Equity Release Loans And Their Tax-Free Status Explained

Equity release is tax free because you’re not making a profit – you’re borrowing against your home and so it’s just a trade of assets, meaning you don’t need to pay tax.

Is Equity Release Tax-Free?

You do not need to pay tax on any equity release payment your receive. If you invest your money from equity release and make a profit on it then you may be taxed on those profits.

When you choose a lifetime mortgage or home reversion equity release scheme, you can enjoy a cash lump sum to spend as you see fit.

This lump sum is tax free too, so you don’t need to declare it on any tax return and you can spend the full amount in whatever way suits you.

Find out why equity release is tax free by reading on.

Looking for other information on Equity Release? This guide has info on 'Why is equity release tax free?' We have also writen extensively about:

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We update all our guides regularly. If you are researching Equity Release and we haven't got an exact guide that helps you, keep coming back as we update daily.

Why Don’t You Pay Tax on Equity Release?

You don’t pay tax on equity release because you aren’t making any money. Because the loan is secured against the equity in your property, you’re essentially trading an asset you already own (the equity) for equivalent cash.

You’ve not gained anything and so don’t need to worry about the capital gains tax threshold.

You only pay tax when you make money. So you might be liable to pay tax if you turn a profit using the equity release, but the actual cash lump sum itself is not profit.

This means that the lump sum you gain can be used however you see fit, without needing to worry about tax implications. Equity release can have an impact on means-tested benefits though, and it is a high-interest product, so you need to carefully consider your options and seek financial advice before you apply.

When Would You Pay Tax on Equity Release?

The only time you would need to pay tax on equity release is if you used your lump sum to invest and you saw a profit. You would then be taxed on that profit since it’s gains you’ve made from your assets.

Standard savings accounts are considered investments. If you put your money into savings, then you can make up to £1,000 in interest every year without paying tax. This is your personal savings allowance or PSA.

If you’ve taken a large lump sum with equity release and you have a good interest rate on your savings account, you may make more than £1,000 in interest and so you may be taxed on profits above this amount.

That’s why it makes sense to make use of your ISA allowances to avoid paying tax on the lump sum savings you’ve acquired. You have an annual allowance of £20,000 that you can put away where any interest you make won’t be taxed.

Example savings:

The above shows various options based on leading rates with an £80,000 sum. While the taxable amount is low and you wouldn’t pay much on that, it does show that it’s worth being clever with how you save your money to avoid paying any tax that’s unnecessary.

Remember that the ISA limit is annual and so, for your second year, you can put another £20,000 into ISAs without penalty. This could be advantageous since the interest will compound and, if simply left in savings, you’d make more money which would be taxable.

Your financial adviser can take you through the scenarios to help you find the best solution.

You could also consider investing in more high-risk financial products, but some lenders won’t allow you to take equity release if this is your intention. Your financial adviser can give you more details when you first take advice from them before you apply.

If you want to use equity release to invest in stocks or other high risks, high yield investments then you should carefully consider the implications on your financial situation if the value of the investment was to drop significantly.

Equity Release and Inheritance Tax

You could cut your inheritance tax payable on your estate when you take equity release, but it’s not going to be worth it just for that reason. The amount you’ll end up owing for your equity release loan will always be higher than any savings you make on inheritance tax. However, it could still be beneficial and so is worth exploring.

Inheritance tax only applies to your estate value over £325,000. So, if your home is worth less than this and your other assets don’t put you over the threshold then equity release won’t have any impact. If your assets do total above this then you would be taxed at 40% above the limit.

Equity Release and Your Estate Value

That means if your estate is valued at £400,000 then you’d be taxed 40% of £75,000, which is £30,000. But if you took equity release for your home, and spent the money in a way which didn’t increase the value of your estate, then you could bring your estate value down below the £325,000 barrier and you wouldn’t have to pay the inheritance tax – but as you’ve have lost the £75,000 by spending it, then you’ve still lost more money than the £30,000 you would have been taxed instead.

So the choice comes down to whether you would rather retain the value of your estate, but pay a high tax bill, or take the money that you’ve got locked up in your home now and spend it while you can.

You may get more enjoyment or a more comfortable life if you took the money, but you’d be leaving less money to pass on to your loved ones. As with any equity release decision, this is something you’ll need to weigh up and your personal situation will determine your priorities.

It’s also worth noting that the inheritance tax threshold applies to one person. If you own your property with your partner then your threshold doubles to £650,000, so you may not need to worry about inheritance tax at all.

Equity Release: Financial Advice

The first step of any equity release loan application is to receive financial advice. Lenders won’t enter into an agreement with you if you’ve not sought advice, whether you choose to heed it or formally reject it.

As part of this financial advice you will be asked questions about your plans for retirement and your current financial circumstances, and then given a selection of options to fulfil your goals, one of which may be equity release if the adviser deems it suitable for you.

They will also take the time to explore the implications of each solution offered to you, including tax matters. So, you should walk away from your financial adviser meeting understanding just how you will be impacted with tax should you choose equity release, along with the impact on any other benefits you’re currently claiming.

This will enable you to make your own decision in full knowledge of the effect on your tax situation, and it should also give you a plan if you need to start thinking about savings accounts and ISAs should you decide to take a cash lump sum.

In Summary

Equity release provides you with a tax-free lump sum that you can spend as you please in retirement. The money is wholly yours and can be useful to supplement your income, without having to then pay tax. However, remember that it can impact other benefits you receive.

If you want to know more about equity release, we’ve produced a range of guides on interest rates, pros and cons, buying second homes with your loan and more.

How Can Money Savings Advice Help You With Releasing Equity?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Equity Release brokers. They have already helped thousands of people get the best Equity Release deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.