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Do you pay tax on equity release?
Is equity release taxable? The short answer is no, but there may be some tax implications as well as IHT planning to consider
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With over £800 bn in housing equity ready to be released in the UK, it’s no wonder that an increasing number of older homeowners are inquiring about equity release schemes.
But it’s just as important to understand the different cost implications of taking out a lifetime mortgage, including asking “Do you pay tax on equity release?” and how does it impact inheritance tax liability.
Do you pay tax on equity release?
The short answer is no – equity release is tax-free, allowing asset-rich homeowners to unlock wealth from their property, in either a lump sum or in smaller amounts over time, without paying tax on the money released. However, you may have to consider other tax implications or inheritance tax planning.
Paying interest on equity release
You may also need to consider interest payments. The interest rate that applies when releasing equity will depend on your personal circumstances, including the amount that you want to release and the value of your home. With lenders that are members of the Equity Release Council, a consumer-centric trade body, you can choose to fix your interest rate for life.
While there is no tax to be paid on equity release, it is important that you understand how the interest rate can affect the amount you owe - as well as the other related costs. A fully qualified equity release adviser can create a personalised illustration for you, indicating exactly how the amount you owe would increase over time should you choose not to make any optional payments.
To provide you with such a quality service and access to impartial advisers, Telegraph Media Group has partnered with leading equity release broker Responsible Equity Release, to provide The Telegraph Media Group Equity Release Service, and to help us write this article.
Equity release and inheritance tax
Releasing equity from your home will reduce the value of your estate, so it could help minimise your inheritance tax (IHT) liability when you die. Let’s explore how equity release and inheritance tax work together.
How does inheritance work?
Currently, inheritance tax is payable at a rate of 40% only on any part of your estate above the value of £325,000.
If, when you pass away, you leave everything to your spouse or civil partner, therefore not using your £325,000 threshold, then the unused amount will transfer to them. In this way, the threshold after which inheritance tax would be charged could increase to as much as £650,000.
How can equity release help reduce your IHT liability?
By releasing equity from your home now, you reduce the value of your estate. This means that less of your estate will be above the taxable threshold.
For example, Imagine Mr Smith is single and has a house worth £400,000, and other assets worth £100,000. He decides to release equity and owes £150,000 from his estate when he passes away.
Not only is Mr Smith able to access this cash when he wishes, he is also able to reduce his IHT liability by £60,000.
Early inheritance and gifts
For some, equity release offers several positives when it comes to inheritance - not only are they able to gift their loved ones more of their estate by minimising IHT liabilities, but they’re also able to enjoy seeing their loved ones utilise these gifts while they are still alive, and help them spend it responsibly. In this way, they can help their children and grandchildren with a deposit for their first home, with the costs of a wedding, or to just help them live life more comfortably.
When gifting an early inheritance, however, you might want to consider the potential tax implications, as in some cases it could still be liable for inheritance tax if you die within seven years of making the gift.
However, note that inheritance tax is not applied to gifts uniformly over time, but it reduces every year, on a sliding scale known as ‘taper relief’.
The Telegraph Media Group and Responsible Equity Release do not provide advice on inheritance tax, so consider your options carefully and consult an adviser. Gifting a lump sum could also affect your entitlement to means-tested benefits, particularly if your local authority deems it as a deprivation of assets. Your adviser will help you to consider all avenues before you choose to proceed with releasing equity.
The FCA does not regulate inheritance tax planning.
Find out more about equity release
Over 200 people released equity per day between April and June this year. If you are interested in releasing equity then you would not be alone. Use the calculator on this page to see an estimate of the amount that you could release.
By opting to provide your details as well, Responsible’s friendly Information Team can get in touch with you and answer any initial questions that you might have. If you are ready, they can also book a free no-obligation appointment with one of their fully qualified advisers for you.
Meeting an adviser is important, because while there is no tax to be paid on any equity that you release there are other considerations to be made on the potential impact it could have on your estate and entitlement to means-tested benefits.
Considering equity release? Find out how much you can free up by using the equity release calculator
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The Telegraph Media Group Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,690.
Equity release is only available to homeowners that own a property within the United Kingdom.
The above article was created for Telegraph Financial Solutions, a member of Telegraph Media Group Limited. For more information on Telegraph Financial Solutions, click here.
Information correct at date of publication.