Do you pay tax on equity release?
*Updated October 2023*
The good news is, no you don’t. The money you raise using equity release is completely tax-free. Equity release could actually have a positive effect on your estate by reducing the amount of inheritance tax (IHT) your heirs will have to pay.
However, some of the things you might do with your equity release money might be taxable, especially if you save rather than spend it.
We would always recommend getting advice from a specialist financial independent adviser to help you understand the impact of equity release on your tax position.
In this article we will cover:
Equity release and inheritance tax implications
Inheritance tax is payable when someone dies. It is due on the value of their estate and on any 'lifetime gifts' they might have made in the seven years before they die. The current IHT threshold is £325,000 – any amount below this lies in the 'nil-rate band'.
One of the advantages of equity release is that it reduces the value of your estate, which in turn should reduce the amount of IHT due when you die. It might even lower the value of your estate to less than the IHT threshold.
There is also a ‘main residence’ IHT allowance of £175,000 per person that can be added to the £325,000 nil-rate band. Combining these allowances means that a couple could leave a family home worth up to £1 million to a direct descendent before any IHT is payable.
The additional main residence allowance will apply to the equity you have released from your home provided you have spent it during your lifetime. If you have saved or invested some of the money, it's likely to be subject to IHT as part of your estate.
You can find out more about how inheritance tax works in the UK by visiting https://www.gov.uk/inheritance-tax.
Your pension is not part of your taxable estate, so your heirs can inherit it without having to pay inheritance tax (IHT). Many people arrange equity release to raise funds for a comfortable retirement and bolster their pension. This can help to increase your pension pot, which you can ultimately pass on to your beneficiaries free of IHT.
During your lifetime, you can give your children as much money as you want.
These gifts are known as 'potentially exempt transfers' and won't count as part of your estate if you live for another seven years, and do not gain any direct or indirect benefit in exchange. Releasing equity from your home could mean you use some or all of the money you've released to support your children and grandchildren. For example, you could help them through university or to get on to the housing ladder. Basically, they are getting their inheritance early, and without having to pay IHT.
The snag is that you need to live for at least another three years (and preferably seven) after making the gift.
If you die within three years, your estate will have to pay 40% tax on the gift. If you die between three and seven years after making a gift, it will be taxed on a sliding scale – i.e. the tax rate falls as time passes.
The recipient of the gift may also have to pay tax on it, so it's essential to think carefully and speak to a tax adviser before making any lifetime gifts over £325,000.
If you invest your tax-free lump sum or place it in a savings account and it grows in value, you may have to pay tax on that growth if it is more than your Personal Savings Allowance (PSA). For the 2023/2024 tax year a basic rate taxpayer can earn up to £1,000 in saving interest tax free.
It’s important to understand that the rate of interest you'll pay on equity release is likely to be higher than the interest you might earn on savings or investments, so it rarely makes financial sense to raise money through equity release in order to save it.
Compare equity release interest rates from leading UK providers.
CGT is charged on the sale or disposal of an asset. Most equity release lenders will only consider a property that is your primary residence. This means that, although your home is counted as an asset, it benefits from full CGT exemption as it's your main residence.
For an idea of how much money you could unlock from your home, use our free and easy-to-use equity release calculator.
Next steps
If you are thinking about releasing equity from your home, you should always start by getting professional financial advice. An equity release adviser will take account of your unique circumstances and explain how equity release could affect your tax position. You should also remember that releasing money from your home could affect any means-tested benefits you're entitled to.
We have teamed up with the UK’s leading equity release broker Age Partnership. Their award-winning specialist advisers can research the market to find the most appropriate equity release schemes for your personal circumstances.
Call 0800 368 8466 for a free and impartial discussion on releasing equity from your home.
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