Equity Release and Tax Implications Explained

If you’re thinking about taking an equity release loan, you’ll need to understand the financial implications, including tax.

Are Equity Release Plans Tax Free?

Equity release payments are tax-free, but if you invest the money you get from the loan, you may be taxed on any profit you make. You can use Equity release to lower the inheritance tax you will have to pay from your estate when you die.

Equity release payments are tax-free, but if you invest your money, you may need to pay tax on any growth. You will potentially save on inheritance tax due to lowering your estate’s value.

Continue reading to get the full details about Equity Release and Tax.

Looking for other information on Equity Release? This guide has info on 'Equity release schemes tax implications' We have also written extensively about:

• - How safe are Equity Release schemes?
• - Releasing Equity for new property
• - Jointly Owned property Equity Release schemes
• - Equity Release to help with Retirement Planning

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.

Is Equity Release Taxable?

The short answer is simply “no”. When you take an equity release loan, whether it’s a lifetime mortgage or a home reversion plan, you won’t be taxed on the money you take out, whether that’s an initial lump sum or a draw down amount. If you choose regular monthly payments through home reversion, you should check with your equity release adviser for any tax implications.

The only time you may need to pay tax on your lump sum is if you invest it and you see financial growth. You would probably be taxed on any profit you make, and so again seek professional financial advice.

Equity Release: Loan, Savings and ISAs

If you did decide to take an equity loan and put it into savings, consider tax-free options such as ISAs. You can invest up to £20,000 a year in ISAs although each may have individual limits on how much you can pay in, and how often.

However, it’s not recommended that you take an equity release loan purely for savings, as the interest you accrue will far outweigh any growth. If you don’t intend to spend your cash lump sum, then a drawdown lifetime mortgage makes much more sense since you’ll only withdraw money when you need it, and only accrue interest on what you’ve withdrawn.

Equity Release and Inheritance Tax

The flipside of equity release is that, because you’ll either be selling your home through home reversion or owing money with a lifetime mortgage, your estate that you’ll be passing onto loved ones will significantly decrease in value. However, this can actually have some minor benefits, depending on the value of your property and estate.

That’s because, by lowering the overall value of the estate, you’d have less inheritance tax to pay from your estate when you have passed away. If your estate is worth £325,000 or more (or £650,000 for couples) then the inheritance tax rate is 40%.

You’ll still lower the overall value of what you pass on when you take an equity release loan, because you’ll need to repay the full amount plus interest. But if you’ve only borrowed a small amount, and it’s pushed you below that £325,000 threshold, it could end up being beneficial to you in your lifetime without too high a penalty when you’re gone.

In summary, equity release payments are tax-free, but you should balance this against the interest you’ll end up owing or the fact that, if you’ve chosen home reversion, the fact that your home will have been sold at much lower than market value.

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.