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Is Equity Release Tax Free?
Is Equity Release Tax-Free?
The simple answer is yes, equity release is tax-free, as you don't need to pay income or capital gains tax when you receive equity release funds.
But why is this the case, and what other tax benefits can be drawn through the use of equity release? At Clifton Private Finance, we have the answers.
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The Tax Structure of Equity Release
Equity release is a financial product that takes the form of a mortgage - a secured loan that is leveraged on your home as collateral.
This is the case not only for lifetime mortgages but other types of equity release too, including drawdown lifetime mortgages and home equity lines of credit (HELOC).
As the equity release in all these forms is not considered income, it is not liable for income tax.
Similarly, as you are not selling the home, there are no profits to be considered for capital gains tax.
Also, one of the aspects of equity release is that it lowers the value of your estate to be passed to your heirs. This means that equity release also has a positive benefit in offsetting inheritance tax.
In short; equity release wins on every front when it comes to UK tax regulations.
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A Deeper Look at Equity Release and Income Tax
As stated above, as equity release is a loan, it doesn’t count as income and thus will have no impact on your income tax.
However, there are situations where income tax can rear its ugly head - when the money gained from equity release is used to generate income.
In this instance, the interest earned will form part of your overall income (which will also include your pension). If this total is over your personal allowance (currently £12,500 in the 2024/25 tax year), then you will have to pay income tax on the amount.
That said, using money gained from equity release as savings is generally a poor idea; this is because the rate of interest that will be paid to you on the money (even before tax) is likely to be lower than the interest rate on the equity release itself, effectively negating any benefit that might be gained. It is rarely beneficial to obtain equity release on your home only to put the capital into a savings account.
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Another situation where equity-released capital can effectively result in additional income tax is where the equity release is used to fund a business venture that, in turn, generates income. In this instance, income tax would be payable on any income that exceeds your personal allowance as before.
Unlike using equity release as savings, however, utilising the funds to grow a business and provide an income in this manner is far more likely to result in a net gain, meaning the income tax paid is often acceptable.
Recent Equity Release Case Studies
Equity Release and Capital Gains Tax (CGT)
In a similar way to how equity release doesn’t count as income for income tax, neither does it count as a capital gain for capital gains tax (CGT).
Additionally, CGT is not liable against the sale of a main residence and, as equity release products such as a lifetime mortgage are specifically for the use of releasing equity against a main home, it would again not be due in these cases.
For the release of equity in a property to result in a CGT liability, it would have to be a secondary property and part, or all, of the property would have to be sold.
Equity Release and Inheritance Tax (IHT)
One benefit of equity release exists in the fact that it lowers the overall value of the estate, potentially bringing the estate to a level below the IHT nil-rate band (currently £325,000, or £500,000 if the beneficiaries are your children, step-children, or grand-children).
As IHT is a 40% tax, releasing equity on a property can effectively lower the total liability by 40% of the size of the equity release. For example, on a £1 million value property, releasing £300,000 of equity in advance of death would lower the estate value by £300,000 (plus interest) resulting in a saving of at least £120,000 in inheritance tax.
This is a simplified way of looking at the inheritance tax advantages of equity release for illustration purposes only, but clearly shows the potential benefits of equity release for IHT offsetting.
It should be noted that the IHT ‘7 year rule’ will apply, by which any gifts given within the prior seven years of death are liable for IHT on a sliding scale.
At Clifton Private Finance, our expert inheritance tax planning team are able to advise on the use of equity release to offset inheritance tax in this manner - call today to speak to a specialist advisor.
And for a detailed look into how equity release can be used over the long term to counter the implications of inheritance tax, read this case study.
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Tax Implications with HELOC or Drawdown Lifetime Mortgages
Both HELOC (home equity lines of credit) and drawdown equity release mortgages offer similar equity release to a standard lifetime mortgage but with a more flexible payment structure that allows you to take only the money you need, when you need it.
Because these products can provide funding in a way that’s similar to an income, many people ask if the tax implications for them are different.
Home Equity Release and Your Pension
Your equity release product will not affect your pension; however, having savings available to you (which equity release will provide, at least in the immediate term) will have an impact on any pension credit.
If you are releasing equity for immediate use, such as a holiday, to provide support to a family member, or to consolidate other debts, then this drop in pension credit will be temporary, lasting only until the money has been used.
Equity Release with Clifton Private Finance
Our equity release team at Clifton Private Finance are available to answer any questions you have regarding equity release.
Our specialist partners can help you get the best equity release rates, maximising the capital you can raise while minimising the impact it will have on your estate.
For more information and to speak to a specialist advisor, call CPF today.
