What You Need to Know Before Releasing Money From Your Home
If you’re a homeowner aged 55 or over and thinking about releasing money from your property through an equity release product, one of the first questions that naturally comes up is:
Will I have to pay tax on the money I unlock from my home? Entering into an equity release agreement involves understanding the terms and costs involved, including any fees that may apply.
Let’s look at the tax implications of equity release.
“Do I pay tax on equity release?”
It’s a completely fair question. Your home is likely your biggest asset, and understanding the tax implications helps you make confident, informed decisions about your future.
The reassuring news is that equity release is designed to be simple, transparent, and tax‑efficient. In most cases, equity release is tax-free, meaning the money you receive is both equity release tax free and release tax free, with no income tax or capital gains tax to pay on the funds released. However, the details do matter, especially when it comes to paying inheritance tax, claiming means‑tested benefits, and how a lifetime mortgage affects the value of your estate.
Let’s walk through everything in a clear and simple way.
Is equity release taxable?
No, the money you release from your home is tax‑free.
A lifetime mortgage (the most common type of equity release) is a loan secured against your property, not income. You’re not selling your home or earning money, you’re borrowing against its value.
That means you do not pay:
- Income tax on the money released
- Capital gains tax
- Tax on the lump sum or drawdown amounts
Whether you take a single cash lump sum or smaller amounts over time, the funds themselves remain tax‑free. However, the money gained from equity release is not taxed, but if you use these funds to generate income, such as earning interest, savings income, or business income, that income may be subject to income tax.
However, while the money isn’t taxable, equity release can still influence other areas of your finances, particularly inheritance tax, means‑tested benefits, and the value of your estate.
If you are interested in learning more equity release works and how much you may be able to release, you can read more in this handy guide.
How a lifetime mortgage affects inheritance tax (IHT)
Equity release can reduce your estate’s value, which may lower the amount of inheritance tax you need to pay when you pass away, as the estates worth is used to determine if you exceed the tax free threshold and must pay inheritance tax (inheritance tax owed when you pass away).
Here’s how it works:
- A lifetime mortgage is a secured loan
- The loan plus compound interest is repaid from the sale of your house when you pass away, which significantly reduces the equity left to beneficiaries
- This reduces the market value of your estate for inheritance tax purposes, and can decrease the inheritance tax bill
This can be helpful if:
- Your estate’s value is close to the standard tax free allowance (nil‑rate band) of £325,000
- You want to support family members now rather than leave a larger taxable estate later
It’s important to say: equity release should never be used solely to avoid inheritance tax. If IHT planning is a priority, professional tax advice is essential.
Do I pay income tax on equity release money?
No, you do not pay income tax on equity release funds.
The money released is a loan, not income.
However, if you choose to invest the money and it generates income (for example, interest in a savings account), that income may be taxable in the usual way.
What about capital gains tax?
You do not pay capital gains tax on equity release because:
- You’re not selling your home
- You’re not disposing of an asset
- You’re borrowing against your property, not making a gain
Capital gains tax only applies when you sell an asset for more than you paid for it, not when you release equity from your home.
Does gifting money from equity release reduce inheritance tax?
Many people use equity release to gift money to children, grandchildren, or a family member, often to help with deposits, weddings, or financial support.
Gifting can reduce the value of your estate, but the usual rules still apply:
- Gifts are typically exempt from inheritance tax if you live for seven years after making them
- If you pass away within seven years, a sliding scale may apply
By choosing to release money tied up in your home’s equity, you can reduce inheritance tax liabilities while providing funds for personal needs or to support loved ones.
If gifting is part of your plan, your adviser will explain how this interacts with your estate and the inheritance tax thresholds, and you may also benefit from tailored equity release advice if you are based locally.
Does a home reversion plan affect tax differently?
A home reversion plan works differently because you sell a percentage of your home’s property value to an equity release provider, something our specialist equity release advisers explain to clients considering their options.
However:
- The money you receive is still tax‑free
- You still do not pay income tax or capital gains tax
- Your estate value is reduced because you own less of your property
Some equity release products also offer inheritance protection, allowing you to ring-fence a portion of your property value and guarantee a fixed inheritance amount for your loved ones.
Your adviser will explain the differences clearly so you can choose the right option for your circumstances, and local experts can help you explore equity release options.
A simple example
Let’s say you use home equity release on your £400,000 property and release £80,000 tax‑free through a lifetime mortgage.
- You pay no income tax
- You pay no capital gains tax
- Your estate becomes £400,000 minus the equity release loan and interest
- This may reduce your inheritance tax bill
- But it may affect means‑tested benefits.
This is why personalised advice matters, especially in areas with higher property values where specialist equity release advice can be particularly helpful.
This is just a demonstration, not financial advice
Common mistakes to avoid with equity release and tax
Navigating the tax implications of equity release can be complex, and there are several common mistakes that homeowners should be careful to avoid:
- Not seeking professional advice: One of the biggest pitfalls is proceeding without guidance from a qualified equity release adviser or financial adviser. Equity release, capital gains tax, income tax, and inheritance tax rules can be intricate, and expert advice is essential to avoid unnecessary tax liabilities or missed opportunities.
- Overlooking tax implications: While equity release itself is tax free, using the funds released to generate income,such as investing in a savings account, could mean you need to pay income tax on the interest earned. Similarly, not considering how releasing equity affects the value of your estate can lead to unexpected inheritance tax bills for your beneficiaries.
- Ignoring the impact on means-tested benefits: Releasing equity can affect your entitlement to benefits like Universal Credit or Pension Credit, as these often have savings thresholds. If the funds released push your savings above these limits, you may lose eligibility for these important means-tested benefits, including council tax reductions. More information can be found in this article.
- Not reviewing plan terms and conditions: It’s crucial to understand the details of your equity release plan, including how interest accrues, repayment terms, and whether you can make voluntary payments. Overlooking these factors can result in a larger loan balance and a greater reduction in the value of your estate, which may increase the inheritance tax owed.
- Failing to consider alternatives: Equity release isn’t the only way to access funds in later life. Sometimes, downsizing, using existing savings, or exploring other financial products may be more suitable and cost-effective. A thorough review of your personal circumstances and goals with a financial adviser can help you choose the best option.
By being aware of these common mistakes and seeking professional advice, you can make confident decisions about releasing equity, manage your tax implications, and protect your future benefit entitlement and the value of your estate.
Why independent advice is essential
Equity release and tax are closely linked to your:
- Personal circumstances
- Family situation
- Estate value
- Long‑term plans
- Other assets
- Existing mortgage
- Financial needs
Your equity release adviser will help you understand the equity release process from first chat to cash released:
- How equity release affects your estate
- Whether it impacts your tax position
- How it interacts with benefits
- What alternatives exist
- Whether it’s the right option for you
- The importance of seeking further advice and fully understanding the equity release product and agreement before proceeding
You’ll also receive independent legal and professional financial advice before proceeding, ensuring you fully understand the equity release product and the terms of the equity release agreement.
The bottom line: Is Equity Release Taxed?
Equity release itself is tax‑free, but it can influence your wider finances.
To summarise:
- Equity release funds are tax‑free
- You do not pay income tax or capital gains tax on the released amount, but how you use the funds can have tax implications, especially if they are used to generate income or make gifts
- It can reduce inheritance tax liability
- It may affect means‑tested benefits.
- Equity release reduces the value of your estate
- No Negative Equity Guarantee standards ensure your estate will never owe more than the value of your home
- Personal circumstances matter, and the financial implications of equity release should be carefully considered
Equity release isn’t about tax avoidance, it’s about accessing money tied up in your home in a safe, regulated way.
Thinking about releasing equity? We’re here to help
At Bower Home Finance, our independent equity release advisers offer:
- Whole‑of‑market advice
- Clear explanations of any tax implications
- Guidance tailored to your personal circumstances
- Ongoing support for you and your family
- A free initial consultation
- A calm, pressure‑free experience from start to finish
We recommend seeking further advice to ensure your decisions are right for your unique situation, including considerations for your loved ones.
Your home. Your future. Your choice.
Let’s Chat
Let’s start with a relaxed conversation focused entirely on you.
For transparency, an advice fee may be payable only upon successful completion, and you can check that your adviser is reputable and regulated by searching the financial services register.
