Intracisternal A-particles (IAPs) are endogenous retroviruses (ERVs) responsible for most insertional mutations in the mouse. Full-length IAPs harbour genes flanked by long terminal repeats (LTRs). Here, we identify a solo LTR IAP variant (Iap5-1solo) recently formed in the inbred C57BL/6J mouse strain. In contrast to the C57BL/6J full-length IAP at this locus (Iap5-1full), Iap5-1solo lacks DNA methylation and H3K9 trimethylation. The distinct DNA methylation levels between the two alleles are established during preimplantation development, likely due to loss of KRAB zinc finger protein binding at the Iap5-1solo variant. Iap5-1solo methylation increases and becomes more variable in a hybrid genetic background yet is unresponsive to maternal dietary methyl supplementation. Differential epigenetic modification of the two variants is associated with metabolic differences and tissue-specific changes in adjacent gene expression. Our characterisation of Iap5-1 as a genetically induced epiallele with functional consequences establishes a new model to study transposable element repression and host-element co-evolution.