When thinking of unlocking cash from your property, it is fair to wonder if you must pay tax on equity release.

Our expert researchers have combed various reputable sources to give you the necessary answers.

We have put together everything in one place for your convenience.

Read here to learn what the tax implications are.

Is Equity Release Taxable in the United Kingdom?

No, you do not have to pay Income Tax¹ or Capital Gains Tax (CGT)² on money you receive through equity release.

Equity release in the United Kingdom is not typically subject to taxation.

As homeowners, we can unlock the value tied up in our property without incurring income tax or capital gains tax liabilities.

This is primarily because the money received is considered a return of capital, rather than a conventional income source.

However, the money received from equity release can potentially affect eligibility for means-tested benefits.

Additionally, if the money released is invested and generates an income, the income may be subject to tax.

It's crucial to understand the ramifications on various financial aspects to make well-informed decisions.

Why Is Equity Release Tax-Free?

Since equity release is a loan similar to a mortgage, it is not classified as income and, therefore, exempt from tax.

Do the Same Rules Apply to Income Tax and Capital Gains Tax?

Although the rules are slightly different, you are not liable for Income Tax or Capital Gains Tax.

Rules for Income Tax

With Income Tax, you are only taxed on the income you receive, not on money you receive through loans, such as equity release.

Although funds are exempt from Income Tax, any interest you earn if you decide to invest this money may be taxed.

Rules for Capital Gains Tax (CGT)

CGT applies to profit made on the sale of high-value items. 

However, even though it is possible to make a large profit on your property, you are exempt from CGT if your home is your primary residence. 

Unlocking property value would not help you to make a profit because it is a loan and, therefore, not subject to CGT.

Learn More: Equity Release Rules

Can Equity Release Be Used to Reduce Inheritance Tax (IHT)?

Yes, releasing equity can be used to reduce Inheritance Tax (IHT)³ because it can help reduce your estate's value.

In Which Instances Would IHT Not Be Paid?

Your beneficiaries would be exempt from IHT when:

• The value of your estate is less than  £325,000.⁴
• You choose to leave any amount over the £325,000 threshold to a spouse, civil partner, charity, or a non-profit community sports club. 

When Should IHT Be Paid?

Your beneficiaries would be liable to pay IHT if their inheritance is above the threshold of £325,000.

They would only be taxed on the portion of the inheritance above the threshold at the standard tax rate of 40%.⁵

Also, if you die within 7 years of gifting your beneficiaries more than £325,000, they would be liable to pay IHT.⁶

IHT Example: No Equity Release

If you, for example, leave an inheritance of £500,000, your beneficiaries would have to pay IHT of 40% on the £175,000, above the threshold of £325,000.

Therefore

40% of  £175,000 is  £70,000 that would be deducted from the total inheritance, which means that your heirs will receive £430,000 after the deduction of IHT.

*Please note that these figures are fictional examples for illustrative purposes only.

IHT Example: With Equity Release

IHT would only be charged if you gifted released equity over £325,000 to your heirs within 7 years of your death.

THe IHT will then be calculated according to a reducing scale known as taper relief.⁷

Currently, tapered relief works as follows:

• Less than 3 years since the payment = 40%
• 3 – 4 years since the payment = 32%
• 4 – 5 years since the payment = 24%
• 5 – 6 years since the payment = 16%
• 6 – 7 years since the payment = 8%
• 7 or more years since the payment = 0%

Please note that these rates are subject to change and may differ in some cases.

Common Questions

Conclusion

The money you receive by releasing equity is tax-free and could even reduce inheritance tax.

It is always recommended to seek advice from a specialist financial advisor to determine the tax implications of your financial decisions.

At least now you know that the answer to the question: ‘Do you pay tax on your equity release?’ is generally ‘no’.