Do You Have to Pay Tax on Equity Release?

Many potential consumers of equity release get in touch with us and ask ‘do you have to pay tax on equity release?’ We want to tackle this question today, as well as answer some more general questions you may have about equity release.

What is Equity Release?

There are two types of equity release, lifetime mortgages and home reversion schemes, and they both offer homeowners the opportunity to release funds from their property without having to move home.

How Does Equity Release Work?

You simply have to make an application to an equity release lender in your area, and state the plan that you would like to apply for. The lender then performs eligibility checks, potentially along with credit checks and affordability checks.

If you fit the provider’s requirements, a valuation of your property will take place, and if the lender is still happy with your application, they will make you an offer for a lifetime mortgage or a home reversion plan.

When you are enrolled onto an equity release scheme, there is no expectation that you will begin to repay your loan unless you have specifically request a plan that facilitates this, such as a voluntary repayment plan or an interest-only plan.

Instead, the money is paid back when your property is sold, which happens either when you enter a care home on a long-term basis, or you pass away.

At this point, the equity release provider is informed of the new situation, and they prepare to sell your home to make up for the money they have lent to you.

Please call our 24-Hour Helpline: 0330 058 1579

Do You Have to Pay Tax on Equity Release – The Short Answer

The short answer is no, you do not have to pay tax on equity release. However, we know that many of our clients will be dissatisfied with this simple response, so we are going to delve into the details of tax-free equity release funds.

Do You Have to Pay Tax on Equity Release – No, and Here’s Why

Equity release loans are viewed in the same way as traditional mortgages when it comes to tax, so you do not have to pay tax on an equity release mortgage. You only have to pay tax on that which is considered income, and a loan is not an income.

This applies to every type of tax, including income tax, capital gains tax (CGT), and inheritance tax. None of these will be applied to your equity release funds.

Are Equity Release Funds Liable For Income Tax?

The money you release from your home through an equity release scheme is not liable for income tax, as it is not considered a form of income, but rather a loan.

This may be confusing as we refer to equity release as a way of boosting your retirement income, but in legal terms, your loan is not included as part of your income.

It is possible that your money ends up being subject to income tax if you are also earning income through things like savings and investments, as your income will increase significantly.

However, the equity funds themselves will not be taxed, but rather the additional income you are earning.

Please call our 24-Hour Helpline: 0330 058 1579

Are Equity Release Funds Liable For Capital Gains Tax?

Again, equity release funds are not taxed in any way, so they are not liable for capital gains tax.

This may be surprising as capital gains tax is something that is applied to assets that have risen in value, and your property is likely to rise in value at the moment given that this is the general trend in the UK.

However, the equity release plan itself does not impact the value of your home, so the money you release from your home is not counted as a capital gain.

What’s more, any profit that materialises when the home is sold will not be yours anyway, as the equity release lender is in charge of selling your home when you pass away.

Even if you purchase a second home with equity release, through a buy-to-let plan or a second home arrangement, the funds will not be liable for capital gains tax, as they are protected by Private Residence Relief.

Please call our 24-Hour Helpline: 0330 058 1579

Are Equity Release Funds Liable For Inheritance Tax?

Finally, equity release funds are not liable for inheritance tax. Sometimes, homeowners seek advice on inheritance tax and learn that equity release money is exempt from this, so they take out equity specifically for that reason.

They want to ensure their family can benefit from their money as much as possible, which is facilitated by not having to pay inheritance tax on the estate (1).

Even if a homeowner decides to gift money to their loved ones while they are still alive, this money will be exempt from inheritance tax after 7 years, which is one reason for equity release consumers spending their loan on their loved ones while they still can.

Frequently Asked Questions About Equity Release

This article is all about tax, but we still don’t want to leave you in the dark about other areas of equity release, so please read the following frequently asked questions to get a better understanding of what it is like to release equity.

Please call our 24-Hour Helpline: 0330 058 1579

What are Equity Release Products?

When we refer to equity release products, we are referring to the schemes you can be a part of when you decide to take equity. The two main schemes in the UK are home reversions and lifetime mortgages. We also have retirement mortgages and retirement interest-only mortgages.

There are 8 different types of lifetime mortgage alone, so when we refer to two equity release products, we are simply pointing out the two umbrella terms when it comes to equity release plans.

Can I Release Equity Anywhere in the UK?

You can release equity from properties all over the UK, provided that both you and your property are eligible for equity release.

However, you are likely to encounter more challenges in areas where there is a lower availability of lenders, or where the property types tend to be rejected by lenders e.g. in the Scottish Highlands.

It is also important to mention that Equity Release Warehouse is currently working in towns and cities all across the UK, so we are very likely to be able to help you with equity release in your local area. Contact us to find out if your area is included.

Can I Release Equity From Any Property?

No, you cannot release equity from any property. You must own a house or flat that is worth at least £70,000 to take out equity with any equity release provider. Then, certain providers will request other things, such as the house being in the right location or being a certain age.

If you want to release equity from a retirement apartment or house, it is possible, but it will be harder to find a lender who accepts you, so you would need to ask around for quotes.

How Much Interest Will I Be Paying?

The amount of interest you will pay depends on what you have agreed with the mortgage provider (lenders rates differ), and what your chosen plan demands. The way interest works with equity release is that it accrues over time and is classed as part of your debt at the end of the scheme.

Remember that it does not have to be repaid, so don’t worry about the fact that the interest adds up over time.

However, if you do want to contribute to this cost, opt for an interest-only scheme and repay some or all of the interest each month.

Please call our 24-Hour Helpline: 0330 058 1579

Do I Have to Tell My Family That I am Releasing Equity?

No, there is no obligation to inform your family of your plans to release equity. However, unless you do not speak to your family, we recommend telling them the news as they can support you throughout the equity release process by offering advice and helping out with administration.

Some people have to tell their family as they are taking out equity with the specific purpose of helping their family purchase a house, pay their rent, or pay for education.

Even if this is not the case for you, releasing equity is bound to affect the inheritance you pass on to your family, so it’s good for them to know this now rather than later.

Can I Release Equity Without My Partner?

Most people choose to release equity as a couple, as you would tend to do with a traditional mortgage. However, if your partner is not eligible for equity release and you are, it is certainly possible to take out a loan on your own.

This does mean that your partner would have to vacate the home when you pass away or go into long-term care, as this would mark the end of the equity release scheme.

To avoid this, you could take out a joint loan later down the line when you are both eligible (if their ineligibility is linked to something flexible, like their current age).

Please call our 24-Hour Helpline: 0330 058 1579

How Long Does it Take to Get an Equity Release Loan?

We expect that it will take 6-8 weeks to get an equity release loan, which includes making an application, having a valuation, and dealing with legal issues along the way (2).

There are sometimes delays in the process, as there are with getting any mortgage, so do not be alarmed if it takes longer than 8 weeks.

Is there a Specific Plan I Should Select?

There is no plan that is perfect for everyone, so you will have to do your research to find the best plan for you. Check out our plans page where we list all the possible lifetime mortgages, as well as home reversions and retirement mortgages.

We encourage you to read about each plan in detail and consider whether you would be willing to adhere to its policies. For example, with a second home plan, would you be prepared to spend at least six months of the year in this home?

With a drawdown plan, would you be prepared to set up a cash reserve that you could withdraw money from?

Should I Get a Lump Sum or Monthly Payments?

This decision is entirely up to you; there is no right answer. Monthly payments or regular payments can be better if you need to top up your income regularly to pay your bills or pay for things like food and travel.

Lump sum arrangements may be better if you have something in mind that you would like to spend your loan on, and it requires a large sum of money.

Please call our 24-Hour Helpline: 0330 058 1579

Can I Release Equity If I am Under 55 Years Old?

Unfortunately, you cannot take out equity until you turn 55 years old (or 65 for a home reversion). However, you can prepare for equity release by speaking to an equity release adviser and a financial adviser, researching plenty, and deciding which plan you want to opt for.

You could even prepare for equity release by pursuing one of the alternatives to equity release before joining the scheme.

For instance, you could first downsize, therefore generating more income, and then release equity on this second property, or perhaps re-mortgage in order to release equity.

Can I Rent Out My Home?

No, you will not be permitted to rent out your home if you have released equity funds from it. You would have to commit to not renting it out, or you would have to withdraw from the scheme and potentially pay a fee for doing so.

What you could do is use your equity loan to purchase a new property, and rent out this second property. You could do this by selecting a buy-to-let scheme, which is designed for this specific purpose, and offers fixed interest rates.

Please call our 24-Hour Helpline: 0330 058 1579

Can I Back Out of an Equity Release Scheme?

Yes, you are usually allowed to back out, but it is heavily discouraged. You would have to pay a penalty of up to 25% of the money you borrowed in most cases.

However, you could make changes to your experience of equity release, such as moving house or requesting a different type of plan.

Find Out More By Speaking to an Adviser

We hope you now understand the link between tax and equity release, and the fact that you will never have to pay tax on your equity release loan.

If you have further questions, please reach out to us by sending us your contact details here and we will be in touch as soon as we can. You could also call us on 0330 058 1579.

Though you do not have to pay tax on equity release, there are other expenses.

You will have to pay interest, which can add up to a significant amount over time, and you will have to pay for various fees during the application process such as legal fees and financial advice fees.

You may want to use any savings you have to fund this, but if that’s not possible, let us know and we will suggest other options to you, such as using your equity loan to pay for these expenses.

Whatever your concerns, we are here to help, so don’t delay calling us for a free consultation. We would love to help.

Please call our 24-Hour Helpline: 0330 058 1579

References

[1] Do you pay tax on equity release? https://www.telegraph.co.uk/financial-services/retirement-solutions/equity-release-service/do-you-pay-tax-on-equity-release/#:~:text=Equity%20release%20allows%20asset%2Drich,interest%20on%20the%20released%20equity.

[2] How Long Does Equity Release Take? Quick Answer https://moneynerd.co.uk/how-long-equity-release-take/