Do You Pay Tax on Equity Release? Quick Answer
Our preferred equity release adviser is Age Partnership. For free and impartial money advice you can visit MoneyHelper.
Our preferred equity release adviser is Age Partnership. For free and impartial money advice you can visit MoneyHelper.
Are you curious about equity release and whether it’s tax-free in the UK? Well, the short answer is yes, you don’t have to pay any taxes, including income tax or Capital Gains Tax, on equity release.
To expand on this topic, we’ve prepared a helpful guide. Each month, our website supports over 7,000 people looking for guidance on equity release. In this article, we’ll explore:
- The meaning of equity release.
- Tips for securing a realistic quote.
- Advantages of releasing equity.
- The tax details linked with equity release.
- The impact of equity release on your inheritance tax.
We understand that the process of equity release can seem puzzling, which is why we’re here to help make it easier for you. With our advice, you’ll feel more at ease and ready to take the next step.
Let’s get started.
What are the benefits of releasing equity?
There are a number of benefits in choosing to release equity:
- Receive a lump sum or you might even receive recurring payments
- You cannot be forced out of your home
- Don’t pay anything back until your home is sold
- Easy way to make you financially comfortable in later life
- You are protected by the Equity Release Council
- You can choose to make interest payments or not
Do I pay income tax on equity release?
You do not need to pay income tax on the money you receive from equity release schemes. Income tax is only subject to payments you receive from an employer or money received through self-employment as a sole trader.
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Do you pay tax on releasing equity?
You do not need to pay any other type of tax on the lump sum amount or regular payments received from equity release schemes. If you sell a house for more than its purchasing price, you might owe Capital Gains Tax on the difference. However, equity release is not selling a house and is a type of loan. Therefore no Capital Gains Tax is owed.
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More than 2 million people have used Age Partnership to release equity since 2004.
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Why is equity release not taxed?
The reason that you do not have to pay any type of tax on equity release is that equity release is formally a type of loan. The loan is secured against your property and the money has to be repaid. An equity release plan does not feel like a loan because you don’t make monthly repayments to pay it back – but that doesn’t mean it’s not a loan!
How much tax do you pay on equity release?
There is absolutely no income tax, Capital Gains Tax or any other type of tax owed when you receive money when you use equity release schemes. One of the benefits of using equity release is that all the money received is tax-free.
How can equity release be used to reduce inheritance tax?
It is possible for a lifetime mortgage to reduce inheritance tax (IHT) paid from your estate, but it should not be considered for this reason alone. In fact, doing it solely to reduce IHT could make your beneficiaries worse off.
Inheritance tax is a type of tax applied to someone’s estate and any financial gifts in the seven years prior to their death. It is applied to all estates unless the estate is to be solely handed over to the person’s spouse or civil partner.
If you are not passing your estate to a spouse or civil partner, possibly because they have already died, then inheritance tax may apply. Inheritance tax is only due on estates valued above £325,000 or £650,000 if you already received an estate from a spouse. Inheritance tax is charged at 40% above this amount only. However, the threshold can be increased by £150,000 per person if a property is left to a child or grandchild.
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If you release equity and give some or all of the money to a family member, and then live for at least another seven years, then this money will not be subject to inheritance tax and could save your beneficiaries money if you have an estate that exceeds the inheritance tax threshold. Of course, there is an element of risk with this type of inheritance tax planning and you should discuss it further with an equity release adviser.
Do you pay tax on equity release UK? (Quick recap)
To recap, you do not need to pay any type of tax on equity release in the UK, including income tax or Capital Gains Tax (CGT). This is because releasing equity is taking out a secured loan and the cash lump sum must be repaid at a later date. It’s not the same as receiving an income or selling your property.
Things to consider
Equity release will involve a home reversion or a lifetime mortgage, which is secured against your property and will reduce the value of your estate and impact funding long-term care. Our equity release partner, Age Partnership provides a personalised illustration to explain the full details. The money you release, plus the accrued interest is then repaid when you die or move into long-term care. Advice is required before proceeding with equity release and any existing mortgage must be repaid. Age Partnership provide initial advice for free and without obligation. Only if your case completes would Age Partnership’s advice fee of £1,895 be payable. Other lender and solicitor fees may apply.