The short answer is no, you do not pay tax on equity release. It allows asset-rich homeowners to unlock wealth from their property in a large, lump sum or in smaller amounts over time. While there are no tax implications homeowners will still have to pay interest so it is important that you fully understand all the implications before taking out this type of scheme.
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What’s the interest rate on equity release?
If you invest your tax-free cash or put it into a savings account, you may have to pay tax on any growth and while there is no tax on equity release, it is important to understand that the rate of interest you will be charged on the amount you are borrowing is likely to far exceed any interest you earn on the money you do not spend initially.
Personal savings allowance (PSA)
Having your tax free equity release cash in a savings account means you can earn up to £1,000 in interest each tax year without having to pay any tax if you are a basic-rate taxpayer, known as your personal savings allowance (PSA). This allowance falls to £500 if you are a higher-rate taxpayer, and there is no allowance if you are an additional-rate taxpayer.
This tax year you can invest up to £20,000 in ISAs, in either cash, stocks and shares, innovative finance, Help to Buy and Lifetime accounts, and returns are free from income tax and capital gains tax (CGT).
If you have released a large sum from your property and have used up your PSA, it is possible to shelter some of your savings from tax by making use of your annual individual savings account (ISA) allowance.
Drawdown equity release
If you don’t need money in the short term, however, you may want to consider a drawdown equity-release plan. A drawdown enables you to release cash as and when you need it, and you are not charged interest until you access the money.
This means, for example, you could agree an £80,000 lifetime mortgage and only take £50,000. You would not be charged interest on the remaining £30,000 until it’s withdrawn.
If you are considering equity release, always seek professional financial advice first. An adviser can let you know the impact equity release would have on your tax position based on your individual circumstances. Keep in mind that releasing money from your home could affect any means-tested state benefits you are entitled to.
What happens with inheritance tax?
Releasing equity from your house will reduce the value of your estate, so it could help minimise your inheritance tax (IHT) liability when you die. IHT is payable at a rate of 40 per cent on estates valued above the current £325,000 IHT threshold, or £650,000 for couples.
IHT thresholds have remained at this level for the current tax year, but there have been increases in the residence nil-rate band (RNRB), which now totals £150,000. We are obliged to say that the Financial Conduct Authority (FCA) does not regulate IHT planning.
Following changes to pension rules that enable you to pass on pension assets outside of your estate for IHT purposes, equity release has become a popular way of raising cash for retirement, leaving pension savings intact to pass on to beneficiaries.
Steve Wilkie, managing director of equity-release specialist Responsible Life, says:
"It's taken a while for people to get their heads around exactly what pension freedom means, but we are already starting to see the positive impact on the equity-release market. For many, the goal is to enjoy a comfortable retirement without outliving savings and to leave a substantial legacy to loved ones. Now that a pension has been transformed into an asset which can be passed down, retirees can take a more holistic view of their financial situation.
“There has always been this mindset that you can't count the house you live in as a potential source of retirement income, that the only savings you have are those in your bank and pension. It is starting to register that anyone who owns a home bought with a mortgage has been saving throughout their lives. The difference is the money hasn’t gone into a bank but into bricks and mortar."
Equity-release lending on the rise
The trade body for the equity-release sector said more than 12,891 new plans were agreed from October–December 2018. This is a 25% year-on-year growth, and more than double the number in 2015.
But while the money you release may be tax free, there are broader equity-release tax implications to watch out for, particularly if you are not planning to spend the money straight away.
Speak to an adviser
The Telegraph Equity Release Service can help you decide if equity release is right for you. While you do not pay tax on equity release you need to fully understand if it is the best option for you. For more information, request a face-to-face consultation with an equity release adviser in your area.
They will provide an obligation-free, personalised recommendation based on your circumstances. If you decide to go ahead, your adviser will handle the entire application process for you.
The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Only if your case completes will Responsible Life charge an advice fee, currently not exceeding £1,490.
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