Do you pay tax on equity release?

Your questions answered: Is equity release tax-free?

Written in line with our editorial policy.

Equity release is an increasingly popular way to boost your income when you are in or approaching retirement. In the early stages of enquiring about equity release many customers ask: “Is equity release tax-free?” It’s an important question to ask, as the amount of money you release could be tens of thousands of pounds.

To clarify any potential equity release tax implications, we’ll discuss the following in today’s article:

• Do you pay income tax on equity release cash?
• Will I have to pay capital gains tax on equity release?
• Are there any equity release tax implications?
• Do you pay tax on equity release with home reversion plans?
• Can equity release reduce inheritance tax liability?
• Do I have to pay tax on equity release from my buy-to-let property?

We hope this guide will help you understand the issues around equity release and tax. Our selected advisers are also available to discuss your circumstances and offer further information. Just call us on 0808 178 3055 or request a call back and we’ll arrange a no-obligation appointment for you. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

Please note: This article is provided for information purposes only and does not represent financial, mortgage or investment advice. If in doubt, you should seek independent financial advice.

Do you pay income tax on equity release cash?

The most common form of equity release is a lifetime mortgage. This involves borrowing money through a loan secured against your property. 

Where a lifetime mortgage differs from conventional mortgages is that you don’t have to make monthly repayments. Instead, the loan is typically paid back through the sale of your home when you pass away or move into long-term care.

Your money can be paid to you as a single lump sum or in smaller amounts as and when you need a cash boost. Whichever option you select, you will not have to pay income tax on the money you release. 

Why do I not have to pay income tax on equity release money?

You don’t have to pay income tax on the money you unlock with equity release as it’s a loan. Any cash you borrow from a loan is exempt from the taxes that apply to other forms of income. 

This doesn’t mean that equity release is a cheap way of borrowing. Although you do not pay income tax on equity release, you will have to pay interest on the money you borrow. This can be paid each month, or you can leave it to roll-up each month to be paid back with the loan amount when you pass away or move into long-term care. 

Will I have to pay capital gains tax on equity release?

No you do not. You pay capital gains tax on any profit you make from the sale of your home or other assets or properties. With equity release you are taking out a loan secured against the value of your home, so you are not disposing of the property. This means you do not have to pay capital gains tax on the money you unlock with equity release.

Are there any equity release tax implications?

If you decide not to spend all of your money straight away then you may choose to move it into a savings account. If you do this, any interest you earn on these savings could be subject to tax. 

Our selected equity release advisers can provide more information on this. They may also recommend that you seek specialist tax advice to address issues around equity release and tax. 

However, they are unlikely to recommend a plan to bolster your savings account. This is because the amount of interest you are charged on your plan is likely to far exceed any interest you make on your savings. 

One way to minimise the risk of paying tax on interest earned from equity release savings could be to arrange a drawdown lifetime mortgage. This lets you reserve an amount of money from your home’s value that you then release in stages, as and when you need it. 

As well as minimising tax you might pay on interest earned from a savings account, you’ll only pay interest to the equity release provider on the money you unlock. This could therefore save you thousands of pounds in interest compared to a lump sum plan.

Do you pay tax on equity release with home reversion plans?

So far we have only been discussing the potential tax implications of a lifetime mortgage, but there is another form of equity release to consider. A home reversion plan allows you to sell all or part of your home in exchange for a cash lump sum. You then continue to live in your home as a tenant, rent-free.

With this type of plan you still do not pay tax on the income you receive. Although you are selling a percentage of your home to your chosen reversion company, it is still an equity release plan and so the money you receive is considered a loan. This means it is exempt from income tax or capital gains tax.

Can equity release reduce inheritance tax liability?

When looking at the main pros and cons of equity release, something to consider is that a plan will reduce the value of your estate. As a result, it can reduce the amount of inheritance tax that your estate might be liable to in the future.

Your estate is all the property, money and possessions that you leave behind when you pass away. If your total estate is valued at less than £325,000 – or £650,000 for couples – then there wouldn’t be any inheritance tax to pay. If your estate comes to more than the threshold then any amount above it may be taxed at 40%. 

Inheritance tax is a potentially complex subject so please make sure you are fully informed about it before committing to an equity release plan. You can read more about how inheritance tax works here.

Can I gift some of my money to reduce inheritance tax?

What you do with your equity release money is entirely up to you. One of the main uses of equity release is for homeowners to gift their loved ones with a ‘living inheritance’ now, while they are alive and able to see them enjoy their money. This can make a huge difference to the lives of family members, for example if they are struggling to get on the property ladder. 

There are inheritance tax gifting rules to consider, however. These rules mean that any gifts given less than seven years before you die may be subject to tax. Gifts include money, property, stocks and shares, valuables and more. 

If you die within seven years of gifting to someone, the money or the value of the gift will be subject to inheritance tax. The full 40% would be charged if you die within three years. If you pass away between four and seven years after gifting then a sliding scale called taper relief is applied. Importantly, there is no inheritance tax to pay when gifting to your spouse or charities. You can read more about the inheritance tax gifting rules here.

Do I have to pay tax on equity release from my buy-to-let property?

As equity release is a loan, you will not have to pay income tax or capital gains tax on the money you receive, even if it is a buy-to-let or other investment property. This means that you could unlock the cash you need from your portfolio of properties without incurring a tax bill. In addition, you can choose whether or not you would like to make monthly repayments.  If you choose not to, the loan plus interest will roll up each month.

Speak to a specialist equity release adviser

If you are thinking about equity release then it is vital you speak to a qualified specialist who can give you honest advice. Equity release plans don’t suit everyone, but our selected advisers will take the time to understand your unique goals and circumstances to help you make a decision.

Speak to our team today and they will arrange an appointment with one of our selected advisers who can explain everything to you. They may also recommend that you seek specialist tax advice. If you wish, they can prepare quotations for you and arrange your plan for you from the comfort of your home. Just call us on 0808 178 3055 or request a call back to get started.