Gifting money to reduce inheritance tax

Helping your family today while thinking about tomorrow

Many homeowners would like to give their children or grandchildren a helping hand, and equity release may provide the answer. 

It could be towards a first home, university costs, a wedding, starting a business, or simply making life easier while they’re still around to see the difference it makes. 

For some homeowners, it’s an opportunity to gift an early inheritance, allowing loved ones to benefit from their money when they may need it most. This may also bring the advantage of reducing or removing future liability to inheritance tax (IHT).

Using equity release to gift money

For many of us aged 55 and over, much of our wealth is tied up in our property. According to the Nationwide House Price Index, thirty years ago in 1996, the average UK house price was around £51,000. In the first quarter of 2026 it was around £275,000. That’s an increase of £224,000 in the average home value, creating far more property wealth for long-term homeowners.

Equity release is one way to tap into that wealth, without having to move home. The money you release is tax-free and, once any secured mortgage is repaid, it can be spent in almost any legal way. One of the most common reasons people choose equity release is to gift money to family and friends. A less common option is to release money and lend it to loved ones rather than gift it.

Do you have to pay inheritance tax on gifts?

This is a question people often ask when they are thinking about using equity release to gift an early inheritance, or when looking at how gifting money to children might affect their estate.

Any inheritance tax (IHT) is worked out based on the total value of your estate when you die. IHT is usually charged at 40% on the value of an estate after any allowances. At the moment, the first £325,000 (2026–2027) is exempt, with an additional £175,000 potentially available when your residential home is passed on to your children or grandchildren. That’s a potential total of £500,000 to leave without incurring IHT.

Whether a gift has any impact on inheritance tax depends mainly on the following factors:

• When the gifts were given.
• The total value of gifts given.
• The overall value of your estate.

Inheritance tax rules can change, and the amount payable depends on your circumstances. You should seek independent tax advice before making decisions.

Could my loved ones have to pay back some of their gift?

Inheritance tax is typically only due on gifts if the total value of the estate and gifts you have given away in the seven years before death exceeds £325,000. 

If this happens, the tax is usually paid directly from your estate, although in some cases it may be paid by the person receiving the gift if your estate cannot cover it.

HMRC states that gifts use up the £325,000 IHT allowance first, and any unused allowance can then be transferred to your estate. So if you were to gift £25,000 a couple of years before you die, it means the first £300,000 of your estate will typically be exempt from IHT.

The seven-year rule explained

The seven-year rule is one of the main inheritance tax rules to understand when making larger gifts. These are the main points:

• If you survive for seven years after making one or more gifts, it will usually fall outside your estate and won’t be counted for inheritance tax.
• If you die within seven years, the gift may still be included when calculating inheritance tax, and the amount of tax due depends on when the gift was made.
• Gifts made in the three years before death are normally taxed at the full inheritance tax rate of 40%, if tax is due.
• For some gifts made earlier than that, a system called taper relief may apply. This gradually reduces the amount of tax charged the longer you survive after making the gift.
• Taper relief only applies if the total value of gifts made in the seven years before death is above the £325,000 tax-free threshold.

With all the above considered, for most homeowners, inheritance tax on gifts only becomes relevant in higher-value estates or where large amounts have been given away.

What gifts can you make without affecting inheritance tax?

There are several allowances that let you give money away without it counting towards inheritance tax.

These include:

• Annual gift allowance: £3,000 each tax year, which can usually be carried forward for one year if unused
• Small gifts: £250 per person per year, provided they haven’t received part of your annual allowance
• Wedding gifts: £5,000 for a child, £2,500 for a grandchild, or £1,000 for others

You may also be able to make regular gifts from surplus income if conditions are met. You can read more about making regular payments here.

Larger gifts may still be possible and are often covered by the seven-year rule.

Is equity release a good way to reduce inheritance tax?

For some homeowners, it can be. By releasing money from your home and gifting it during your lifetime, you can reduce the overall value of your estate, so there is less to consider for inheritance tax purposes. Equity release can be a helpful tool if you think your estate will surpass IHT thresholds when you pass away.

However, equity release is still a loan secured against your home, and the amount you owe can grow quickly over time if interest is not paid.

Whether using equity release to gift an early inheritance is right for you depends on your personal circumstances, long-term needs and financial goals. It should never be based on tax planning alone. Speaking to a financial adviser or tax specialist can help you decide.

A simple example

Imagine your home is worth £600,000 and you own it outright. You take equity release and release £150,000. From this:

• £75,000 is used for holidays, home improvements and clearing a loan you have. 
• £75,000 is gifted to your child to help them with a home purchase.

This reduces the value of your estate by £150,000 overall. You still own your home in full and live there for the rest of your life.

When you die, your equity release loan plus interest is repaid from the sale of your home. If the value of your remaining estate falls below the inheritance tax threshold, no inheritance tax would usually be due.

Of course, property values may rise over time. So while you can use equity release to reduce the value of your estate, potential future house price growth should always be factored in. 

Speak to the experts

Inheritance tax rules can be complex and depend on individual circumstances. If you’re considering gifting money to reduce a future inheritance tax bill, speak to a qualified financial adviser or tax specialist.

If you’re exploring equity release to help family or to gift an early inheritance, our selected advisers can explain your options and provide personalised recommendations at no cost. Call us on 0808 178 3055 or request a call back and we’ll arrange an appointment for you. You can also use our instant-result equity release calculator to see how much you may be able to release before deciding what’s right for you.