If you are over the age of 55 and own your own home, it is likely to be your most high-value asset.
Equity release schemes could be an option for you to access cash stored in your home or other assets such as buy-to-let properties. But it’s not right for everyone, so it’s important to understand the pros and cons before making a decision.
One of the first things you might consider is whether you’ll have to pay taxes on the cash lump sum you receive from equity release. This article will answer all of your taxation and equity-release questions so you can make an informed decision.
Equity release is when you release equity from your home by taking out a loan or selling your property while still living in it. You can use the funds released by equity release plans for anything you choose, from supplementing your income to paying off bills or existing debts or making home improvements.
There are two main types of equity release: lifetime mortgages and home reversion plans.
If you take out a lifetime mortgage, you borrow money against the current value of your home. The loan and any interest that accumulates is paid off only when your house is sold – either after you pass away or enter long-term care.
The interest rate that applies when you release equity will depend on your personal circumstances.
You can still choose to make monthly interest payments, although this isn’t usually necessary as the interest will be added to the loan amount and repaid at the end.
If you don’t need a large lump sum in the short term, but you do have future plans that need funding, you might want to consider releasing equity with what is known as a drawdown lifetime mortgage.
A draw-down plan allows you to potentially release money from your property in stages as and when you need the funds. The reserve facility holds money which you don’t need right away and is non-interest bearing. You can consider it as similar to a savings account. You can withdraw money from it as and when you need it, typically with a minimum withdrawal of £2,000.
Home reversion plans differ in that you sell a share of your property to a home reversion provider in exchange for a lump sum or regular payments.
When the providers are unable to pay you what your property is worth today, they will usually pay you a percentage of the current value rather than the market value.
The provider sells your home and keeps the money when you pass away or enter long-term care.
It’s worth noting that both types of equity release will affect your entitlement to means-tested benefits, such as Pension Credit. And, if you have a mortgage or other loans secured on your property, you may need to fulfil your monthly repayments on these before taking out equity release.
Call Boon Brokers on 0333 567 1607 to discuss your equity release requirements.
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All equity release and mortgage advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757.
If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation. By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.
The fee we receive is used to help keep this site operational and to produce new content.
Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.
In short, yes – you won’t have to pay tax on equity release money.
Income tax is only subject to payments you receive from an employer or money received through self-employment as a sole trader, and because any money you receive as a result of releasing equity is usually classified as a loan rather than salary, you don’t pay income tax on equity release.
However, it is still worth bearing in mind that the interest on the loan will be added to the amount you owe, and this will be repaid when your property is sold after your death or if you eventually move into long-term care. At this point, you might be required to pay tax on equity release.
In the case that the value of your property has risen since releasing equity from your home, you may be liable for inheritance tax, and in certain circumstances, you might also be required to pay income tax or capital gains tax.
The reason equity release isn’t taxed is that it is not considered to be income. This is because you’re not selling your property; you’re simply taking out a loan against the value of it.
The equity release tax implications are complicated: crucial to note that, while equity release payments are not entirely free from taxation, they will be subject to inheritance tax if the value of your home has risen since taking out the loan.
The personal savings allowance means that you can earn up to £1,000 in interest without being liable to pay any tax on it.
If you have a lifetime mortgage, however, the interest is added to the principal and repaid only when your home is sold. There might be inheritance tax to pay if the value of your property has risen since joining the equity release scheme.
If you have taken out a home reversion plan, the lump sum you receive is not subject to income tax because it is treated as a loan rather than as income.
However, if you choose to receive regular payments from your plan, this money will be considered income like a salary you would receive as an employee, business owner or sole trader and will be taxed as such.
In the case that the value of your property has risen since releasing equity and you have a home reversion plan, you will have to pay capital gains tax on any profit you make if and when the property is sold.
Generally speaking, no – you will still not have to pay any tax on the money you receive from releasing equity. However, it is worth remembering that if you have a buy-to-let mortgage, the interest you pay on this will no longer be tax-deductible.
If you invest the money you release from equity release, any profits you make will generally be subject to capital gains tax.
Furthermore, although the funds initially released are tax-free, any interest earned on those funds, for example in a savings account, could be subject to tax.
Inheritance Tax is charged on the money and possessions you leave behind when you die.
If the value of your estate (which includes your property, savings and investments) is worth more than £325,000, Inheritance Tax will be payable at 40% on anything above this amount.
If you have a partner, your estate can be worth up to £650,000 before you can expect a tax bill on your inheritance.
In general, because your estate is calculated from the worth of all your assets minus any liabilities you may have, releasing money from your estate lowers your estate’s value, therefore reducing any IHT that could be applied.
If you have a home reversion plan, your beneficiaries will not have to pay any IHT on all the money they receive from the sale of your property.
However, if you have a lifetime mortgage, the interest is added to the loan and only repaid when your property is sold. So, if the value of your property has gone up since taking out the equity release loan, there could be IHT to pay.
To figure out whether or not you will have to pay IHT, you need to add up the value of your property, any assets you have (such as savings or investments) and any debts you owe. If this total is more than the IHT threshold (currently £325,000 for a single person or £650,000 for a couple), IHT will be payable on the amount over this threshold.
It’s vital to remember, however, that if you’re married or in a civil partnership, your civil partner or spouse will be able to inherit your entire estate without having to pay tax on the inheritance.
If you give away your home (or sell it for less than its market value) to a close relative, for example a child or grandchild, you will not need to pay tax on that gift.
This is because of the ‘main residence nil-rate band’, which allows you to pass on your home to your children or grandchildren free of IHT.
The amount of the main residence nil-rate band is determined by the value of your home at the time you pass away.
For example, if you died on or after 6 April 2020 and your property was worth up to £500,000, no IHT will be payable.
In the case that your property is worth more than £500,000, the amount of the main residence nil-rate band will be reduced.
The main residence nil-rate band is currently increased to £175,000 from 6 April 2021.
You can use equity release to offer your beneficiaries a lump sum of money while you are still living if you are concerned about leaving them with a large IHT obligation.
This money can then be used to pay off any debts or bills, such as an outstanding mortgage, or it can be invested so that it can grow in value over time.
It’s important to remember when gifting money that, if you do this, the money you give away will be subject to IHT if you die within seven years of making the gift.
Furthermore, the financial conduct authority does not regulate inheritance tax planning, so make sure you seek proper, trustworthy advice if you are considering this kind of early inheritance.
There are a few ways you could potentially avoid paying tax on equity release:
There’s an exemption on any gains you make on the sale of your main residence, known as private residence relief. This means, if you wanted, you could typically sell your entire home on the open market and downsize to release equity rather than using an Equity Release provider.
You don’t pay interest on lifetime mortgages: instead the interest is added to the loan and only repaid when your property is sold. So, if the value of your property has gone up since taking out the equity release plan, there could be IHT to pay.
If you put the money into an ISA or a pension fund, any profits you make as a result of equity release will not be subject to capital gains tax.
If you move into long-term care and your property is sold to pay for your care, the money you receive from equity release will not be subject to IHT.
If the value of your property is below the IHT threshold when you die, there will be no IHT to pay on the money you receive from equity release.
If you take out equity release, while the money you receive will be classed as a loan for taxation purposes, it will be counted towards your income while calculating benefits and could affect your eligibility for means-tested benefits such as Pension Credit and Housing Benefit.
Before taking out equity release, you should contact a benefits advisor to ensure you understand how it will impact your benefits.
If you decide that you are interested in releasing equity from your property and what this might mean for whether you have to pay tax, you should consult an equity release calculator and then seek professional financial advice to find out if it is the right thing for you.
In all cases, you should seek professional financial advice from an adviser that is part of the Equity Release Council (ERC) and entered on the Financial Services Register. The ERC sets rules and guidelines for all parties involved in the equity release process and will ensure you find a plan with a no negative equity guarantee.
They will be able to tell you how much equity you could release, how much it would cost and what the implications would be for taxation (through income tax or capital gains tax).
Equity release is a long-term commitment and once taken out it can be difficult (and expensive) to cancel.
The adverts for Boon Brokers on this page have been signed off as a Financial Promotion by Boon Brokers Limited, to ensure that they are in compliance with Section 21 of FSMA. Boon Brokers Limited is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757.
Equity release is when you release equity from your home by taking out a loan or selling your property while still living in it. You can use the funds released by equity release plans for anything you choose, from supplementing your income to paying off bills or existing debts or making home improvements.
The reason equity release isn’t taxed is that it is not considered to be income. This is because you’re not selling your property; you’re simply taking out a loan against the value of it.
Generally speaking, no – you will still not have to pay any tax on the money you receive from releasing equity. However, it is worth remembering that if you have a buy-to-let mortgage, the interest you pay on this will no longer be tax-deductible.
If you take out equity release, while the money you receive will be classed as a loan for taxation purposes, it will be counted towards your income while calculating benefits and could affect your eligibility for means-tested benefits such as Pension Credit and Housing Benefit.
Before taking out equity release, you should contact a benefits advisor to ensure you understand how it will impact your benefits.
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Unlike most equity release advisors, Boon Brokers do not charge any fees! Have a free consultation to see how they can help.
You can speak to Boon Brokers on the number below and discuss your options
0333 567 1607
Use the equity release calculator and see how much money you could receive.
You can book a call back from for an equity release specialist, who can call you when it's conveniant
All equity release advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757.
If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation. By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.
The fee we receive is used to help keep this site operational and to produce new content.
Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.
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