Inheritance protection and equity release: what is it?

Last updated 26^th January 2024 by the SunLife Content Team
5 min read

Inheritance protection is an option available with some equity release plans. It lets you set aside some of your home’s value for your loved ones to inherit after your loan has been repaid. But, it does reduce the maximum amount of equity you can release.

It’s a myth that you can't leave any inheritance with equity release. In reality, that may not be the case.

Compound interest can cause your amount owed to reach the value of your home (but not exceed it). Choosing inheritance protection means that a portion of your home’s value can not be eaten into by compound interest.

There are other ways to ensure an inheritance for your loved ones with equity release. These include paying off the interest, choosing a different type of equity release, or gifting your loved ones an early inheritance with some of the released cash.

In this article we’ll explain what an inheritance protection guarantee is, how it works and what other options are out there.

Why is inheritance protection needed?

Equity release is a way to release some money from the value of your home, usually between 20% and 60%. It is often used towards things like home improvements or paying off debts. Learn more about what equity release is and the different types of schemes in our helpful guide.

With an equity release mortgage, such as a lifetime mortgage, you don't need to make any monthly payments. Instead, the amount of money you have borrowed and the additional compound interest is paid back from the sale of your home when you die or go into long-term care.

Some providers do allow you to make ad hoc or regular repayments to help reduce the total cost of borrowing.

If there is any money leftover when your home is sold, it can be inherited. But, if you are not making regular repayments, the amount owed could eventually reach the full value of your home. (As long as your plan has a ‘No-negative equity guarantee’, the amount owed cannot be more than the value of your home.)

So, someone who wants to ensure there's some money left for their loved ones might opt for inheritance protection.

How does inheritance protection work?

Some equity release products offer an inheritance protection guarantee. This lets you ring-fence some of your home’s value to guarantee an inheritance for your loved ones. But, it will reduce the maximum amount of equity you are able to release.

When the house is sold, this protected portion will pass on to your beneficiaries, no matter how much is outstanding on your loan. Let’s look at an example.

Joe’s house is worth £250,000. He has been advised that he can release 60% of the value of his home. And he has the option of inheritance protection with his chosen provider.

So, he could take 40% as released equity (£100,000) and preserve 20% to leave behind as an inheritance for his loved ones.

That means when his house is sold, at least 20% of the value would be left to his loved ones. The actual amount will depend on his home’s value when it is sold.

Important considerations with inheritance protection

If you do choose inheritance protection, there are some important considerations to be aware of.

The more that is protected, the less is available to you as equity release. If you choose to protect a portion of your home’s value as inheritance, let’s say 30%, the maximum amount you can release will be reduced by 30%.
You are protecting a percentage of your home’s value, not a fixed amount of money. So, the amount protected and inheritance left will depend on the value of your home when it is sold.
Some providers charge extra for including an inheritance protection guarantee. Make sure to check this if leaving an inheritance is important to you.

If you’d like to estimate how much money you could release from your home with a lifetime mortgage, use our equity release calculator.

How does inheritance protection impact Inheritance Tax?

Equity release can reduce your estate’s Inheritance Tax, as it is worked out based on the size of your estate. If a portion of the money has already been spent, it cannot be taxed.

The standard tax-free allowance for inheritance is £325,000 per person(www.gov.uk opens in a new tab), with an additional allowance for your main home of £175,000 per person. The protected inheritance will be included within this allowance. Anything above this allowance will be subject to usual inheritance tax rates.

You can learn more about equity release, Inheritance Tax and ways to reduce it in our guide to the tax implications of equity release.

Other ways to leave an inheritance with equity release

Inheritance protection is not the only way to leave some of the value of your home to loved ones with equity release.

Making repayments to reduce compound interest

Many equity release products let you choose to make regular or ad-hoc repayments. This means the compound interest on your loan will grow more slowly. If you pay off all of the interest each time it is added (called an interest-only lifetime mortgage) then your total amount owed will always stay at your original loan amount.

This makes it more likely that there will be cash leftover from the sale of your home when your loan has been repaid. But, this does depend on how much it sells for.

Gifting early inheritance with your released equity

You can use the money you release however you like (once you have paid off any existing mortgage). So, many people choose to spend some of their released money on early inheritance for their loved ones.

Doing this means you could help them get onto the property ladder, have a wedding, or support them after the birth of a baby. The best part is that you can be there to see them enjoy the money.

Choosing a different type of equity release

A home-reversion plan is a type of equity release where you sell all or part of your home. This is a sale, rather than a loan, so there is no interest that builds over time. You could choose to sell 60% of your home, and know that 40% of it’s value would be leftover to be inherited.

Find out more about different types of equity release.

Exploring alternatives to equity release

Equity release isn’t right for everyone. Your financial advisor will discuss alternatives to equity release with you to find the right solution for your unique circumstances and needs.

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