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Do you pay tax on equity release?

Do you pay tax on equity release?

What is the tax treatment on equity release?

Whether you’re a business owner, sole trader or self employed and you’re considering equity release, you’ll want to know, do I pay tax on equity release?

Equity release is when you release the equity in an asset, such as your home, to access cash from its value in either small bursts or a constant stream. 

Equity release is tax-free since it is a loan, just like a mortgage. Even if you intend to use Equity release to supplement your income, you will not be subject to Income Tax or Capital Gains Tax.

With over 99% of equity release applications being a lifetime mortgage, it is by far the most popular form of equity release and what this article focuses on. 

Why is equity released not taxed as a sole trader or a limited company?

There are two types of tax people want to understand when thinking about equity release; Capital Gains Tax and Income Tax. For taxation purposes, equity release has no impact on either of these. 

However, it's entirely possible that you’ll have complicated financial affairs and in these cases, it's always highly recommended that you seek equity release advice regarding your specific circumstances.

Will I be subject to income tax as a director of a limited company or sole trader?

If you are either a director of a limited company, a sole trader or self employed, you will not pay Income Tax when releasing equity. Even if you intend to use the money to top up your income because it’s as a loan and not income.

A common feature of lifetime mortgage equity release plans, is draw-down. Draw-down allows you to release funds from your property in stages over a period of time.

Draw-down facilities make funds available to you as and when you need them and are classed as non-interest bearing. Think of them like a savings account, you can access money as and when you need it, most plans have a minimum withdrawal set by the provider.

Will I have to pay Capital Gains Tax if I’m self employed or a director?

Capital Gains Tax is something people always associate with property as it’s typically a high value asset, which increases in value. 

Whether you’re self employed or a director, the rules on Capital Gains tax remain the same. Capital Gains Tax is a tax on the profit you make when you sell/dispose of your property (or any other asset).

With equity release you are not disposing of your property, you are receiving a loan against the equity in the property so you will not incur Capital Gains Tax. 

What are the advantages and disadvantages of equity release for a sole trader and limited company director?

As a sole trader and director of a limited company, there are several advantages and disadvantages of equity release:

Advantages Disadvantages
You can free up a lot of cash to inject into your business The process may take longer than extending your overdraft
You can stay in your home and won’t need to downsize You must be over the age of 55
You can go through the equity release process whenever you want If you live with your partner, the youngest person will need to be at least 55 years of age
You don’t need to own your home outright It may not be the most effective way of raising funds for your business
You may get access to credit at a much more affordable rate Interest may continue to roll up, leaving you with little equity left in your home
You can reduce your inheritance tax bill You may leave a smaller inheritance for your family
You can choose a plan where you never have to make any repayment on the equity release loan If your property value rises, you won’t be in a position to benefit from the portion you’ve sold

If I release equity on buy-to-let mortgages, will I have to pay Tax?

There are fewer products in the market for buy-to-let mortgages, however, as a business owner it is possible to release equity on your portfolio of buy-to-let properties and not incur a tax bill.

If you choose to release equity on your buy-to-let properties, you won’t pay tax as equity release is a loan and not income.

Will my beneficiaries have to pay Inheritance Tax?

Equity release has the overall effect of reducing the value of your estate. Your estate is the value of all your assets minus any obligations. Taking money from your estate reduces its worth, lowering any potential Inheritance Tax (IHT).

With equity release, the value of the estate will be lowered by the whole amount owed to the equity release provider, which includes the principal and interest, which includes:

  • Rolled up interest 
  • Share in property appreciation 
  • Fees and charges due on mortgage redemption

If I invest money from equity release, will I be subject to tax?

Although the funds released are free of income tax, if you invest the money, for example into a savings account, any interest could be subject to tax.

Will I have to pay Capital Gains Tax or Income Tax on home reversion plans?

If you release equity through a home reversion plan, you won't have to pay Income Tax or Capital Gains Tax on the equity. 

Although home reversion plans differ from lifetime mortgages in that with a home reversion plan, you sell part of your property and get a lifetime tenancy, while with a lifetime mortgage, you’re taking a mortgage with a legal charge raised against your property. A home reversion plan still constitutes a loan as opposed to income.

How do I go about releasing equity from my property?

Whether you’re a sole trader or a limited company, If you want to release equity from your property you will have to seek independent equity release advice from a financial adviser to make sure you’ve considered everything. 

You should always seek professional financial advice from an adviser that is part of the Equity Release Council (ERC). The ERC sets rules and guidelines for all parties involved in the equity release process. One of the protections they afford is a no-negative equity guarantee which protects you from owing more money than your property is worth.

Tom Riley
Written by: Tom Riley - Joslin Rhodes Pension and Retirement
Follow Tom:
Tom Mark Riley is a financial services writer at Joslin Rhodes Pension & Retirement Planning. Joslin Rhodes takes a holistic view of your finances and offer a free equity release calculator to show how much equity you could potentially release from your home.

This article was written for Handpicked Accounts by Tom Riley.

David Tattersall
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Hi there - I'm David from Handpicked Accountants. If you need help finding the right accountant, simply give me a call. My expertise is in connecting business owners with the very best professional services and I'm on hand to assist you today.

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