Is Equity Release Tax Free?

 

Do You Pay Tax On Equity Release | April 2024

Equity release is a financial strategy often pursued by homeowners who wish to access the funds tied up in their property.

A common question which arises is, “Is equity release money taxable?

This article will explore this query in detail, looking at the various tax implications of equity release.

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Understanding Equity Release Taxation

Taxation on equity release can be complicated. Although funds obtained through equity release are typically considered tax-free, depending on the equity release plan you choose and the way you choose to take it, this may not be true. 

The income which you receive from equity release is viewed as a loan, hence it is not considered taxable.

However, depending on how you utilise your equity release lump sum, tax can be incurred. For example, if you place the funds in a savings account, the interest earned could be subject to income tax.

Equity release may also have an impact on your means-tested benefits. If you have a substantial amount of savings following an equity release, it could affect your eligibility for certain benefits.

Consequently, it’s advisable to seek professional financial advice to understand these implications fully.

It’s also worth noting that tax rules can vary depending on the specific equity release plan chosen. Lifetime mortgage mortgages and home reversion are the main types of plan, with each offering their own tax implications to consider.

Are Equity Release Schemes Taxable?

Whilst equity release schemes are typically not taxable, other tax liabilities can arise depending on how you use the released funds. For example, if you invest money in a buy to let property, you may have to pay capital gains tax when you sell the property.

Similarly, if you invest the money in a savings account, the interest earned may be subject to income tax.

In addition, releasing equity from your home can potentially affect your inheritance tax liability. This is because releasing equity from your home reduces the overall value of your estate.

This could potentially reduce the inheritance tax that your beneficiaries would have to pay.

In addition,it’s worth noting that the tax rules can change over time.

Therefore, to stay updated on the latest tax laws and regulations related to equity release schemes, it’s advisable to seek professional financial advice.

Why is equity release not taxed?

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.

Tax Implications of a Lifetime Mortgage 

A lifetime mortgage is one type of equity release where you take out a loan secured against your home. The loan, along with any accrued interest, is repaid when you die or move into long-term care.

The lump sum which you receive from a lifetime mortgage is generally tax free, as it’s considered a loan rather than income. However, if you generate an income or gains from the loan, your equity release may not be completely tax free.

Moreover, a lifetime mortgage may affect your inheritance tax liability.

The value of your home, part of your estate, is reduced by the amount of the loan. This can reduce inheritance tax, meaning that your beneficiaries might receive a lower inheritance tax bill.

Another thing to consider is that the interest which accrues on your equity release loan can be rolled up, and consequently added to the loan amount. This means that the amount you owe can increase rapidly over time.

While this doesn’t have immediate tax implications, it can reduce your estate value further, potentially impacting the inheritance tax.

Is a Home Reversion Plan Taxable?

Home reversion is the other main type of equity release. In this scheme, you sell all or part of your home to a home reversion company in return for a lump sum or regular payments. 

As with a lifetime mortgage, the money which you receive from a home reversion plan is generally tax-free.

Although not considered a loan, it is considered the sale of an asset and hence, is not taxable.

Despite this, a home reversion plan can still potentially affect your capital gains tax liability. For instance, if you sell your entire home to a home reversion company, you might be exempt from capital gains tax due to private residence relief.

Alternatively, if you only sell a part of your home, you might have to pay capital gains tax on the portion you sold.

Home reversion plans can also affect your inheritance tax liability. Like lifetime mortgages, home reversion plans can also reduce the value of your estate.

This is because the percentage of your home sold to the home reversion company reduces its value. 

Just like with a lifetime mortgage, it’s important to remember that tax rules can change.

To understand the current tax implications of a home reversion plan, always consider seeking professional financial advice.

do you pay tax on equity release

Speak To An Equity Release Advisor Or Use the Equity Release Calculator Below To Estimate How Much You Can Borrow

The UK Care Guide works in partnership with Boon Brokers, one of the UKs leading equity release specialists.

You can contact them on 0333 567 1607 , or use the equity release calculator to estimate how much you can borrow.

Here is what Boon Brokers Offer

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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.

How does equity release affect tax?

The personal savings allowance

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.

Income Tax

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.

Capital Gains Tax (CGT)

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.

Inheritance Tax Impact on Equity Release

Inheritance tax, the tax on the estate of someone who has died, can be significantly affected by equity release. The standard inheritance tax rate in the UK is 40% of the value of the estate above the taxable threshold.

As equity release reduces the value of your estate, it often lowers your inheritance tax (IHT) liability.

As a consequence of equity release, the reduced value of your estate means that the potential IHT liability on your estate could also be reduced. This could be beneficial to your beneficiaries, as they may not be required to pay as much inheritance tax.

Additionally, if you use the money released to give gifts to your family or friends, it could further reduce your inheritance tax liability. However, there are rules around inheritance tax which need to be observed.

For example, if you give a gift and die within seven years, the gift might still be subject to inheritance tax. 

Furthermore, if you use equity release funds to pay off your debts or other financial liabilities, your inheritance tax liability can be further reduced.

Again, it’s important to seek professional financial advice to understand these implications fully.

Equity Release and Capital Gains Tax

Capital gains tax is a tax on the profit you make when you sell or dispose of an asset. Depending on the use of your loan, you may or may not have to pay capital gains tax on your equity release.

Firstly, the lump sum you receive from an equity release scheme is generally not subject to capital gains tax. This is because it is not a profit from selling an asset.

However, if you use the equity release funds to buy an investment property and later sell it at a profit, you might have to pay capital gains tax on the profit.

Similarly, if you invest the money and make a gain, you might have to pay capital gains tax.

It’s important to note that there are certain reliefs and allowances which can reduce your capital gains tax bill.

For instance, there’s an annual tax-free allowance, also known as the Annual Exempt Amount. This allows you to make a certain amount of gains each year, whilst also avoiding tax.

How Income Tax Affects Equity Release

Income tax is, self-explanatorily, a tax on income earned. Income tax typically does not affect equity release, since it is usually considered a loan, rather than income.

However, if you use the equity release funds in a way that generates income, you might have to pay income tax.

For example, if you put the funds in a savings account and earn interest, the interest might be subject to income tax. Similarly, if you invest all the money and receive dividends, the dividends might be subject to income tax.

It’s important to note that the rules surrounding income tax can be complex, and they can change. Therefore, it’s always advisable to seek professional financial advice to understand the potential income tax implications of equity release.

Reducing Tax Liability Through Equity Release

As mentioned, equity release can reduce tax liability in some occasions.

This is because often, releasing equity from your estate lowers the property value. Therefore, this could potentially reduce your inheritance tax liability. This is because inheritance tax is charged on the total value of your estate above a 40% threshold.

Subsequently, reduced tax liability can be used to pay off debts or other financial liabilities. Alternatively, the equity release funds could also be used to give gifts to your family or friends.

It’s important to remember that although equity release can potentially reduce tax liability, the rules around tax are complex and can change.

Therefore, it’s always advisable to seek professional financial advice to understand the potential tax implications of equity release.

is equity release tax free

Equity Release Tax Rules for Non-Residents

For non-residents, the tax rules for equity release can be different.

This could include people who live outside the UK, but own property in the UK. As the rules can be complex, it’s always advisable to seek professional financial advice.

Non-residents can potentially withdraw money with an equity release scheme on a property in the UK.

However, the tax implications can vary depending on various factors such as the country of residence and the specific tax laws in that country.

The lump sum received from an equity release scheme is typically tax-free in the UK, but may be subject to tax depending on your country of residence.

Other forms of tax, including inheritance tax and capital gains tax, may apply depending on how the equity release funds are used and the specific tax laws in the country of residence.

As for UK residents, taxation on equity release is complicated, and therefore subject to change.

To understand the potential tax implications of equity release for non-residents, it’s always advisable to seek professional financial advice.

Changes in UK Tax Laws and Equity Release

UK tax laws have undergone, and will continue to undergo, various changes. Consequently, this will sometimes have implications on the taxation of your equity release. This makes it advisable to seek professional financial advice, allowing you to stay updated on the latest tax laws and regulations.

Changes in tax laws can affect various forms of tax related to equity release, including income tax, capital gains tax and inheritance tax.

For instance, changes in the tax-free allowances, tax rates or reliefs can affect the amount of tax you might have to pay.

It is also important to note that these tax law changes can impact the potential benefits of equity release in terms of tax planning. This includes changes in the rules surrounding gifting or the value of your estate, which can affect your potential inheritance tax liability.

Furthermore, this can affect non-residents who have taken out an equity release scheme on a property in the UK. However, the tax implications can vary depending on multiple factors such as the specific changes in the tax laws, as well as the tax laws in the country of residence.

Consequently, it’s always advisable to seek professional financial advice to understand the potential tax implications of equity release, allowing you to stay updated on the latest tax laws and regulations.

The Role of Equity Release Providers

Equity release providers also play a crucial role in the equity release process. These are the institutions which offer the equity release plans, be it a lifetime mortgage or a home reversion plan. Consequently, these providers allow homeowners to release equity from their properties.

It is key to acknowledge the specific regulations which equity release providers must follow in order to protect consumers, under UK law.

Therefore, these regulations guarantee that the equity release plans are fair and transparent. The ‘no negative equity guarantee’ is an example of a safeguard which these regulations include, ensuring that you’ll never owe more than the value of your home.

As dealing with an equity release provider requires understanding the terms and conditions of the equity release plan, seeking professional advice could prove helpful.

This will allow you to fully comprehend the potential tax implications, such as inheritance tax liability or capital gains tax, depending on how you use the funds released.

Equity Release and Residential Mortgages 

Equity release and residential mortgages are both ways to borrow money using your home as security. However, as they are different schemes, their tax regulations also differ. For instance, you usually make regular payments with a residential mortgage. In addition, payments can include interest and capital.

Alternatively, equity release differs, since the total loan and accrued interest is paid in full at one time. Typically, this is when you die or move into long-term care.

However, if you use the money from the equity release to pay off an existing mortgage, it could have potential tax implications.

For instance, it could reduce your inheritance tax liability by reducing the value of your estate.

It’s also worth noting that if you have an existing mortgage on your property, you’ll generally need to pay this off first before taking out an equity release plan.

This is because the equity release provider will usually require the first charge on your property. This can be done using the funds released from the equity release plan.

Equity Release and Non-Interest Bearing Assets 

Non-interest bearing assets are assets that do not earn interest, such as cash or certain types of savings accounts.

If you use the funds released from an equity release plan to invest in non-interest bearing assets, it’s unlikely to have immediate tax implications.

However, if later down the line you do decide to invest in other assets that generate income, you may have to pay tax.

For example, if you later move the money into a savings account that earns interest, the interest could be subject to income tax.

Similarly, if you use the money to buy an investment property, you might have to pay capital gains tax when you sell the property.

Interest Rates and Equity Release 

Interest rate is another significant factor in equity release. Depending on the interest rate of your equity release scheme, the overall cost of the loan over time will vary.

The interest is usually rolled up, meaning it’s added to the loan and compounds over time. Consequently, the amount you owe can increase rapidly which reduces the amount that’s left for your beneficiaries.

It’s important to note that the interest rate can also have tax implications.

Although you don’t have to pay income tax on the lump sum you receive from an equity release plan, the interest that accrues on the loan can reduce the value of your estate. Therefore, this can potentially reduce your inheritance tax liability.

Taper Relief and Equity Release 

Taper relief is a form of tax relief that reduces the amount of inheritance tax payable on gifts given during your lifetime. If you survive for seven years after making a gift, the gift can be exempt from inheritance tax. This sliding scale is known as ‘taper relief’.

Alternatively, if you use the funds released from an equity release plan to provide gifts, it could potentially reduce your inheritance tax liability. This is because the gifts would reduce the value of your estate, which is what inheritance tax is based on.

However, it’s important to remember that there are rules around gifting and inheritance tax. For example, if you don’t survive for seven years after making the gift, it might still be subject to inheritance tax. 

Will my beneficiaries have to pay Inheritance Tax upon my death?

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.

Are there other reasons why Inheritance Tax would not be paid?

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.

equity release and inheritance tax

FAQ

1. Is the money withdrawn from an equity release taxable?

Generally the money which you withdraw from an equity release mortgage is not taxable. The funds you receive from an equity release plan, whether it be a lifetime mortgage or a home reversion scheme, are considered a loan rather than income. 

This means that it is tax-free, and you will not have to pay income tax on it. As explained in this article, depending on how you choose to use your equity release, there are tax implications to consider.

2. Will my partner have to pay inheritance tax upon my death if we have an equity release plan?

Inheritance tax, or ‘death tax’ is a tax on the estate of someone who’s died. This includes the property, money, and possessions. If your estate is valued above a certain threshold, then your partner may have to pay inheritance tax. However, if you and your equity release partner are civil partners or married, any assets passed to them upon your death would be exempt from inheritance tax. Therefore, this includes any property held in a joint equity release plan. 

3. Can equity release help to reduce my inheritance tax liability?

Yes, equity release can potentially reduce the value of your estate, which could in turn reduce your inheritance tax liability. When you take out an equity release plan, the value of your home in your financial assets is reduced by the loan amount. This means that when your estate is valued for inheritance tax purposes after your death, it could be worth less than the inheritance tax threshold. Consequently, this would reduce or even eliminate the inheritance tax payable. As this is a complex area to comprehend, it’s always advisable to seek professional financial advice.

4. What happens to my equity release plan if I move into a care home?

Your equity release plan usually ends once you move into a care home. Depending on your plan, your home is likely to be sold with the proceeds from the sale being used to repay the loan and any accrued interest. Consequently any leftover money would then go to you or to your estate. As moving into a care home can affect your means-tested benefits, it’s worth seeking advice on this when making the decision to move.

5. Can I use the funds from equity release to buy to let?

Yes, you can use the funds released from equity release to invest in a buy to let property. Alternatively, the equity release can be used to pay off any buy to let mortgages. However any rental income which you receive from doing so will be subject to income tax. Moreover, if you decide to sell the property, you may have to pay capital gains tax on any profit you make.

use the equity release calculator to see how much money you could release from your property. Takes less than 60 seconds!

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