Our Guide To Tax Implications Of Equity Release

Equity Tree guide to tax implications of equity release
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As the UK’s population continues to age, equity release is becoming more popular than ever as a way to help people improve their standard of living through retirement. The scheme allows homeowners over the age of 55 to access the wealth locked up in their property.

Using the value of your home as security, equity release enables you to borrow a lump sum or withdraw a steady stream of income without making any repayments. The loan and any interest are generally paid off when you die or move into long-term care.

Although the basic premise of equity release is quite simple, people rightfully tend to have lots of questions about the ins and outs of the process- including the tax implications.

Continue reading to get the fully nitty-gritty details

Do You Pay Tax On Equity Release?

Not directly. The money you receive when you release equity from your home is not taxable, because it is counted as a loan rather than capital.

However, just because equity release itself is tax-free, it doesn’t make your lump sum immune from other forms of tax.

In the end, how much tax you’ll end up paying depends on what you decide to do with your cash once it has been released.

Which Taxes Could Be Affected By Equity Release?

There are just as many ways that your equity release funds could be taxed as there are ways to spend them.

However, there are a few which crop up more than others when considering ways that equity release funds could affect tax:

Inheritance Tax

At the end of your equity release scheme, the total sum owed to the lender will be subtracted from the value of your estate.

If your estate is worth less than £325,000 after you subtract your equity release bill, it doesn’t meet the nil-rate threshold and won’t be taxed.

There is a standard 40% inheritance tax on everything in your estate above this threshold. 

Capital Gains Tax

You don’t need to worry about capital gains tax being levied against your released equity unless you use your home for business.

If so, you will be liable for capital gains tax against the released equity whenever the property is sold.

Basic rate taxpayers are typically liable for 20% of the equity, while taxpayers on the higher band are liable to pay 40%.  There are also certain circumstances under which this can be reduced.

If you’re worried about a capital gains tax bill arising from equity release, it might be a good idea to consult with a tax advisor.

ISAs

You can save up to £20,000 per year with an Individual Savings Account (ISA)  without having to paying tax on any interest earned or capital gained through the account.

There are different kinds of ISA accounts you can hold, and it’s up to you how you decide to spread your allowance out across them.

If you’re planning to withdraw money through equity release, you might consider using some of your ISA allowances to shelter it from tax.

Personal Savings Allowance

If you earn less than £150,000 per year, you’re entitled to a ‘personal savings allowance, which allows you to earn up to £1000 interest per year on your savings before paying any tax. If you’re a higher-rate taxpayer, the amount of tax-free interest you’re entitled to be slightly less, at £500.

Exactly how much you can shelter with your personal savings allowance depends on the interest rate paid by your savings account.

For example, you could shelter up to £100,000 before paying any tax if your savings account paid 1%, but only £50,000 if your account had a 2% interest rate.

Using your personal savings allowance wisely could help you shelter a sizeable chunk of your equity release funds before having to pay any tax on their earnings.

Are There Any Other ‘Hidden Costs’ I Should Know About?

Many people turn to equity release to help improve their financial situation, without realising that in certain cases, it may have an effect on the income you already have.

Although equity release is not taxed as capital, it may still be considered as a form of income.

If you currently receive any means-tested benefits, assistance or discounts from the government, you should check to find out how these could be affected by equity release.

The main means-tested benefits which could be affected by equity release include:

  • State Benefits
  • Pension Credits
  • Jobseekers Allowance
  • Council Tax Reductions
  • Employment and Support Allowance
  • Tax Credits 
  • Home Improvement Grants (Northern Ireland)

How Can Equity Tree Help?

Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.

They have already helped thousands of people release equity already, 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 equity release companies, click on the below and answer the questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting Equity Tree.
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