What is equity release and how is it taxed in the UK?

Full answer

What Is Equity Release Equity release is a way for homeowners aged 55 and over to access the value tied up in their home while continuing to live in it. The two main products are: - Lifetime mortgage: you borrow against your home and interest rolls up until the property is sold (usually on death or moving into care). This is by far the most common form. - Home reversion plan: you sell a share of your property to a provider in exchange for a lump sum or regular payments and the right to live there rent-free. Is the Money Taxable No. The cash you receive through equity release is a loan (in the case of a lifetime mortgage) or sale proceeds on your share (home reversion), not income. HMRC does not treat it as taxable income, so you do not pay income tax on the funds released. Interest and Tax Interest on a lifetime mortgage is not tax-deductible for personal homeowners (unlike buy-to-let properties, where mortgage interest has specific rules). The rolled-up interest reduces the equity remaining in your estate. Inheritance Tax Interaction Equity release reduces the net value of your estate because the outstanding loan (including rolled-up interest) is deducted from the property's value on death. This can reduce or eliminate an IHT liability. The nil-rate band remains GBP 325,000 and the residence nil-rate band GBP 175,000 for 2026/27. Means-Tested Benefits If you receive Pension Credit, Council Tax Reduction or other means-tested benefits, a large lump sum from equity release could push your savings above the capital threshold (GBP 16,000 for most working-age benefits) and affect your entitlement. Spending the funds quickly (on home improvements, for example) or taking drawdown in smaller amounts can manage this risk, but you should seek benefit advice first. Regulation Equity release products sold in the UK must be authorised by the Financial Conduct Authority. Members of the Equity Release Council provide a no-negative-equity guarantee, meaning you will never owe more than the property is worth. Always take independent financial advice before proceeding.

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