Do you have to pay tax on equity release?

By Carrie Ann on

Equity release is becoming an increasingly popular way for older homeowners to access the money tied up in their homes.

Figures published by the Equity Release Council in January 2018, highlighted that over £3 billion of property wealth was accessed by over 55’s in 2017 – a 40% increase on the previous year.

With a wide choice of plans available, people are turning to equity release for many different reasons – from supporting their retirement incomes, to paying off existing mortgages and debt or helping their children onto the property ladder. In some circumstances, people are also using equity release to reduce their Inheritance Tax (IHT) liabilities.

With the increasing popularity of equity release it is important to understand the tax implications of these schemes and what to watch out for if you’re considering it as an option to achieve your financial goals.

The money you withdraw from equity release is tax free, but what you do with your money could be taxable. For example, if you don’t spend the money straight away and hold it in a variety of different savings accounts, it could be subject to tax.

As well as the money you release being tax-free, equity release could also have a ‘tax positive’ impact through reducing your IHT bill.

IHT used to be the preserve of the rich, but with ever increasing property prices, more and more people are being caught out by it. According to the Office for Budget Responsibility, the number of families paying IHT increased by 160% between 2010 and 2016. 40,000 families paid IHT in the 2015/16 tax year.

IHT is payable at a rate of 40% on the value of your estate above the current £325,000 IHT threshold, or £650,000 for couples. The government has also recently introduced an additional tax-free allowance if you pass on your home to your children, which for the 2018-19 tax year is £125,000.

Releasing equity from your home may reduce the value of your estate and therefore may help reduce your IHT liability.

Another reason equity release has become a popular way of raising extra income for retirement is due to changes to pension rules that mean you are now able to pass on pension assets outside of your estate. This means you don’t pay any IHT on pension savings passed onto your beneficiaries after your death.

For some people, it could make sense to use equity release first to support their retirement goals and once exhausted, start to deplete their pension pot. Another positive of this approach is that as your pension pot is invested for longer, it has more opportunity to continue to grow.

If you’re thinking about equity release and in particular, to reduce your IHT bill, you must seek professional financial advice first. An expert and impartial equity release adviser – such as one from Equity Release Supermarket – will inform you exactly what impact it will have on your finances and recommend a solution based on your personal needs.

Categorised in: Equity Release Mortgages
This post was written by Carrie Ann