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Free equity release guide
Understanding the tax implications of equity release
Equity release is a way for homeowners to release some of the tax-free funds from the value of their home. It is available to UK homeowners aged 55 or over with a property worth at least £70,000.
When considering if equity release could be right for you, understanding the tax implications is essential. On this page, we’ll cover everything you need to know about the tax aspects of equity release to help you make an informed decision.
ⓘ Key don't offer tax advice, this should be obtained from a suitably qualified tax specialist.
Is equity release taxable?
The funds you receive from equity release are generally not subject to income tax. This makes it a tax-efficient way to access some of the equity in your home.
Unlike wages or pensions, the money you release is not treated as taxable income. This means it won’t increase your tax bill.
However, how you use the funds could have other financial implications. For example, it might affect your eligibility for means-tested benefits.
How does equity release affect inheritance tax?
Inheritance tax is payable on someone’s estate when they pass away. The estate includes any property, vehicles, funds and other material assets such as jewellery or antiques.
If you choose equity release, it’s important to bear in mind that it will have an impact on your estate when you pass away. It will reduce the value of your estate and how much your beneficiaries can inherit. And depending on the value of your estate, it could also affect the amount of inheritance tax your estate will pay HMRC.
ⓘ Did you know...
The standard tax-free allowance for inheritance tax in the UK is currently £325,000. However, if your estate is left to your children, stepchildren or grandchildren, an additional allowance known as the Residence Nil Rate Band (RNRB) increases this threshold to £500,000. If the value of your estate exceeds your allowance, the excess will typically be taxed at a rate of 40%.
Yes, equity release can reduce the amount of inheritance tax owed. Since equity release is treated as a liability, it lowers the overall value of your estate, which in turn can reduce the inheritance tax bill. However, keep in mind that while equity release reduces your estate’s value, it also reduces the total inheritance your beneficiaries will receive.
Before making any decisions, it’s important to consult with an inheritance tax adviser to understand how equity release could fit into your wider estate planning strategy.
How gifts impact inheritance tax:
If you decide to gift any of the funds released through equity release, keep in mind that gifts are only exempt from inheritance tax if the amount of the remaining estate value and the amount of the gift is below the £325,000 inheritance tax threshold (plus £175,000 residence nil-rate band RNRB if available). Or if you live for at least seven years after gifting them.
If the gifts exceed the threshold and you pass away within seven years, inheritance tax will apply on a sliding scale called 'taper relief'. The rates are:
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32% for gifts made 3-4 years before death
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8% for gifts made 6-7 years before death
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40% for gifts made within three years of death
Understanding how equity release affects taxes and benefits
When considering equity release, it’s important to understand how it may affect your taxes and means-tested benefits. While equity release itself doesn’t directly impact your income tax, it can influence other financial aspects. Here’s what you need to know:
Capital Gains Tax is applied to the profit made when you sell an asset that has increased in value. However, there is no Capital Gains Tax on the funds you release through equity release.
If you choose to sell your home after releasing equity and it has gained value, you may assume you'd be taxed on the profit. However, your primary residence is usually exempt from Capital Gains Tax in the UK, due to Private Residence Relief.
Equity release funds are not considered as income and, therefore aren't subject to Income Tax. This applies even if you plan to use the funds to supplement your income in later life.
While equity release does not directly affect your council tax, the additional funds you receive may impact your eligibility for council tax reductions.
If you currently receive a reduction or exemption, it’s a good idea to check with your local council to avoid any unexpected changes to your benefits.
Equity release can affect your eligibility for means-tested benefits. For example, receiving funds from equity release may push your savings beyond certain thresholds, which could impact benefits such as Pension Credit or Universal Credit.
If you rely on these benefits, it’s advisable to consult with an adviser to understand how equity release might affect your entitlements and ensure you maintain any essential support.
Benefits and drawbacks of equity release
Our equity release advice relates to Key's range of lifetime mortgages only - loans secured against your home.
Watch our video to find out more about the benefits and drawbacks of equity release.
Video transcript (pdf)
Key is a specialist, award-winning equity release provider for the over 55s. We've helped over a million customers see if equity release was right for them. After we take the time to understand your needs, we'll recommend the most suitable later life option for you.
Our £1,299 advice fee is only payable on completion.
Your other options with Key
Key offers alternatives to equity release such as a retirement interest-only mortgage or retirement repayment mortgage. If another product is more suitable, including home reversion, we'll refer you to a different adviser within Key Group to help. If you go ahead, you'll only be charged the same £1,299 advice fee you'd pay with us, even if their fee is usually higher.
Other options to think about
It's important to know your other options before going ahead with equity release. These include: downsizing, unsecured lending, using existing assets, or support from friends or family.
Page last updated: Tuesday 17 December 2024