Is equity release tax free?

Updated 3rd May 2022

Yes, the money you unlock from your home with equity release is tax free and you can use it how you wish. However although you don’t pay tax on the equity you release, there are other considerations to be aware of, such as the amount of interest you pay.

Therefore it’s important to understand how equity release works and get advice from experts before deciding if its right for you.

Why is equity release tax free?

When you release equity from your home, the cash sum you receive is completely tax free. Depending on what you choose to do with the money however may have tax implications.

For example, if you were to place the money in savings, investments or an annuity, you may be liable for tax. Therefore if you don’t need the full amount of equity in one go, it would be worth considering a drawdown lifetime mortgage.

What is a drawdown lifetime mortgage

The drawdown facility available with some equity release schemes or lifetime mortgages as they are also known, lets you release your tax free cash as and when you need it. So you only draw down the money you require; the rest is held in reserve for future borrowing.

This may prevent any future tax implications you may have faced by keeping the money in a savings account. Also, you won’t incur interest on the money held in reserve, only the cash you have received.

Do you pay interest on equity release?

Although the equity you release will be tax free, interest will need to be paid. The difference with a lifetime mortgage is that the loan plus the interest is only paid once you have died or moved into permanent care.

As a result, equity release interest rates do tend to be higher than the interest charged on regular mortgages.

How does equity release affect inheritance tax?

Equity release can help reduce your liability for inheritance tax as essentially you are reducing the value of your estate. Currently inheritance tax is payable on estates valued above IHT threshold of £325,000 for individuals or £650,000 for couples (not taking into account the nil rate band).

Changes to pension rules also means that individuals can now pass pension assets outside of the estate to avoid IHT. As a result, households have looked to equity release as way of raising retirement income, preferring to leave their pension intact to pass on to beneficiaries.

Equity release and estate planning can be complicated though so it’s important to seek advice from professionals who can review your personal situation and provide the best advice.

How does equity release affect benefits?

When you unlock the cash that is tied up in your home, the money you release forms part of your capital or income. Therefore any benefits you receive that are based on your current financial situation may be affected.

So although you will benefit for the tax free money released from your home, you may lose some or all of the benefits you are entitled to, which may leave you worse off.

Basically means tested benefits such as pension credits, council tax reduction or universal credit will be impacted but your adviser will discuss this with you so you can decide on the best course of action.

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We know it's a big decision!

That's why we have teamed up with Age Partnership one of the UK's leading equity release specialists.

Find out how much cash you could release by clicking on the button below.

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