Equity Release and UK Tax 2026/27: What Homeowners Need to Know

How Equity Release Works -- Lifetime Mortgage vs Home Reversion

Equity release is a broad term for two distinct products, both regulated by the Financial Conduct Authority (FCA) and both designed to let homeowners aged 55 and over access the wealth tied up in their property.

Lifetime mortgage is by far the most common form. You borrow against your property and retain full legal ownership. Interest is charged but typically rolls up (compounds) rather than being paid monthly. The loan plus accumulated interest is repaid from the sale of your home when you die or move permanently into residential care. Rates are fixed or capped for life. The Equity Release Council requires all member providers to include a no negative equity guarantee, so you and your estate can never owe more than the sale proceeds of the property.

Home reversion plan involves selling a share (or all) of your property to a specialist provider in exchange for a lump sum or regular income. You retain the right to live in the property rent-free for life. The provider receives their share of the eventual sale proceeds. You typically receive significantly below market value for the share sold -- often 20% to 60% of market value depending on your age and health -- because the provider must wait an uncertain period before realising their investment.

Both products are irreversible in practice (though some allow partial repayment) and involve long-term commitments with compounding costs. Specialist regulated advice is mandatory for both.

Income Tax -- Why Equity Release Proceeds Are Tax-Free

The single most important tax point about equity release is also the most reassuring: the cash you receive is not taxable income. HMRC taxes income -- wages, pension payments, rental income, interest, dividends. It does not tax loan proceeds, and it does not tax proceeds from selling an asset that qualifies for Principal Private Residence (PPR) relief.

Under a lifetime mortgage, the money released is a loan. You have a corresponding liability (the debt) for every pound received. A loan cannot be income because you owe it back -- there is no net gain to tax. The UK personal income tax rates for 2026/27 are:

• Personal Allowance: GBP 12,570 (tapered above GBP 100,000; fully withdrawn at GBP 125,140)
• Basic rate: 20% on income GBP 12,571 to GBP 50,270
• Higher rate: 40% on income GBP 50,271 to GBP 125,140
• Additional rate: 45% above GBP 125,140

None of these thresholds are affected by equity release proceeds. The released funds do not appear in your tax calculation, do not push you into a higher band, and do not erode your Personal Allowance. They are invisible to HMRC for income tax purposes.

Under a home reversion plan, you sell a share of your property. PPR relief exempts any gain from CGT, and the sale proceeds are not income -- they are capital. No income tax applies.

Capital Gains Tax and Principal Private Residence Relief

Capital Gains Tax applies to gains made on the disposal of assets. For 2026/27, CGT rates on residential property are 18% (basic-rate taxpayer) and 24% (higher-rate taxpayer), with an Annual Exempt Amount (AEA) of GBP 3,000. Gains from the sale of a Business Asset under Business Asset Disposal Relief (BADR) are taxed at 18% up to a lifetime limit of GBP 1 million.

However, your main home -- the property in which you live as your principal private residence -- is fully exempt from CGT under PPR relief. The exemption covers the entire period of ownership during which the property was your main home. This means:

• With a lifetime mortgage, there is no disposal at all -- you remain the owner throughout -- so CGT is simply not in play.
• With a home reversion plan, you sell a share of the property, but PPR relief exempts that gain in full because it is your main home.
• If you own a second property or buy-to-let and take equity release against that property, PPR relief does not apply and CGT may be relevant on any eventual sale.

One planning point: if you are considering moving from your main home to a second property before taking equity release, the CGT position on each property changes from the date of the move. Always take advice before changing your main residence designation.

Inheritance Tax -- Estate Reduction and the IHT Calculation

Equity release is sometimes promoted as an IHT planning tool because it reduces the value of your estate. The logic is straightforward: a lifetime mortgage creates a debt that is deducted from your estate on death, reducing the amount subject to IHT at 40%.

The 2026/27 IHT thresholds are:

• Nil-Rate Band (NRB): GBP 325,000 per person (transferable between spouses)
• Residence Nil-Rate Band (RNRB): GBP 175,000 per person (when leaving a qualifying home to direct descendants)
• Combined threshold for a couple: up to GBP 1,000,000 (2 x NRB + 2 x RNRB)
• Standard IHT rate: 40% above the threshold (36% if at least 10% of the net estate is left to charity)

The crucial word above is spent. If you use the released funds on care costs, home improvements, travel or your own lifestyle, the estate genuinely shrinks and the IHT saving is real. But if you gift the proceeds to family, the gift with reservation of benefit (GROB) rules can reverse the IHT advantage entirely -- see below.

Gift with Reservation of Benefit -- The Key IHT Trap

The gift with reservation of benefit (GROB) rules under the Finance Act 1986 are one of the most important IHT pitfalls for equity release users who plan to gift the released funds.

GROB applies when you make a gift but continue to benefit from the gifted asset -- or from something connected to it. In the equity release context, the risk arises as follows: you release GBP 150,000 from your home via a lifetime mortgage and immediately gift GBP 150,000 to your adult children. You continue to live in the home. HMRC can argue that you are still benefiting from the full property (your continued occupation) while purporting to have given away value derived from that property. If GROB applies, the gifted amount is treated as remaining in your estate for IHT purposes -- negating the IHT saving entirely.

GROB applies to the gift, not to the equity release itself. The practical rule is: if you intend to gift released equity, take specialist legal and tax advice before releasing the funds. In some cases, a structured arrangement (e.g., the children pay a market rent to the parent) can avoid the GROB issue, but this has its own income tax implications for the parent.

If you release equity and spend it on your own costs -- care fees, holidays, home renovations -- the GROB issue does not arise. The seven-year potentially exempt transfer (PET) clock does not start because you have not made a gift.

Means-Tested Benefits -- The Risk Most Advisers Emphasise

For homeowners with modest incomes who rely on means-tested benefits, equity release can be financially damaging even if it is tax-free. The reason is that released funds parked in a bank account become assessable capital -- and most means-tested benefits have strict capital limits.

The main benefits at risk include:

• Pension Credit -- tariff income is assumed at GBP 1/week for every GBP 500 of capital above GBP 10,000; above GBP 16,000 of capital you are generally excluded from Savings Credit.
• Universal Credit -- capital between GBP 6,000 and GBP 16,000 reduces the award by GBP 4.35/month per GBP 250 of capital; above GBP 16,000 you cannot claim at all.
• Council Tax Reduction -- rules vary by local authority but most mirror the above capital thresholds.
• Housing Benefit (for those still receiving it) -- similar capital rules apply.

Example: a homeowner receives Pension Credit worth GBP 3,600/year. They release GBP 25,000 via a lifetime mortgage for care costs but hold the funds in a current account for six months while arranging care. That GBP 25,000 pushes their capital well above GBP 16,000 and Pension Credit stops. The loss of GBP 1,800 in Pension Credit over six months is a real financial cost that partially offsets the value of the released equity.

The solution -- where possible -- is to spend released funds promptly, or to structure the release in tranches so capital never exceeds the threshold for extended periods. A drawdown lifetime mortgage (where funds are released in stages) is often more suitable than a lump sum for this reason.

ISA Allowance -- Sheltering Investment Returns from Released Equity

If you have released equity and have more cash than you need for immediate spending, the ISA wrapper is the most efficient place to invest it. The 2026/27 ISA allowance is GBP 20,000 per person per tax year (GBP 9,000 for a Junior ISA). A couple can shelter GBP 40,000 per year.

The tax benefits of an ISA are substantial for higher-rate taxpayers:

• Dividend income -- outside an ISA, dividends above the GBP 500 allowance are taxed at 10.75% (basic rate), 35.75% (higher rate) or 39.35% (additional rate). Inside an ISA: zero.
• Interest income -- outside an ISA, savings interest above the Personal Savings Allowance (GBP 500 for higher-rate taxpayers in 2026/27) is taxed at your marginal rate. Inside an ISA: zero.
• Capital gains -- outside an ISA, gains above the GBP 3,000 AEA are taxed at 18% or 24%. Inside an ISA: zero.
• Withdrawals -- ISA withdrawals are completely tax-free and do not affect your income tax position or Personal Allowance.

One subtlety: ISA withdrawals are tax-free and do not count as income for means-tested benefit purposes in the way that pension drawdown does. For equity release users who are also managing a means-tested benefit position, an ISA can be more flexible than drawdown from a pension, which is taxed as income and can affect benefit entitlement.

Repayment on Death or Care -- IHT and Probate Mechanics

Understanding what happens at the end of the equity release arrangement is essential for estate planning. For a lifetime mortgage, the sequence on death is:

1. The property is valued at date of death (or confirmed sale price if sold during probate).
2. The outstanding loan balance (original loan plus rolled-up interest) is confirmed with the provider.
3. For IHT purposes, the outstanding loan is a liability of the estate deducted from gross estate value.
4. The property is sold (or transferred subject to the mortgage) and the provider is repaid from proceeds.
5. Any surplus equity passes to beneficiaries as part of the estate.

The no negative equity guarantee (mandatory for Equity Release Council members) means that if rolled-up interest has grown the debt to exceed the property value, the provider writes off the shortfall. The estate owes nothing beyond the property itself.

The Residence Nil-Rate Band interaction is a technical but important point. The RNRB (GBP 175,000 in 2026/27) is based on the value of the residential interest that passes to direct descendants. If the property is sold and GBP 250,000 of the proceeds repay the lifetime mortgage, only GBP 50,000 of equity (from a GBP 300,000 property) passes to descendants. The RNRB is capped at the lower of GBP 175,000 or the value passing -- so only GBP 50,000 RNRB would be available, not the full GBP 175,000. This can be a significant and unexpected IHT cost.

Alternatives to Equity Release -- Tax Comparison

Before committing to equity release, homeowners should consider whether alternatives achieve the same cash-flow goal with a better overall tax and financial outcome.

Downsizing is frequently the most efficient option. Selling your home and moving to a smaller property releases equity outright with no debt and no rolled-up interest. The gain on the sale of your main home is entirely exempt from CGT under PPR relief. Stamp Duty Land Tax (SDLT) is payable on the new purchase: nil up to GBP 125,000 at standard rates, then a tiered system applies. A GBP 250,000 new home would attract SDLT of GBP 2,500 (2% on the GBP 125,001 to GBP 250,000 band). No IHT complications, no GROB risk, no means-tested benefit trap from cash held.

Pension drawdown from a defined contribution pension offers up to 25% of the fund as a tax-free lump sum (Pension Commencement Lump Sum or PCLS, capped at GBP 268,275 lifetime). Further withdrawals are taxed as income. The risk is that large drawdown can push you into a higher income tax band or into the Personal Allowance taper (60% effective marginal rate between GBP 100,001 and GBP 125,140). Pension funds remaining on death are generally outside your estate for IHT purposes -- a significant advantage over equity release, where the debt reduces your estate but your pension is preserved outside it.

SIPP contributions are relevant for those with earned income who have not yet retired. You can contribute up to GBP 60,000/year (the Annual Allowance, or GBP 10,000 if the Money Purchase Annual Allowance (MPAA) has been triggered) and receive income tax relief at your marginal rate. This builds a more tax-efficient pot for the future rather than drawing on property equity now.

Family loan arrangements -- where a family member lends money at a documented commercial interest rate -- avoid the GROB problem that arises with gifting equity release proceeds. The interest paid is income to the lender (and taxable) but the principal is not a gift. These require proper legal documentation to withstand HMRC scrutiny.