Yes, the money you release from a lifetime mortgage is tax free. A lifetime mortgage, the most common form of equity release, is a loan secured against your home. It is borrowed money, not income, so receiving it is not taxed. What you then do with the money can have tax consequences, and that part depends on your own circumstances.
Why the money itself is not taxed
Income Tax is charged on income: things like earnings, most pensions and interest on savings above your allowance. Money you borrow is not on that list. A lifetime mortgage is a loan, and the amount you owe is repaid from the sale of your home, normally when the last borrower dies or moves into long term care.
So whether you take a lump sum or use drawdown, the money released reaches you as cash you have borrowed, not as earnings.
Where tax can come into it
The release itself is not taxed. What happens to the money afterwards can be.
If you save it. Interest earned on savings can be taxable. Whether you pay tax depends on how much interest you earn, your other taxable income and your tax-free allowances. It is one reason we would always say borrow only what you need, rather than releasing money to sit in a bank account.
If you give it away. Some gifts you make while you are alive may be taxed after your death. If you gift money released from your home, inheritance tax rules may become relevant, and special rules can apply where borrowed money is used to make gifts.
When you die. The loan is repaid from your estate before anything passes on. Equity release will reduce the value of your estate. Whether that changes any inheritance tax bill depends on your whole estate and your family circumstances, and it should not be assumed that borrowing, or gifting what you borrow, automatically reduces inheritance tax.
Craig has written about this in more detail in can equity release help with inheritance tax planning? For what equity release means for the people you leave your home to, see equity release and your inheritance.
Not a tax question, but worth knowing
Money released could affect your entitlement to means-tested benefits, such as Pension Credit, Universal Credit or Council Tax Reduction. We go through this with you, and there is more on our page about equity release and benefits.
We do not give tax advice
We advise on later life borrowing. We do not give tax advice. Where tax is part of your thinking, particularly inheritance tax or gifting, we can refer you to an appropriate specialist for advice on the tax implications. It is worth doing that before you commit, not after.
Is equity release tax free: common questions
Is equity release taxable?
No. The money released from a lifetime mortgage is a loan, not income, so it is tax free when you receive it. Interest earned on it if you save it can be taxable, and gifts of it can bring in inheritance tax rules.
Do I pay Income Tax on money from equity release?
No. Income Tax is charged on income such as earnings, pensions and savings interest. Borrowed money is not income.
Does equity release affect inheritance tax?
It can. The loan is repaid from your estate, which reduces what is left. How that interacts with inheritance tax depends on your whole estate and what you do with the money. Craig's article on inheritance tax planning explains the main points, and a tax specialist can tell you how they apply to you.
Can you tell me whether I will pay tax?
No. We do not give tax advice. We can explain your borrowing options and refer you to a specialist for the tax side.
Not sure how any of this applies to your own circumstances? Craig is happy to talk it through, free and with no obligation.
Talk it through with Craig
If you want to understand your borrowing options, and where you might need a tax specialist alongside us, that is a conversation. The first one is free.
Book a call with Craig or call 0113 403 5584.
