August 12th, 2020

Is equity release taxable? – Here’s the answer

It’s a key question when you are trying to generate capital: is equity release taxable? After all, you need to know exactly how much of a lump sum you’re going to wind up with. Let’s find out where you stand.
 

Is equity release taxable?

There are two ways you can turn equity in your home into cash: take the money as a lump sum or drawdown the cash in smaller chunks. Whichever you choose, the good news is there will be no tax to pay. However, tax isn’t the only consideration when you are weighing up the pros and cons of equity release.


You could end up paying a lot of interest

The amount you borrow via equity release will incur interest. With most agreements, the amount of interest owed will be repaid once the borrower dies or moves into long term care accommodation. At this point your lender will sell your home and deduct the interest you owe from the sale proceeds.

The snag is that interest on equity release is compounded, which means it can add up fast. So if you live for many years beyond the start of your equity release agreement, the money your lender takes from the sale of your home could be far more than the amount you originally borrowed. Obviously that has knock on effects if you are hoping to leave something behind for your nearest and dearest after you’ve gone.

Having said that, it is possible to find lenders that will allow you to repay some or all of the interest on your equity release while you are still occupying your property. That’s why it’s so important to study the equity release market carefully before you commit to a decision. There are lots of lenders out there, each with their own way of doing things.

Questions about equity release? Let us answer them for you.


Equity release could impact your benefits entitlement

Another important consideration is the possibility of equity release impacting your entitlement to certain state benefits. In short: the money you take via equity release could push you over the allowable income or capital thresholds that are used to determine your benefits entitlement.


Equity release: one piece of the jigsaw

If you are considering equity release, it’s a good idea to scrutinise lenders – and what they are offering you – carefully. But it’s equally important not to lose sight of the bigger picture. Equity release can sometimes have a significant impact: on both your retirement wealth and the amount you are able to leave behind to loved ones.

Talking with a professional may help you to find more cost-effective ways to achieve your financial ambitions. The big financial decisions are never easy. But talking to one of our financial advisers can help to make your options clear. Sounds good? It only takes a few seconds to begin the conversation.


You may also be interested in:

>> Is income protection insurance a taxable benefit?
>> Is critical illness insurance a taxable benefit?
>> Annuity vs drawdown: which best suits your retirement plans?