Equity Release Tax: Here's How to Save Tax in 2025
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- The tax implications of equity release in the UK are generally minimal as it is not considered taxable income, however, it could potentially increase your inheritance tax liability.
- Equity release is not classified as taxable income in the UK, meaning you won’t have to pay income tax on the money you release.
- Equity release does not directly affect your income tax in the UK, but depending on how the funds are used it can potentially influence other taxes you may owe.
- Equity release could potentially increase your inheritance tax in the UK, if your estate's value crosses the inheritance tax threshold after the equity release amount is added.
- No specific tax exemptions exist solely for equity release in the UK, but it's generally not considered taxable income, although other taxes could potentially apply based on how the released funds are utilized.
If you are considering joining the thousands of homeowners in the UK who have released the cash from their homes, then you are probably wondering about the tax implications of equity release.
It can be a massive, costly mistake if not done properly. Luckily, we are here to be your guide.
In This Article, You Will Discover:
At SovereignBoss, we are proud to be one of the leading information portals for retirees.
We have spent hours researching all the implications of releasing the money from your home.
Here is what we found.
What Is Equity Release?
Through equity release, individuals can unlock the equity tied up in their homes, receiving cash that can be used for various purposes, such as enhancing retirement income or financing home improvements.
This dual benefit of liquidity and housing stability makes equity release mortgages a practical choice for homeowners who wish to stay put while tapping into their home's value.
Is Equity Release Income Taxed?
No, it is not income taxed. The money you receive from the loan is completely tax-free.
However, if you do not spend the cash straight away and keep it in many different savings accounts, it may be taxable, depending on the circumstances.
Why is Equity Release Not Taxed?
Equity release is not taxed because the money is seen as a loan instead of a salary.
People usually speak about two main types of taxes when considering plans, income and capital gains tax.
However, neither will be applied to your loan.
Income Tax
Since income tax is charged when you earn money, there are no charges on your loan.
You can add a drawdown facility to your loan, which allows you to withdraw funds from your home in small increments as needed.
The reserve account contains money you do not need right now and is non-interest bearing.
It is similar to a savings account in some respects.
You may withdraw money from it at any time, although the minimum amount you can typically withdraw is £2,000 at a time.
This set-up is ideal for when you are not planning to spend all the money in the short term, but plan on using it in the future.
Although the money is tax-free, the interest earned on it may be taxed if you put the money into a savings account.
Capital Gains Tax (CGT)
The capital gains tax, or CGT, is a levy that is frequently associated with property holdings since they are often high-value assets.
When you sell an asset and realise a profit from the sale, you usually pay CGT.
We have seen property values rise substantially in recent years, and as a result, you may earn reasonable profits when compared to the amount you originally invested.
Luckily, 'Private Residence Relief'1 provides a full CGT exemption for your primary residence.
Therefore, this is only relevant to a second home.
What is Inheritance Tax?
Inheritance Tax (IHT) is an amount charged on the property of someone who died.2
Luckily, some people do not have to pay this due to the threshold of £325,000.
This means that if your estate or property is valued at less than that amount, you will not need to pay any IHT on it.
How Does Equity Release Affect Inheritance Tax (IHT)?
When it comes to equity release and inheritance tax, it can affect the IHT by drastically reducing the value of your estate, and as a result, if your estate value is less than £325,000, there will be nothing to pay.3
However, if your final inheritance is worth more than £325,000, you may be responsible for 40% IHT on the amounts exceeding this.
Note that if you leave your inheritance to your children, stepchildren, or even grandchildren, the IHT threshold can be increased to £475,000.
This process is known as the Residence Nil Rate Band,4 established in April 2017.
The good news is that any unused amount in the threshold can be added to the other person's threshold for married couples or partnerships.
So, it's possible to create a max limit of £950,000, for example, by adding the basic IHT threshold of £325,000 and the Residence Nil Rate Band threshold of £150,000 for each spouse or partner.
This combined amount would be exempt from Inheritance Tax.
IHT Example: Without Equity Release
In a scenario where your property value is £500,000, and your investments, savings, and assets add up to £200,000.
The total value of your estate is £700,000, which includes your home. This scenario also accounts for no active mortgages.
IHT on An Estate Worth £700,000
| Threshold | Total | |
|---|---|---|
| £325,000 | £375,000 | |
| Inheritance Tax (IHT) | 40% | |
| Total IHT Payable | £150,000 |
These figures are for indicative purposes only.
How Can Equity Release Reduce Your Inheritance Tax Liability?
Using the same example mentioned above, we will work out how equity release can reduce your inheritance tax liability.
If your lifetime mortgage is £267,000*, and you owed £325,000 four years ago at an interest rate of 4%.
That amount will be subtracted from your property value. So, you will only have to pay £30,000 IHT, instead of £150,000. How did that work?
* These figures are for indicative purposes only.
IHT Example: With Equity Release
Estate (£700,000) - £300,000 Equity Release = £400,000
Less the primary threshold £325,000 leaving you with £75,000.
IHT & Equity Release on An Estate Worth £700,000
| Threshold | Equity | Total | |
|---|---|---|---|
| £325,000 | £300,000 | £325,000 | |
| Inheritance Tax (IHT) | 40% | ||
| Total IHT Payable | £30,000 | ||
| Total Amount Saved | £120,000 |
These figures are for indicative purposes only.
Gifting as an Early Inheritance and Inheritance Tax Implications
Generally, if you are using equity release to give a cash gift to a family member, keep in mind the restrictions and exclusions that apply.
If you give gifts of more than £325,000 in the seven years before your death, these extra amounts will be taxed as an inheritance.
There are other ways to alleviate the burden of inheritance tax, such as transferring property between spouses or civil partners.
Well, it works according to a sliding scale or taper relief.
Early Inheritance Gifts and IHT
| Years Between Gift & Death | Tax Payable |
|---|---|
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
The Booming Market and Why It is a Good Thing
Due to the significant benefits of releasing tax-free cash from your home, the market is growing as people realise the opportunities!
According to the ERC yearly reports, £3.92bln was released in 20204 and a record £4.8bln in 2021.5
Equity release can certainly offer many benefits, but one must not overlook the possible drawbacks.
These drawbacks, such as reduced inheritance for your loved ones, impact on means-tested benefits and hefty early repayment fees, should always be discussed with your adviser.
Common Questions
Is Equity Release Taxable Income in the UK?
Why Do not I Have to Pay IHT with Equity Release?
What Are the Tax Implications of Equity Release in the UK?
Will I Need to Pay CGT on Equity Release?
How Does Equity Release Affect My Tax in the UK?
Can Equity Release Impact My Inheritance Tax?
Are There Tax Exemptions for Equity Release in the UK?
In Conclusion
If you are considering a later-life mortgage, you will need financial advice.
Your adviser will run through all of the pros and cons of each prospective plan in order to find the best one for your circumstances.
Fortunately, you now know a bit more about the tax implications of equity release and can ask your adviser any questions you may have.