Here we present the synthesis of core–shell structured hexagonal-phase NaYF4 : Yb3+,Er3+@Ag nanoparticles (NPs) and their unique bio-functional properties. The structure and morphology of the NPs are confirmed by X-ray powder diffraction (XRD), transmission electron microscopy (TEM), scanning electron microscopy (SEM) and Fourier transform infrared (FT-IR) measurements. They displayed both strong 2H11/2/4S3/2–4I15/2 (green) and 4F9/2–4I15/2 (red) upconversion luminescence (UCL) and photothermal transfer properties under the excitation of a continuous 980 nm laser diode. Furthermore, the UCL intensity ratio of 2H11/2–4I15/2 to 4S3/2–4I15/2 acted as a temperature sensor due to the low energy gap between 2H11/2 and 4S3/2 (∼740 cm−1). After coating with the silver shell, the cytotoxicity of the composite NPs was reduced largely in contrast to the pure NaYF4 : Yb3+,Er3+ NPs. HepG2 cells from human hepatic cancer and BCap-37 cells from human breast cancer incubated with the composite NPs in vitro were found to undergo photothermally induced death on exposure to 980 nm NIR light, and the optimum mortality approaches 95% with a power density of 1.5 W cm−2 which is much lower than that reported for Au nanoshells and Au nanorods. Overall, this class of core/shell NPs is expected to be an attractive therapeutic agent for tumor ablation with bioimaging and thermal detection in real time.