As you get older, your financial needs and goals might change. If you own your home, equity release could offer a way to unlock some of the value you’ve built up over the years.
Many borrowers question whether the money raised is taxed. It’s a fair question as the average lump sum taken is around £80,000, according to the Equity Release Council.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
What is Equity Release?
Equity release is a way for homeowners aged 55 and over to access some of the money they have built up in their property over the years.
With equity release, you receive a cash sum (either as a lump sum or in instalments) from a lender. The amount you can access depends on your age, the value of your property and how much equity you own.
The key difference from a traditional mortgage is that with most equity release plans, you don’t have to make any monthly repayments.
The interest on the loan rolls up (accrues) over time.
The loan, along with the accumulated interest, is eventually repaid when you pass away or move into long-term care.
This usually happens when your home is sold.
There are two styles of equity release plan.
Lifetime Mortgages
This is the most common type of equity release. You borrow money against your home with a lifetime mortgage and retain full ownership.
This is the type we will be focusing on below.
Home Reversion Plans
With a home reversion option, you sell a portion or all of your home to a reversion company. In exchange, you receive a cash sum or regular income. You have the right to live in your home rent-free for the rest of your life.
How Does a Lifetime Mortgage Work?
With a lifetime mortgage, you borrow a sum of money against the value of your home. You receive this money tax-free, either as a lump sum or in regular instalments.
Unlike a traditional mortgage, you don’t have to make monthly repayments. The interest charged is added to the amount borrowed and compounds over time.
You retain full ownership of your home and can continue living there for the rest of your life or until you move into long-term care.
The loan, plus the accumulated interest, is repaid from the sale of your home when you pass away or permanently move into long-term care. Any remaining equity after the loan is repaid will be included in your estate.
You will find more useful information in our article: How does equity release work when you die
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Is Equity Release Taxable?
The short answer is no.
The money you receive from an equity release plan is tax-free.
This is because the money generated is a loan secured against your property and not income.
Income tax is applied to money you earn, such as from employment or certain investments, and therefore doesn’t apply to equity release proceeds.
Similarly, capital gains tax is charged when you sell an asset for a profit (like shares).
With equity release, you’re taking out a loan rather than selling an asset, so income tax or capital gains tax doesn’t come into play.
Do you pay tax if you take a monthly drawdown income?
No, you do not pay tax on the monthly drawdown income itself from an equity release plan.
The money you receive is still considered a loan advance, not taxable income. It does not make you liable for personal income tax and there’s no need to declare it as income (as it isn’t).
Potential Tax Implications
While the money you receive directly from equity release is tax-free, it’s important to understand how it might indirectly affect your tax situation in a few key ways:
Income Tax
Equity release payments themselves aren’t taxable.
However, if you invest the money and it generates income (such as interest or dividends), that additional income might be subject to income tax if it pushes you above certain thresholds.
This is generally a concern for those who already have income from other sources.
Inheritance Tax (IHT)
Releasing equity usually reduces the value of your estate, which could potentially impact your Inheritance Tax (IHT) liability.
If you pass away with a smaller estate, you might fall below the IHT threshold or pay a reduced rate. Careful planning with both an equity release adviser and a tax specialist can help you assess the potential impact on your IHT situation and develop strategies accordingly.
Seek appropriate advice
It goes without saying that you should get some decent advice before making any changes to your finances.
While a lifetime mortgage might sound quite straightforward, if you have already implemented some IHT planning, or receive benefits, then these could be affected.
Giving the money away
Gifting away money derived from equity release can be a wonderful way to help loved ones financially.
It is the way that many parents and grandparents help their children move house.
The IHT tax laws concerning gifts can be complicated. It’s always a good idea to run it by a tax expert before handing over any money.
If you do give away some of the money so that your children can use it as a mortgage deposit it must be declared to the mortgage lender.
Your broker can handle all of this for you.
Your financial gift will be classed as a ‘gifted deposit‘ by lenders.
They are generally pleased that your children have a larger deposit, but will require some additional formalities before agreeing to the new mortgage.
You will find more useful information in our article: Can I give my children money from equity release?
How we can help
Respect Mortgages is not permitted to give you personal financial advice.
What we can do is match you with some of the best advisers and brokers in the business, so you get expert independent advice and a personalised service.
For the lifetime mortgage you must first receive advice from a qualified equity release adviser. We can introduce you to one of the largest specialist advisers in the UK, with trained experts available wherever you are located.
If your children also need mortgage advice as you are providing a gifted deposit, then we can help again. First-time buyers or home movers will need to declare their gifted deposit to the lender. Let us find you an award winning independent mortgage broker to help handle the research and paperwork, with expert and friendly advice of course.
For a no-obligation initial call please call us on 0330 030 5050.
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