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person.
You can also combine a wedding gift allowance with other allowances, such as the annual exemption. You cannot combine it with the small gift allowance.
5. You could make gifts from your regular income
If it doesn’t reduce your own standard of living, you can also make cash gifts to another person from your regular income. You’ll have to commit to making these payments on a regular basis.
6. Gifts that exceed these allowances are known as potentially exempt transfers
If you gift a sum outside of HMRC’s gifting allowance rules, it becomes a potentially exempt transfer (PET).
This means that if you die within seven years of giving the gift, it may attract IHT. If you die more than seven years after giving the gift, it becomes IHT-free.
Different rates of IHT apply to PETs based on the time elapsed since giving the gift. This is known as “taper relief”.
Gifting rules can be complex. Reaching out to a financial planner at Milsted Langdon can help clear up any confusion and give you more gifting confidence.
The importance of seeking professional advice
Releasing equity isn’t a one-size-fits-all solution; there are various moving parts you need to consider before deciding if it’s right for you.
Here are some potential drawbacks to be aware of when applying for home equity release.
You can build up considerable interest
Equity release mortgages often have compound interest rates. While you won’t usually have to make regular payments, interest will roll up over time, meaning you or your beneficiaries may have substantial interest to pay when selling your home.
You may miss out on means-tested benefits
If you receive a significant lump sum, you could risk losing certain benefits you currently claim. For instance, if you qualify for Pension Credit and then receive a lump sum from equity release that takes you over the £10,000 savings threshold, every £500 counts as an extra £1 of income, which may affect your overall eligibility.
There are sometimes substantial costs associated with equity release
These costs can include footing the bill for a valuation, legal fees, and lender charges.
Get in touch
If you are unsure whether home equity release is right for you and your family, you can reach out to a Milsted Langdon financial planner today for help planning your estate.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
A lifetime mortgage is a loan secured against your home. To understand the features and risks, ask for a personalised illustration.