Money released through a lifetime mortgage is borrowed rather than earned, so there is no income tax on it. That is where the simple part ends. Interest earned on the money is taxable in the ordinary way, and money given away can be counted back into your estate if you die within seven years. Every figure here comes from GOV.UK and carries the date it was opened.
The money released is not income, so there is no income tax on it. What you then do with it is where tax can arrive, and the rules that catch people are about savings interest and about gifts.
Equity release may involve a lifetime mortgage, secured against your property, or a home reversion plan. It will reduce the value of your estate and impact funding long-term care.
Money released through a lifetime mortgage is borrowed against your home rather than earned, so it is not income and there is no income tax to pay on the amount you receive. That is the whole of the "tax free" claim and it is accurate as far as it goes.
It goes no further than the moment the money arrives. Interest earned on it while it sits in a savings account is taxable in the ordinary way. Money given away can be counted back into your estate for inheritance tax if you die within seven years. And money held as capital can cost you a means-tested benefit, which is a different page.
Capital held in the bank is assessed for means-tested benefits whether or not any tax is due on it. That rule catches more people than the tax rules do.
How the benefit rule works →Borrowed money is not income. There is no income tax and no capital gains tax on the sum released, whether you take it as a lump sum or draw it down over time.
Put the money in a savings account and the interest is taxed like any other savings interest. The Personal Savings Allowance is 1,000 pounds for a basic rate taxpayer, 500 for a higher rate taxpayer and nothing at all for an additional rate taxpayer.
GOV.UK publish a starting rate for savings of up to 5,000 pounds. You get none of it if your other income is 17,570 pounds or more, and below that it reduces by one pound for every pound of income above your Personal Allowance.
What is owed is deducted before inheritance tax is worked out, so the loan reduces the taxable estate. That is a consequence of borrowing rather than a reason to borrow, and it is the point where this page stops and an adviser starts.
What is left, worked out →| Death within 3 years of the gift | 40% |
|---|---|
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more The gift is outside your estate entirely | nothing |
This is the rule that catches people, because releasing money in order to help a child or a grandchild is one of the commonest reasons for doing it at all.
GOV.UK put it plainly: no tax is due on any gifts you give if you live for seven years after giving them. Die inside that window and the gift can be counted back into your estate.
Some giving is exempt from the start rather than tapered, and the amounts are small enough that people often do not realise they are allowances at all.
Whether any of this applies to you. Your estate, your income and your intentions decide that, and none of them are on this page.
Whether releasing money and giving it away is a sensible thing to do. That is tax planning, it is regulated advice, and it is a specialism inside that. We publish the published rules and stop.
Whether you will pay tax, how much, or whether a gift is a good idea. Those depend on your whole financial position and they are advice. The figures here are the published rules as they stood on the date shown, and rates move at fiscal events.
Equity release may involve a lifetime mortgage, secured against your property, or a home reversion plan. It will reduce the value of your estate and impact funding long-term care.
Questions worth putting to an adviser, and to an accountant if there is an estate of any size.
If I give some of this away, when does the seven year clock start?
From the date of the gift, not from completion. On a drawdown plan those can be years apart.
Does the plan reduce my estate for inheritance tax?
The debt is deducted before the tax is worked out. Ask what that means with your own numbers rather than in general.
Should any of this be in a savings account at all?
Money sitting in the bank earns taxable interest and counts as capital for means-tested benefits. Both are avoidable by not releasing more than you need.
Do I need an accountant as well as an adviser?
An equity release adviser is not a tax adviser. If there is an estate of any size the answer is usually yes.
Short answers to the things that come up most. None of it is advice, and every figure on this page carries its source.
No. It is borrowed against your home rather than earned, so it is not income and there is no income tax or capital gains tax on the amount you receive, whether you take it as a lump sum or draw it down over time. Tax can arrive afterwards, depending on what you do with it.
Yes, in the ordinary way. GOV.UK publish a Personal Savings Allowance of 1,000 pounds for a basic rate taxpayer, 500 pounds at higher rate and nothing at additional rate. There is also a starting rate for savings of up to 5,000 pounds, which you get none of if your other income is 17,570 pounds or more.
GOV.UK state that no tax is due on any gifts you give if you live for seven years after giving them. Die inside that window and the gift can be counted back into your estate: gifts in the three years before death are taxed at 40 per cent, then taper relief reduces that to 32, 24, 16 and 8 per cent across the remaining years.
Some. You can give away 3,000 pounds of gifts each tax year without them being added to your estate, and carry an unused amount forward one year. You can give as many gifts of up to 250 pounds per person as you like, provided you have not used another allowance on the same person. Gifts between spouses and civil partners living permanently in the UK are exempt.
What is owed is deducted before inheritance tax is worked out, so the debt does reduce the taxable estate. That is a consequence of borrowing rather than a reason to borrow, and whether it helps you is a question for an adviser and usually an accountant, not for a web page.
Equity release may involve a lifetime mortgage, secured against your property, or a home reversion plan. It will reduce the value of your estate and impact funding long-term care.
One qualified equity release adviser. They will go through your figures and tell you if there is a better answer. It costs nothing and commits you to nothing.
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