Equity Release Tax Guide
Is Equity Release Tax-Free? Tax, Benefits and Gifting Explained
Money released through a lifetime mortgage is not normally subject to Income Tax or Capital Gains Tax. However, savings interest, investments, gifts, benefits and care funding can all be affected by what you do with the money afterwards.
Do You Pay Tax on Equity Release?
In most ordinary circumstances, you do not pay tax simply because you receive money from a lifetime mortgage.
The money is treated as a loan secured against your property. It is not normally treated as employment income, pension income, investment income or a profit made by selling an asset.
You may receive the money as one lump sum, several withdrawals from a drawdown facility or a combination of the two. The initial funds are still normally classed as borrowing rather than taxable income.
The equity-release money itself is normally tax-free, but what you subsequently do with it may have tax, benefit, care-fee or estate-planning consequences.
Why Is Equity Release Normally Tax-Free?
A lifetime mortgage is a loan secured against your home.
You are borrowing money from a lender and creating a debt that must eventually be repaid. The mortgage balance is normally repaid when the last borrower dies or moves permanently into long-term care, usually from the proceeds of selling the property.
Because the released money is borrowed rather than earned, the amount you receive is not normally subject to Income Tax.
The release is not a salary, wage or payment for work.
It is separate from withdrawals made from a pension arrangement.
The initial payment is not interest, a dividend or an investment profit.
The loan and any unpaid interest remain secured against the property.
Do You Pay Income Tax on Equity Release?
The answer
You do not normally pay Income Tax on the amount released through a lifetime mortgage.
This is generally the case whether you receive the funds as:
- One tax-free lump sum
- Several smaller drawdown withdrawals
- Regular withdrawals over a period of time
- A mixture of an initial sum and later withdrawals
Regular drawdowns may look like income because money reaches your account at intervals. However, each withdrawal is still normally money borrowed under the mortgage rather than taxable earnings or pension income.
Income Tax could become relevant if the money later produces income. This might happen if you place the funds in savings, invest them, receive dividends or use them to buy an asset that generates rent.
Will You Pay Tax on Savings Interest?
What to know
The original amount released is not normally taxable, but interest earned after placing it in savings may be taxable.
Whether tax is due will depend on your total taxable income, the amount of interest earned and the allowances available to you.
Borrowing a large lump sum before you need it may also be inefficient because you could:
- Pay lifetime-mortgage interest on the full amount released
- Receive a lower rate on the money held in savings
- Potentially pay tax on some of the savings interest
- Increase the capital counted in a means-tested benefit assessment
A drawdown lifetime mortgage may allow you to take a smaller initial amount and release more later. Interest is normally charged only on money already withdrawn, although future releases may use a different interest rate and remain subject to lender terms.
Is Capital Gains Tax Charged on Equity Release?
The answer
Capital Gains Tax is not normally charged when you take out a lifetime mortgage.
You have borrowed money against the property rather than sold or disposed of it.
Capital Gains Tax may become relevant later if you use the released funds to buy investments or other assets that increase in value and are subsequently sold.
A taxable gain may arise when investments held outside a tax-efficient account are sold.
Buying and later selling another property may create a Capital Gains Tax liability.
Certain valuable possessions or business assets may also create taxable gains.
A home reversion plan works differently because you sell some or all of your property to the provider. Specialist tax advice may be appropriate where the ownership, use or tax status of the property is unusual.
Can Equity Release Affect Pension Credit or Other Benefits?
Yes. Tax-free does not mean benefit-neutral.
Money held in your bank account may be treated as capital or savings when entitlement to means-tested benefits is assessed.
For Pension Credit, savings and investments of £10,000 or less do not currently affect the calculation. When capital exceeds £10,000, every £500 or part of £500 above that level is treated as £1 of weekly income.
Other support that could be affected includes:
- Pension Credit
- Housing Benefit
- Council Tax Reduction
- Universal Credit
- Income-related support
- Some local-authority care contributions
The rules differ between benefits, and how quickly the money is used may matter. Releasing funds for planned home adaptations can have a different practical effect from holding a large amount indefinitely in an accessible savings account.
Your current and potential future benefit entitlement should be reviewed before you take out equity release. Do not assume the money will be ignored because it came from your home.
Could Equity Release Affect Help With Care Fees?
Potentially
Releasing money from your property could increase the capital available to you and affect a local authority assessment of what you can afford to contribute towards care.
For England in the 2026/27 financial year, the published capital limits remain £23,250 for the upper limit and £14,250 for the lower limit. Different rules and thresholds apply in Scotland, Wales and Northern Ireland.
The outcome of a care assessment may depend on:
- Which part of the UK you live in
- Whether care is provided at home or in residential accommodation
- Whether the value of your property is included
- What you do with the released money
- Who else lives in the property
- Your other savings, assets and income
Giving money away to reduce the amount available for care fees may be treated as deliberate deprivation of assets. There is no simple time limit that automatically makes a gift acceptable for care-fee purposes.
Specialist financial and legal advice may be required before using property wealth to fund care or making gifts when care may be needed.
Can You Give Equity-Release Money to Your Family?
The answer
You can generally give released money to children, grandchildren or other people.
The recipient does not normally pay Income Tax merely because they receive a genuine cash gift.
However, a gift may become relevant for Inheritance Tax if you die within seven years of making it. Most outright gifts to individuals are potentially exempt transfers.
If you survive for seven years after making a qualifying gift, it will generally fall outside your estate for Inheritance Tax purposes. If you die within seven years, the gift may need to be included in the estate calculation.
Whether Inheritance Tax is payable depends on the value of the gift, your estate, available allowances, exemptions and other lifetime gifts.
What Is the Inheritance Tax Annual Gifting Exemption?
You can generally give away up to £3,000 in each tax year using the Inheritance Tax annual exemption.
An unused annual exemption can normally be carried forward for one tax year. Other exemptions may apply to small gifts, certain wedding gifts and qualifying regular gifts made from surplus income.
However, taking out a lifetime mortgage solely to make a gift can create a significant long-term cost.
Your family member receives the money immediately.
Mortgage interest may be charged on that amount for the remainder of the plan.
The loan and unpaid interest are normally repaid from the property later.
You must retain enough money and property wealth for care, moving and unexpected costs.
Can Equity Release Reduce Inheritance Tax?
Possibly, but not automatically
A lifetime-mortgage balance is normally a debt of the estate, which may reduce the estate’s net value.
However, simply moving value from your home into your bank account does not necessarily reduce your estate. You have exchanged property equity for cash while also taking on a debt.
The eventual outcome depends on:
- The amount released
- What happens to the money
- Whether it is spent, retained, invested or gifted
- How long you survive after making a gift
- The interest added to the lifetime mortgage
- Your available Inheritance Tax allowances
- The future value of your property and other assets
- Tax rules in force at the relevant time
The standard Inheritance Tax nil-rate band is currently £325,000. A residence nil-rate band of up to £175,000 may also be available when a qualifying home is left to direct descendants, subject to the rules and tapering for larger estates.
Equity release should not be presented as a guaranteed method of avoiding Inheritance Tax. Estate planning, trust planning and tax advice may require a suitably qualified specialist.
Three Examples of How the Tax Position Can Change
Example 1: Keeping the money in savings
A homeowner releases £60,000 but does not need to spend it immediately.
The £60,000 is not normally subject to Income Tax. However, it could affect means-tested benefits, interest earned may be taxable and lifetime-mortgage interest begins building on the money released.
Example 2: Helping a child buy a home
A homeowner releases £75,000 and gives it to an adult child for a property deposit.
The child does not normally pay Income Tax on the gift. However, the seven-year Inheritance Tax rule may apply, the parent’s mortgage interest continues to build and the parent has less equity available for future needs.
Example 3: Improving the home
A homeowner releases money to pay for repairs, adaptations or a new kitchen.
Using the money on the main home does not normally create an immediate Income Tax charge. However, the work may not increase the property value by the full cost, and interest will still be charged on the borrowing.
These examples are simplified illustrations rather than tax calculations or personal recommendations.
Does a Drawdown Lifetime Mortgage Change the Tax Position?
Each withdrawal from a drawdown lifetime mortgage is still normally borrowing rather than taxable income.
A drawdown facility may nevertheless help manage some of the wider consequences because you can potentially release only what you currently need.
Interest is normally charged only on money that has actually been withdrawn.
A smaller initial release may reduce the amount counted as capital.
You may be able to request additional money when a genuine need arises.
Later withdrawals may use a different interest rate and remain subject to the lender’s conditions.
A drawdown reserve may be subject to lender terms and continuing availability. Your adviser should explain how future withdrawals work before you proceed.
Questions to Ask Before Releasing Tax-Free Cash
Ask for your existing and potential future means-tested benefits to be considered.
A smaller release or drawdown arrangement may reduce unnecessary interest.
Consider savings interest, benefit rules and the difference between saving and mortgage rates.
Ask about the effect on your estate, the seven-year rule and your own future security.
Discuss possible future care needs before converting property wealth into cash.
Tax, investment, trust and legal questions may require a suitably qualified professional.
Ask to see the projected mortgage balance after 10, 15 and 20 years.
Make sure downsizing, savings, benefits and other borrowing have been discussed.
Alternatives to Equity Release
Equity release may be suitable for some homeowners, but it is not the only way to access money in later life.
Existing savings or investments may cover some or all of the amount required.
Moving to a less expensive property could release money without creating mortgage interest.
You normally pay the interest each month, subject to affordability and lender criteria.
A repayment mortgage may be available where the required payments are affordable.
You may qualify for support that reduces the amount you need to borrow.
Reducing the release may preserve more equity and lower the long-term interest cost.
How My Later Life Can Help
At My Later Life, we believe the phrase “tax-free cash” should always be explained properly.
Our advisers can discuss how a lifetime mortgage works, how much you may be able to release and how the decision could affect your estate, benefits and future plans.
We can also consider possible alternatives, including downsizing, retirement interest-only mortgages and other later-life borrowing options.
Where your circumstances raise specialist tax, investment, trust or legal questions, you may need separate advice from an appropriately qualified professional.
You will not be expected to make an immediate decision. You should have enough time to understand the recommendation, review the personalised illustration and discuss the plans with your family if you wish.
Equity Release Tax FAQs
Is equity release tax-free in the UK?
Money received through a lifetime mortgage is not normally subject to Income Tax or Capital Gains Tax because it is borrowing secured against your home rather than taxable income or a gain.
Do I need to declare equity release to HMRC?
The initial loan is not normally taxable income. However, you may need to declare taxable interest, investment income, rental income or gains produced after using the money. Seek tax advice where you are uncertain.
Do I pay tax on a drawdown lifetime mortgage?
Each drawdown is normally treated as borrowing rather than taxable income. Tax may arise later if the money earns interest, produces investment income or is used to purchase an asset that creates a taxable return.
Can equity release affect Pension Credit?
Yes. Money retained as savings may affect the Pension Credit calculation. Savings and investments above £10,000 are currently treated as producing assumed weekly income.
Can I give equity-release money to my children?
Yes, but the gift may be relevant for Inheritance Tax if you die within seven years. You should also consider the lifetime-mortgage interest and whether you will retain enough money for your own future needs.
Will my child pay tax on an equity-release gift?
A recipient does not normally pay Income Tax simply because they receive a genuine cash gift. Other tax, legal or property-purchase consequences may arise depending on how the money is used.
Does equity release reduce Inheritance Tax?
It may reduce the net value of an estate, but the result depends on what happens to the money, the interest added, gifts made, available allowances and the tax rules in force. It is not a guaranteed Inheritance Tax solution.
Is interest earned on released money taxable?
It can be. The original capital is not normally taxable, but savings interest may be taxable depending on your total income and available allowances.
Can equity release affect care fees?
Potentially. Released money may be counted as capital in a local-authority financial assessment. Care-funding rules vary across the UK and depend on your circumstances.
Should I take the maximum tax-free lump sum?
Not necessarily. Borrowing more than you need may increase compound interest, affect benefits and leave money earning less in savings than the mortgage costs. A smaller release or drawdown facility may be more appropriate.
Would You Like to Understand Your Options?
Speak to a qualified adviser about equity release, benefits, inheritance and alternative later-life mortgage options. We will explain the position clearly and give you time to decide.
Call 0207 100 4255 Explore Your OptionsIs Equity Release Tax-Free? The Final Answer
Money received through a lifetime mortgage is not normally subject to Income Tax or Capital Gains Tax because it is borrowing rather than income or a gain.
However, the position can become more complicated after the money reaches your account.
Savings interest, investments, gifts, Inheritance Tax, means-tested benefits and care-funding assessments may all need to be considered. Describing equity release simply as “tax-free cash” therefore tells only part of the story.
At My Later Life, we can explain how a lifetime mortgage works, consider its possible effect on your estate and benefits and discuss suitable alternatives. Where specialist tax or legal advice is needed, this should be obtained from an appropriately qualified professional.
------------------
Tax disclaimer: Tax treatment depends on individual circumstances and may change in the future. This article provides general information and does not constitute tax, legal, investment or estate-planning advice.
N.B. “This is a lifetime mortgage. To understand the features and risks, please ask for a personalised illustration. Check that this mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt, seek independent advice.”
