Tax and equity release explained | moneyfacts.co.uk

Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 15/06/2020

At a glance

  • Income from equity release is not liable for tax
  • Equity release reduces the value of your estate
  • There is no Inheritance Income Tax to pay on estates worth less than £325,000

Do you pay tax on equity release?

Any income you receive from equity release (also known as a lifetime mortgage) is not liable for tax, but it will accrue interest if you place it in a savings account. If you have borrowed a large sum and plan to hold this in a savings account you need to check if the interest earned will exceed your Personal Savings Allowance (PSA). If you exceed this allowance you will need to pay tax on the excess at your usual rate of income tax. If you reach your PSA limit, you can protect your remaining savings from tax up to the maximum ISA allowance permitted. Any interest earned after this will be liable for tax.
The other factor that reduces the value of the money released through a lifetime mortgage is the difference in the interest cost of the mortgage compared to the interest earned in a savings account. If you take your equity release amount in a single lump sum, you will be accruing interest costs on this at a higher rate than you can earn in a savings account. A drawdown arrangement can help you to avoid this drain on the value of your equity release pot.

The personal savings allowance (PSA)

Read our PSA guide and find out how much you can earn in interest before paying tax on your savings.

The ISA allowance/subscription limit

You can save into an ISA and not pay tax on your interest. Find out this tax year’s ISA subscription.

What is equity release drawdown?

Equity release drawdown is when you get agreement from a lender to borrow a total amount but only actually borrow (or draw-down) selected amounts as and when you need them. You only pay interest on the amounts drawdown. For example, you could be approved for equity release at a total of £75,000, choose to release £20,000 immediately and leave £55,000 to drawdown in the future. You would only start to accrue interest on the £20,000.
This offers you flexibility to access funds when needed, for example if your care needs change or to help a family member, while reducing the cost of your interest. However, you may find the interest rate changes or is different between your initial borrowing and future drawdown amounts.

You must take advice to get equity release

If you want to find out more about releasing equity from your property, then you will need to speak with an adviser. Our preferred equity release adviser will be able to provide you with a no obligation recommendation based on your circumstances and can do this remotely.

How does equity release affect inheritance tax (IHT)?

When you take out equity release it reduces the value of the estate you leave behind when you die. There is no tax to pay if your estate is below £325,000 or if you leave your estate to your civil partner, spouse or to a charity. If your estate is worth more than £325,000 you may be liable for 40% IHT on the value greater than this.
More of us than ever before will potentially need to pay IHT, mainly due to rising house prices. The average house price is now £240,195 (Halifax May 2020) and HMRC has reported that the value of estates continues to increase with 80% of this coming from residential property.
There are exemptions and allowances to reduce the impact of inheritance tax, including due to the passing of property between spouses or civil partners– more information is available on the government website.

How have pension freedoms affected equity release?

Changes in pension rules mean that you can now leave your pension pot as part of your estate and there is no IHT to pay on these monies. This means some people would prefer to use equity release first as a tax-free sum before depleting their pension pot. This also means your pension pot remains invested for longer with the opportunity for future growth.

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Disclaimer

Equity released from your home will be secured against it.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

At a glance

  • Income from equity release is not liable for tax
  • Equity release reduces the value of your estate
  • There is no Inheritance Income Tax to pay on estates worth less than £325,000

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