Expert VerifiedEquity Release Tax in 2025: 5 Essential Tips
- Last Updated: 05 Aug 2025
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Be aware. Equity release comes with drawbacks which are important to think about. Lifetime mortgages are secured loans. Compound interest means the amount you owe can grow quickly. Equity release reduces your estate's value and may impact means-tested benefits.Key Takeaways...
- Equity release funds are usually tax-free in the UK; income tax is not paid on the money received, and capital gains tax does not apply to equity release.
- Investing your tax-free lump sum, however, could place you into a higher tax bracket based on the investment returns.
- Consider that equity release funds could affect means-tested benefits eligibility.
Will you be taxed heavily on your equity release funds? Is equity release tax a concern?
With record-breaking industry lending of £6.2 billion in 20221, these products have rarely been more in demand.
Is it worth following the trend, or may the benefits not outweigh the tax implications?
In This Article, You Will Discover:
Our editorial team at EveryInvestor has researched and compiled the most up-to-date information on equity release taxation.
Therefore...
What Is the Nature of Equity Release for Homeowners in the UK?
Equity release, tailored for those 55 or older, allows you to leverage your home's value for cash, useful for various needs or desires.
It is a viable option for enhancing your lifestyle post-retirement, allowing you to release equity in a manageable way.
The process involves a loan against your home, repayable when you sell the property or from your estate, enabling you to remain in your home without immediate financial burden.
The implications of equity release on estate tax and potential tax liabilities should be considered.
Understanding the Tax Implications of Equity Release: Is It Tax-Free?
Equity release in the UK can have various tax implications depending on the specific scheme you choose.
Primarily, the proceeds from equity release are not generally taxable.
This is because the lump sum you receive is considered a loan and not income.
However, if you invest this lump sum and generate income or capital gains, this could be subject to tax.
Further, the inheritance tax implications also need to be considered.
When your property is sold upon your passing to repay the equity release loan, the value of your estate that could be passed onto your heirs may significantly diminish.
Moreover, if the equity release increases the value of your estate above the Inheritance Tax threshold, there could be a higher tax liability.
In some cases, equity release can reduce an inheritance tax bill if it is structured correctly.
Always consult a tax advisor or financial expert before deciding on equity release.
Do You Have to Pay Tax on Equity Release in the UK?
No, you do not have to pay tax on equity release in the UK.
In fact, an equity release lump sum can help reduce the tax you will be subject to paying on other assets in your estate.
The tax implications will depend on how you use the cash you unlock and your other financial assets and pensions.
It is essential to seek professional advice to ensure the best course of action for your specific situation.
Why Is Equity Release Tax-Free in the UK?
Equity release is tax-free in the UK because it is seen as a loan and not as a form of income, but remember that the loan, along with interest, will need to be repaid, potentially impacting your estate's value.
Interesting fact...
The same rules apply to a residential mortgage, but other factors such as interest rates, repayment terms, and overall impact on your finances can differ.
You will not be taxed even if you use your equity release mortgage to top up your income.
Do the same standards apply to Income Tax and Capital Gains Tax?
Income Tax
As mentioned above, equity release is exempt from income tax as it is not a form of income.
Instead, it is a secured loan against your property, even if used to supplement income.
Capital Gains Tax (CGT)
Capital Gains Tax is due when you sell many assets and receive funds exceeding the Capital Gains Tax threshold.2
Equity release is exempt from Capital Gains Tax because, although it provides a lump sum of cash, it is considered a loan rather than traditional income.
Remember that equity release schemes may not be suitable for everyone, and the risks involved should be carefully considered before making a decision.
The potential downsides include a reduction in the inheritance you leave behind, the possibility of negative equity if the property value declines, and the long-term costs of interest accumulating over time.
It is also important to note that tax laws can change, so staying up-to-date and consulting a financial advisor is essential.
Read More: Is Equity Release Suitable For You?
Can Equity Release Be Used to Reduce Inheritance Tax (IHT)?
Yes, equity release can be used to reduce inheritance tax in certain instances.
Remember, however, that equity release may also reduce the overall value of the inheritance left to your beneficiaries owing to interest accumulation and fees.
This strategy may only suit some, so you must disclose the specific circumstances and consult a financial advisor to determine if this approach is appropriate for you.
If you decide to gift someone with equity release money, it will not be subject to inheritance tax if you live seven years after it was given.3
In addition, equity release decreases the value of the estate due to the principal debt and interest.
This includes...
- Accrued/compound interest
- The share in property appreciation
- Equity release fees
Do Beneficiaries Pay Inheritance Tax on Equity Release Funds?
Yes, in some cases, beneficiaries pay inheritance tax on equity release funds.
Important notice...
If you pass away within seven years of giving your family an early inheritance with equity release, your heirs will be required to pay tax on the funds.
Why Else Would IHT Not Be Paid?
IHT would not be paid in the following cases.4
- Your estate is worth less than £325,000.
- You select to leave everything above the £325,000 to a charity, community non-profit sports club, spouse, or civil partner.
IHT Example: No Equity Release
Inheritance Tax with no equity release would be a standard Inheritance Tax rate of 40%.
This is only charged on inheritance, provided it is above the £325,000 threshold.
For example...
If you provide an inheritance of £400,000, your heirs will be taxed on £75,000.
Therefore, the total funds received will be £370,000 after a 40% tax reduction.
These figures are for indicative purposes only.
IHT Example: With Equity Release
An IHT example with equity release would be relevant when you pass away within seven years of gifting the funds, which could lead to additional tax liabilities for your beneficiaries.
The amount your heirs will pay is calculated using a reducing scale, known as 'taper relief'.5
The tapered relief works as follows, based on current tax laws and regulations...
- Less than 3 years since the payment = 40%
- 3 - 4 years since the payment = 32%
- 4 - 5 years since the payment = 24%
- 5 - 6 years since the payment = 16%
- 6 - 7 years since the payment = 8%
- 7 or more years since the payment = 0%
Note that these rates are subject to change and may not apply to your specific situation.
Common Questions on Equity Release Tax Implications
Inheritance tax in the UK is a tax charged on an estate when someone passes away.
The estate includes all assets, such as property, possessions, and cash.
Yes, you do pay tax on equity from a house sale.
Basic-rate taxpayers will generally pay 18% on the gains earned when selling a property, not on the total sale price; however, individual circumstances and any tax reliefs or exemptions may affect the actual rate applicable.
Higher and additional rate taxpayers will typically have to pay 28%.6
Early inheritance and gifts with equity release involve giving funds to your children or heirs as soon as the money is released.
You will need to notify your advisor, broker, and / or lender that you want to use your equity release for gifting so they provide the correct advice and determine if equity release is suitable for you.
Equity release is not taxed as a sole trader or limited company because the cash unlocked is not an income but a type of secured loan.
You will not be subject to income tax as a limited company director or sole trader if you opt for equity release, even if you use the funds to top up your income.
If you opt for a drawdown lifetime mortgage, you will only pay interest on the funds you release.
No, you will not need to pay Capital Gains Tax if you are a self-employed director who opts for equity release, as you are not disposing of the property with a lifetime mortgage.
The advantages and disadvantages of equity release for a sole trader and limited company director are as follows:
Pros
- Free up cash to invest in your business.
- You can remain living at home without having to downsize.
- You can reduce your inheritance tax bill.
- There are no repayments required in your lifetime.
Cons
- The process will usually take longer than extending your overdraft.
- You can only opt for equity release when you are 55 or older.
- It may not be the most effective way to unlock capital for your business, so you will need professional equity release advice.
- You will not benefit from your unlocked portion if your property price rises.
If you release equity on buy-to-let mortgages, you will not need to pay taxes, but be aware of potential risks such as changes in property values and the need for loan repayment.
Note that fewer products allow you to unlock equity on a buy-to-let property, and the availability of these products may depend on factors such as property location, rental income, and your financial circumstances. It is essential to research and compare your options carefully.
Investments from equity release funds may be taxable.
For example, the interest could be taxed if you place the funds in a savings account.
Home Reversion Plans do not trigger Capital Gains or Income Tax.
Even though you sell your property to your lender with a home reversion, the money is still considered a loan, not income.
The tax implications of equity release depend on how you choose to receive the funds.
If you opt for a lump sum, it is tax-free and will not affect your income tax or capital gains tax.
However, if you choose to receive the funds in smaller amounts over time, it could impact means-tested benefits or entitlement to local authority-funded services.
It is always wise to consult with a professional tax advisor to understand the specific tax implications in your situation.
In Conclusion: Is Equity Release Tax Free?
Understanding the tax implications of equity release schemes before deciding to cash in on your home's value is crucial.
By consulting with a financial advisor and keeping up-to-date with current tax laws, you can make informed decisions and potentially save money in the long run.
Remain knowledgeable and secure your financial future with these valuable equity release tax tips.
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