Understanding the Tax Implications of Equity Release in 2024

Funds released through equity release are not taxed as income, providing a tax-efficient way to access your home's value.
  • Last Updated: 14 May 2024
  • Fact Checked Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui
Equity Release Taxation: Everything You Need to Know Before You Unlock Your Home's Value, Do not Let Hidden Taxes Drain Your Retirement Dreams!
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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 lending of £6.2bln in 20221, the industry has never been more popular. 

Is it worth joining the trend, or is it not worth your while because of the tax implications?

In This Article, You Will Discover:

    Our editorial team at Every Investor has researched and compiled the most up-to-date information on equity release taxation.

    Therefore… 

    Who Offers the Lowest Rates in 2024?

    Discover the Lowest Rates & Save

    Request a FREE call back & discover:

    • Who offers the LOWEST rates available on the market.
    • Who offers the HIGHEST release amount.
    • If you qualify for equity release.
    Tax Implications of Equity Release

    What is the Nature of Equity Release for Homeowners in the UK?

    Equity release, tailored for those 55 or older, allows you 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.

    What Are the Tax Implications of Equity Release in the UK?

    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 Pay Tax on Equity Release in the UK? 

    No, you do not 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 pay 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?

    Equity release is tax-free 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.

    Can Equity Release Be Used to Reduce Inheritance Tax (IHT)?

    Yes, equity release could be used to reduce inheritance tax in certain instances. Still, it may also reduce the overall value of the inheritance left to your beneficiaries due 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

    Will My Beneficiaries Need to Pay Inheritance Tax on Equity Release Funds Received?

    Yes, in some cases, your beneficiaries will have to pay inheritance tax on equity release funds received.

    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.

    Take a look at ‘How long does the equity release process take?‘.

    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

    What Is Inheritance Tax?

    Do You Pay Tax on Equity From a House Sale?

    How Does Early Inheritance and Gifts Work With Equity Release?

    Why Is Equity Released Not Taxed as a Sole Trader or a Limited Company?

    Will I Be Subject to Income Tax as a Director of a Limited Company or Sole Trader?

    Will I Have to Pay Capital Gains Tax if I Am Self Employed or a Director?

    What Are the Advantages and Disadvantages of Equity Release for a Sole Trader and Limited Company Director?

    If I Release Equity on Buy-To-Let Mortgages, Will I Have to Pay Taxes?

    If I Invest Money From Equity Release, Will I Be Subject to Taxes?

    Will I Have to Pay Capital Gains Tax or Income Tax on Home Reversion Plans?

    What are the Tax Implications of Equity Release?

    Do You Need to Pay Income Tax on Equity Release?

    Are There Any Capital Gains Tax on Equity Release?

    Is the Money Received Through Equity Release Taxable?

    Can Equity Release Affect Your Tax Bracket?

    In Conclusion

    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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