Equity release is usually seen as a way for elderly homeowners who are cash-poor but property-rich to convert some of the value of their property into ready cash. But for some comparatively wealthy parents it can also be a way in which they can pass on money to their children, while reducing their inheritance tax (IHT) bill.

Jayne Almond, chief executive of Stonehaven, a specialist equity release provider, says that the process is simple. A couple in their early seventies with a home worth £750,000 could take out a lifetime mortgage of, say, £100,000. This would then roll up, with added interest of about 6 per cent a year until both died, when the accumulated debt would have to be repaid out of their estate.

They could give the £100,000 released by the mortgage to a child, perhaps to help him or her on to the property ladder. On a 25-year repayment mortgage at 5.5 per cent the child would be saving £613 a month by not having to take out a £100,000 loan.

By giving the £100,000 to a child, provided that the couple survive for seven years after making the gift, they would also reduce the value of their estate by £100,000. Since the estate is well above the IHT threshold, currently £285,000, the reduction of £100,000 would be equivalent to a saving of £40,000 in the amount of IHT payable on death. As this initial loan figure grows, thanks to the rolled-up interest, so does the IHT saving.

Ms Almond says: “The scheme is particularly attractive where the inheritors would benefit from receiving the money early.”

But Mike Warburton, senior tax partner at Grant Thornton, the accountant, says that parents should think hard before taking out lifetime mortgages simply to cut the IHT bill on their estate. He says: “I think equity release should be used primarily by elderly people who are struggling to pay their own bills. All other considerations come a long way behind this.

“What’s more, the interest on these deals is not very attractive because lenders have to price in the possibility that they will not recoup their money for a long time and the final sum is, in any event, capped by the guarantee not to cause negative equity. If people are really keen to save IHT, there are other things they can do before considering equity release.”

If an equity release mortgage rolls up over a very long period, it may reduce an estate by more than the borrowers intended. Mick Ferrucci, of Savills Private Finance, the independent mortgage broker, says that a 70-year-old woman taking out a £100,000 lifetime mortgage at 5.99 per cent would find that the sum owed rises to £332,000 after 20 years and £604,000 after 30 years.