Do you pay tax on Equity Release?

Whether you’re a business owner, sole trader, or self-employed, you’ll want to know if you pay tax on Equity Release.

When you release the equity in an asset, such as your home, you can access cash from its value in small bursts or on a regular basis.

Because it is a loan, like a mortgage, Equity Release is tax-free. You will not be subject to Income Tax or Capital Gains Tax if you use Equity Release to supplement your income.

A lifetime mortgage is by far the most popular form of Equity Release, accounting for over 99 percent of all applications, and is the subject of this article.

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

When it comes to Equity Release, there are two types of taxes to be aware of: Capital Gains Tax and Income Tax. Equity Release has no effect on either of these in terms of taxation.

However, it’s possible that you’ll have complicated financial matters, in which case it’s always a good idea to seek Equity Release advice tailored to your specific situation.

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

When releasing equity, you will not pay Income Tax if you are a director of a limited company, a sole trader, or self-employed. Even if you plan to use the money to supplement your income because it is a loan rather than income.

Drawdown is a common feature of lifetime mortgage Equity Release plans. Drawdown allows you to withdraw funds from your property over time in stages.

Drawdown facilities are non-interest bearing and make funds available to you as and when you need them. Consider them a savings account where you can withdraw money as needed. Most plans have a minimum withdrawal amount set by the provider.

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

People often associate Capital Gains Tax with real estate because it is typically a high-value asset that appreciates in value.

The rules on Capital Gains Tax are the same whether you’re self-employed or a director. The profit you make when you sell or dispose of your property is subject to Capital Gains Tax (or any other asset).

You are not disposing of your property when you use Equity Release; instead, you are receiving a loan against the equity in the property, which means you will not be subject to Capital Gains Tax.

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What are the advantages and disadvantages of Equity Release for a sole trader and limited company director?

There are several benefits and drawbacks to Equity Release as a sole trader and director of a limited company:

Advantages Disadvantages
You can free up a significant amount of capital to invest in your company. It’s possible that the process will take longer than extending your overdraft.
You won’t have to downsize because you can stay in your current home. You must be at least 55 years old.
You have complete control over when and how you release your equity. If you and your partner live together, the youngest person must be at least 55 years old.
You don’t need to own your home outright. It might not be the most efficient way to raise funds for your company.
You might be able to get credit at a much lower cost. It’s possible that interest rates will continue to rise, leaving you with little equity in your home.
You can choose a plan in which you don’t have to pay anything back on your Equity Release loan. If the value of your home rises, you won’t be able to profit from the portion you’ve sold.


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

Although there are fewer buy-to-let mortgage products on the market, as a business owner, you can release equity on your portfolio of buy-to-let properties without incurring a tax bill.

Because Equity Release is a loan rather than income, you will not be taxed if you choose to release equity on your buy-to-let properties.

Will my beneficiaries have to pay Inheritance Tax?

Equity Release reduces the value of your estate in the long run. The value of your estate is the sum of all your assets minus any liabilities. Taking money from your estate lowers the value of your estate, lowering the possibility of Inheritance Tax (IHT).

With Equity Release, the total amount owed to the Equity Release provider, including principal and interest, will be deducted from the estate’s value.

If I invest money from Equity Release, will I be subject to tax?

Although the funds released are tax-free, any interest earned on the funds, such as in a savings account, may be subject to tax.

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

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

Home reversion plans differ from lifetime mortgages in that you sell a portion of your property and get a lifetime tenancy, whereas with a lifetime mortgage, you take a mortgage with a legal charge placed against your property. In contrast to income, a home reversion plan is still a loan.

How do I go about releasing equity from my property?

You should always seek professional financial advice from an Equity Release Council-affiliated adviser (ERC). For all parties involved in the Equity Release process, the ERC establishes rules and guidelines. One of the safeguards they provide is a no-negative equity guarantee, which prevents you from owing more than the value of your home.

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