Understanding the Tax Implications of Equity Release in 2024

Equity Release Taxation: Everything You Need to Know Before You Unlock Your Home’s Value, Do not Let Hidden Taxes Drain Your Retirement Dreams!
  • Last Updated: 07 Feb 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui

Key Takeaways

  • Equity release funds are not taxable as income in the UK.
  • Equity release can be considered a loan, not income, thus not subject to income tax.
  • Equity release is exempt from Capital Gains Tax.
  • Using equity release could potentially reduce Inheritance Tax, but it may also lower the overall inheritance due to interest and fees.
  • Gifts from equity release funds may be subject to Inheritance Tax if the giver dies within seven years of the gift.

Will you be taxed heavily on your equity release funds? Is equity release tax a concern?

With record-breaking lending of £6.2bn 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.

    Here’s what we’ve found. 

    What Is Equity Release?

    Equity release, tailored for those 55 or older, lets you leverage your home's value for cash, useful for various needs or desires.

    It's 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.

    Do You Pay Tax on Equity Release (UK)? 

    No, you don’t pay tax on equity release in the UK. 

    In fact, an equity release lump sum can help reduce the tax you’ll 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’s 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’s 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’s not a form of income. 

    Instead, it’s 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's 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’s 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 won’t 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:

    • Rolled up/compound interest 
    • The share in property appreciation 
    • Equity release fees

    Will My Beneficiaries Ever Have 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 7 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 wouldn’t 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’s 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 die within 7 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’m 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?

    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. 

    Stay savvy and secure your financial future with these valuable equity release tax tips.

    Related Articles
    Timeline for Equity Release Process

    Wondering About the Time It Takes to Get Equity Release? Unsure About the Process and How to Speed Things Up? Read Our Guide to Find Out Everything You Need to Know About How Long Equity Release Takes.

    Potential for No Early Repayment Charges

    What Happens if You Want to Pay Back Your Equity Release Loan Early? Is It Possible to Pay Back Equity Release Without Early Repayment Charges? Find Out Here…

    Scroll to Top