Is Equity Release Tax Free?

Yes, the money you release from your home through equity release is tax free. Because you are borrowing against your own property rather than earning income or making a gain, the lump sum or regular payments you receive are not subject to income tax or capital gains tax. However, "tax free in your hands" is not the whole story. What you then do with the money, how the interest builds up, and the effect on means-tested benefits and inheritance tax all deserve careful thought.

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Key Takeaways

• The lump sum or income you take from equity release is free of income tax and capital gains tax.
• Interest on a lifetime mortgage usually rolls up and compounds, so the amount owed grows over time and reduces your estate.
• Releasing cash can affect means-tested benefits, so it is important to check this before proceeding.
• Equity release reduces the value of your estate, which can lower any inheritance tax bill but also cuts what you leave behind.

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Is Equity Release Tax Free?

The money you receive from equity release is not taxable. With a lifetime mortgage, the most common form, you are taking out a loan secured against your home, and borrowed money is not income, so there is no income tax to pay on it. With a home reversion plan, you sell all or part of your home in exchange for a tax-free lump sum or income.

This is one of the reasons equity release appeals to homeowners in later life. You can access wealth tied up in your property without triggering a tax charge on the release itself. But the tax position of what happens next depends on how you use and invest the money, and on your wider financial picture.

Where Tax Can Still Come Into Play

Although the release is tax free, tax can appear elsewhere.

Income earned on the money

If you take a lump sum and place it in a savings account or investment, any interest, dividends or gains that money generates may be taxable in the normal way. The original release is tax free, but returns you earn on it are treated like any other savings or investment income.

Gifting the money

Some people release equity to give money to family. Gifts can have inheritance tax implications depending on how much you give and how long you live afterwards, under the usual gifting rules. This is a common reason to take advice before releasing funds to pass on.

Interest Roll-Up and Compounding

With most lifetime mortgages you do not have to make monthly repayments. Instead, the interest is added to the loan and itself attracts interest, known as compounding or roll-up. This is not a tax, but it has a big effect on how much is eventually owed.

Because the balance grows over the years, the debt repaid from your estate when you die or move into long-term care can be considerably larger than the amount you originally released. Many plans include a no negative equity guarantee so you can never owe more than your home is worth, but the growing balance still erodes what is left for your beneficiaries. Some plans now let you make optional interest payments or ad-hoc repayments to slow this down. You can get a feel for the numbers with our equity release calculator.

Means-Tested Benefits

This is one of the most important nuances. While the cash itself is tax free, receiving a lump sum can affect entitlement to means-tested benefits.

Benefits such as Pension Credit and Council Tax Support take your savings and capital into account. If releasing equity pushes your savings above certain thresholds, your entitlement could reduce or stop. Money sitting in the bank counts differently from money tied up in your home, so converting one to the other can change your position. Our guide to the pros and cons of equity release covers this alongside the other trade-offs, and it is exactly the kind of issue a qualified adviser will check for you.

Inheritance Tax and Your Estate

Equity release reduces the value of your estate in two ways: you spend or give away the released cash, and the outstanding loan is repaid from your estate later. Because inheritance tax is charged on the value of your estate above the available threshold, reducing the estate can reduce or remove an inheritance tax liability.

That can be a benefit for some households, but it cuts both ways. A smaller estate means less to pass on to your family. Equity release is sometimes discussed as part of estate planning, but it should never be used as a tax strategy in isolation, the primary purpose should be meeting your own needs in later life. For the bigger picture, weigh up the pros and cons of equity release and whether it is the safe and right option for you before committing.

Frequently Asked Questions

Do I pay tax on the lump sum from equity release?

No. Whether you take a single lump sum or smaller drawdowns, the money released is free of income tax and capital gains tax because it is either a loan against your home or the proceeds of selling a share of it. Tax may apply later on any income you earn from investing the money.

Will equity release affect my pension?

It will not affect your State Pension, which is not means-tested in the way benefits like Pension Credit are. However, holding more cash could affect means-tested benefits and support, so it is important to check your specific entitlements before releasing funds.

Does equity release reduce inheritance tax?

It can, because spending or repaying the released money reduces the value of your estate, and inheritance tax is charged on the estate above the threshold. But it also reduces what your family inherits, so it should be considered carefully as part of proper advice rather than used purely to cut tax.

Should I take advice before releasing equity?

Yes. Equity release is a regulated product and advice is required. A qualified equity release adviser will look at the tax position, the effect on benefits, the interest roll-up and your inheritance plans, and check whether alternatives might suit you better.

General information only, not financial advice. Speak to a suitably qualified, FCA-authorised professional before acting.