An increasing number of older homeowners are inquiring about equity release schemes to unlock wealth from their homes, but many are also asking the question "do you pay tax on equity release"?
Equity release allows asset-rich homeowners to unlock wealth from their property in a large, lump sum or in smaller amounts over time. While there are no tax implications homeowners will still have to pay interest on the released equity.
What’s the interest rate on equity release?
If you invest your tax-free cash or put it into a savings account, you may have to pay tax on any growth. While there is no tax to be paid on equity release, it is important to understand that the rate of interest you will be charged on the amount you are borrowing is likely to far exceed any interest you earn on any money you invest and do not spend initially.
Personal savings allowance (PSA)
Having your released cash in a savings account means you can earn up to £1,000 in interest each tax year without having to pay any tax if you are a basic-rate taxpayer, known as your personal savings allowance (PSA). This allowance falls to £500 if you are a higher-rate taxpayer, and there is no allowance if you are an additional-rate taxpayer.
This tax year you can invest up to £20,000 in ISAs, in either cash, stocks and shares, innovative finance, Help to Buy and Lifetime accounts, and returns are free from income tax and capital gains tax (CGT).
If you have released a large sum from your property and have used up your PSA, it is possible to shelter some of your savings from taxation by making use of your annual individual savings account (ISA) allowance.
Drawdown equity release
If you don’t need money in the short term, however, you may want to consider a drawdown lifetime mortgage. A drawdown enables you to release cash as and when you need it, and you are not charged interest until you access the money.
This means, for example, you could agree an £80,000 lifetime mortgage only take £50,000 in the initial lump sum and place the remaining £30,000 in a drawdown fund. You would not be charged interest on the remaining £30,000 until it’s withdrawn.
If you are considering equity release, always seek professional financial advice first. An adviser can let you know the impact that an equity release mortgage would have on your tax position based on your individual circumstances. Keep in mind that releasing money from your home could affect any means-tested benefits you are entitled to.
What happens with inheritance tax?
Releasing equity from your house will reduce the value of your estate, so it could help minimise your inheritance tax (IHT) liability when you die. IHT is payable at a rate of 40 per cent on estates valued above the current £325,000 IHT threshold, or £650,000 for couples.
IHT thresholds have remained at this level for the current tax year, but there have been increases in the residence nil-rate band (RNRB), which now totals £150,000. We are obliged to say that the Financial Conduct Authority (FCA) does not regulate IHT planning.
Following changes to pension rules that enable you to pass on pension assets outside of your estate for IHT purposes, equity release has become a popular way of raising cash for retirement, leaving pension savings intact to pass on to beneficiaries.
Steve Wilkie, managing director of equity-release specialist Responsible Life, says:
"It's taken a while for people to get their heads around exactly what pension freedom means, but we are already starting to see the positive impact on the equity-release market. For many, the goal is to enjoy a comfortable retirement without outliving savings and to leave a substantial legacy to loved ones. Now that a pension has been transformed into an asset which can be passed down, retirees can take a more holistic view of their financial situation.
“There has always been this mindset that you can't count the house you live in as a potential source of retirement income, that the only savings you have are those in your bank and pension. It is starting to register that anyone who owns a home bought with a mortgage has been saving throughout their lives. The difference is the money hasn’t gone into a bank but into bricks and mortar."
Equity-release lending on the rise
Over-55s released over 1 billion in the final quarter of 2019, with £3.92 billion released in total last year.
The trade body for the equity release sector said more than 85, 000 older homeowners made use of their property wealth in 2019.
But while the money you release may be tax-free, there are broader equity release tax implications to watch out for, particularly if you are not planning to spend the money straight away.
Speak to an adviser
The Telegraph Equity Release Service can help you decide if equity release is right for you. While you do not pay tax on equity release you need to fully understand if it is the best option for you. For more information, request a face-to-face consultation with an equity release adviser in your area.
- Considering equity release? Find out how much you can free up by using our equity release calculator
The Telegraph 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 £1,490.
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Information correct at date of publication.