Equity Release Tax in 2022

Do You Have to Pay Tax on Your Equity Release Plan?
Contributors: Nicola Date, Katherine Read. Reviewed by Francis Hui
Will You Have to Hand Over Part of Your Equity Release Funds to the Taxman? Will Equity Release Reduce Your Inheritance Tax Liability? If You’ve Got a Question About Tax on Equity Release We’ve Got the Answers. Keep Reading…

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If you’re considering joining the thousands of homeowners in the UK who’ve released the cash from their homes, then you’re probably wondering about the tax implications of equity release.

Equity release can be a massive, costly mistake if not done properly. Luckily, we’re here to be your guide.

Through this article, you’ll discover:

  • What is inheritance tax?
  • The impacts of equity release on inheritance tax.
  • Why equity release is not taxable income.

At SovereignBoss, we’re proud to be one of the leading informational portals for equity release,

Bringing you everything you need to know about these fantastic retirement products.

We’ve spent hours researching all the implications of releasing the money from your home.

Here’s what we found about inheritance tax.


What Is Equity Release & How Does It Work?

Designed for older homeowners, equity release gives you the opportunity to access the funds tied into your home, without having to repay the money in your lifetime.

You can receive a lump sum, place the money in a drawdown facility, or opt for a monthly salary.

Furthermore, you can stay in your home, rent-free, for the rest of your life.

When you die or enter a long-term care facility, your home is usually sold, and the proceeds will cover the loan and any interest that’s accrued.

Is Equity Release Income Taxed?

No, it is not. The money you receive from an equity release loan is completely tax-free.

However, if you don’t 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 2 main types of taxes when considering equity release plans, income tax and capital gains tax.

However, neither will be applied to your equity release loan.

Income Tax

Since income tax is charged when you earn money,

There are no income tax charges on your equity release loan, even if you receive the cash in a monthly salary.

You can also add a drawdown facility to your equity release loan, which allows you to withdraw funds from your home in small increments as needed.

The reserve account contains money you don’t need right now and is non-interest bearing.

It’s 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.

So they can be great for when you aren’t looking to spend all the money in the short term, but planning on needing it in the future.

Although the money is tax-free, any interest 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’s 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 capital gains tax (CGT).

We’ve seen property values rise substantially in recent years, and as a result, you may earn substantial 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 tax is only relevant to a second home.

What Is Inheritance Tax?

Inheritance Tax (IHT)2 is a tax charged on the property of someone who died.

Luckily, some people don’t have to pay this due to the threshold of £325,000.

Meaning if your estate or property is valued less than that amount, you won’t have to pay any IHT on it.

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How Does Equity Release Affect Inheritance Tax (IHT)?

Equity release will drastically reduce the value of your estate, and as a result, if your estate value decreases to less than £325,000, there will be no tax to pay.

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 decreased to £475,000.

This process is known as the Residence Nil Rate Band,3 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, which would then also be IHT-free.

IHT Example: Without Equity Release

Let’s say 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. Let’s say you also don’t have any active mortgages.

IHT on An Estate Worth £700,000

Inheritance Tax (IHT) 40%
Total IHT Payable £150,000

How Can Equity Release Reduce Your Inheritance Tax Liability?

Using the same example mentioned above, we’ll 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’ll only have to pay £30,000 IHT, instead of £150,000. How did that work?

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

 ThresholdEquity ReleasedTotal
Inheritance Tax (IHT)  40%
Total IHT Payable  £30,000
Total Amount Saved  £120,000

Gifting as an Early Inheritance & Inheritance Tax Implications

Generally, If you’re 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 & IHT

Years Between Gift & DeathTax Payable
Less than 340%
3 to 432%
4 to 524%
5 to 616%
6 to 78%
7 or more0%

The Booming Equity Release Market & Why It’s a Good Thing

Due to the significant benefits of releasing tax-free cash from your home, the equity release market is growing as people realise their excellent opportunities!

More than £1bn was released at the end of 2019 and £3.92 billion in 2020.

Incredibly, the industry reached over £4bn in 2021, and 80% of lenders believe it will show further growth in 2022. Viewing authentic holograms on driving licenses gives you different colors at different viewing angles. This is also called Optically variable device by the best fake id websites some of which are using thermal technology to make fake id read more

Common Questions

Is Money Released Through Equity Release Taxable?

Why Don't I Have to Pay IHT with Equity Release?

What's Income Tax on Equity Release?

Will I Need to Pay CGT on Equity Release?

Is Equity Release Tax-Free?

In Conclusion

If you’re considering equity release, you will need financial advice.

Fortunately, your adviser will talk you through the tax implications of equity release, and now you can contribute to the conversation.

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Editorial Note: This content has been independently collected by the SovereignBoss team and is offered on a non-advised basis. SovereignBoss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.