Equity release allows homeowners over 55 to unlock the value in their property without selling or downsizing.

While it can bolster cash flow or fund major expenses, one of the most common questions people have is: “Will I be taxed on the money I receive?”

In most scenarios, the proceeds themselves are not taxed as income. However, your overall tax situation can change depending on your circumstances, the timing of funds distribution, and how you use the money.

This article sheds light on the tax considerations associated with equity release, including Income Tax, Inheritance Tax, Capital Gains Tax, and potential impacts on means-tested benefits.

How Equity Release Is Generally Taxed

Equity release provides money from the capital value of your home, which is why the initial lump sum or drawdown payments themselves are not typically subject to Income Tax.

You are essentially converting part of your property’s value into cash.

However, this doesn’t mean you’re automatically in the clear; other financial changes or objectives—like gifting money or buying additional property—can create new tax obligations.

Inheritance Tax (IHT) Considerations

1. Reduced Estate Value: By tapping into your home’s equity, you may reduce the overall size of your estate. This can lower your potential IHT bill.
2. Gifting to Family: If you give away equity release funds to loved ones and pass away within seven years, the gift may still be considered part of your estate for IHT.
3. Joint Borrowers: If equity release is in joint names, make sure you understand how any remaining debt affects the survivor’s estate.

Want to learn how equity release can affect your legacy? Check out our article on Should You Consider Equity Release for Your Family?

Capital Gains Tax (CGT) Factors

• Primary Residence Exemption: If the property is your main residence, you normally won’t pay CGT on its sale.
• Second Homes or Buy-to-Let: If the equity release is on a second property and you end up selling it later, CGT rules may apply.
• Value Appreciation: A future increase in property value doesn’t directly create a CGT liability while you still own the home, but selling or transferring to someone else could trigger a taxable event.

Effect on Income and Means-Tested Benefits

1. Loss of Benefits: Equity release cash can impact means-tested benefits like Pension Credit or Council Tax Support.
2. Reinvested Funds: If you invest your released funds, any interest or dividends may be considered income, potentially affecting benefit eligibility.
3. Gifting & Deprivation of Assets: If you offload money to intentionally qualify for benefits, local authorities can treat this as “deliberate deprivation of assets.”

For more on safeguarding your benefits, see our Equity Release and Credit Checks Explained.

Planning for Tax Efficiency

• Partial Drawdowns: Taking smaller incremental amounts may help manage overall financial impact.
• Pension Integration: Aligning equity release with your pension drawdown strategy could help optimise your tax position.
• Gifting Strategy: If you plan to gift from equity release, consider the seven-year rule for IHT carefully.
• Professional Advice: Collaborate with tax advisers or financial planners to tailor a plan to your unique circumstances.

Costs and Fees (Non-Tax-Related)

Although not strictly a tax, be aware that equity release products come with fees such as valuation costs, arrangement fees, and legal charges.

While these are not tax per se, they do affect the net amount of money you actually have to spend or gift.

Consider Alternatives

Before choosing equity release as a solution, consider:

• Downsizing: Selling your current home and moving to a cheaper property.
• Retirement Interest-Only (RIO) Mortgages: Paying interest monthly to avoid rolled-up debt.
• Traditional Loans or Remortgaging: If you’re still eligible by age or income, a standard mortgage might be cheaper.

Browse our Alternatives to Equity Release guide for more insights.

Next Steps & Specialist Resources

• Talk to a Qualified Adviser: Equity release specialists can illustrate different scenarios and walk you through the tax implications.
• Seek Independent Legal Advice: Verify contract details, especially regarding estate and gifting clauses.
• Update or Create a Will: Ensure your estate planning documents align with new financial arrangements.
• Monitor Legislative Changes: Tax rules change over time, so keep an eye on HMRC updates or consult your adviser periodically.

Common Questions

Conclusion

While taking out equity release itself usually does not incur direct taxation, the wider financial changes it triggers can affect your tax position, estate distribution, and benefit eligibility.

By understanding the rules around Inheritance Tax, Capital Gains Tax, and Income Tax considerations—and by seeking the right professional advice—you can confidently tap into your home’s equity without unwelcome surprises.

If you’re ready to discuss how equity release could fit into your retirement strategy, speak to a specialist adviser or explore more expert insights at TimeBank.