Is equity release money taxable

Money released from your home through equity release is not income, so there is no income tax on it. A lifetime mortgage is a loan, and borrowed money is not taxed; a home reversion plan is a sale of part or all of your home, and any gain on selling an interest in your main residence is normally covered by private residence relief. The tax questions come afterwards: income earned by investing the money is taxable, gifts of it can fall into your estate for inheritance tax if you die within seven years, and a large cash balance can reduce means tested benefits.

What are the two types of equity release?

• Lifetime mortgage. You borrow against your home and keep owning it. Interest is usually rolled up rather than paid monthly, and the loan is normally repaid from the sale of the home when the last borrower dies or moves into long term care.
• Home reversion plan. You sell all or part of your home to a provider in return for a lump sum or payments, and keep the right to live there. Article 63B of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 defines a regulated home reversion plan as an arrangement under which a provider buys all or part of a qualifying interest in a property in the UK, the seller or a related person is entitled to occupy at least 40% of it as a home, and the right ends on a specified event: moving into a care home, death, or the end of a period of at least 20 years.

Either way, the plan may pay a single lump sum or a series of drawdowns. The tax treatment of the money you receive is the same in both cases.

Why is the lump sum not taxable?

Income tax is charged on income, such as earnings, pensions, rent, interest and dividends. A loan is not income: it creates a debt that must be repaid. Money from a lifetime mortgage is therefore no more taxable than money from an ordinary mortgage, whether it arrives as a single sum or in regular drawdowns.

A home reversion plan is a disposal of a capital asset, so the only possible charge is capital gains tax, considered below. HMRC’s Inheritance Tax Manual at IHTM14250 makes the general point that payments can be regular and look like income while being capital in nature. That distinction is what keeps equity release money outside income tax, and it also has consequences for gifting, explained later.

Is there capital gains tax on a home reversion plan?

Normally not. Section 222 of the Taxation of Chargeable Gains Act 1992 gives private residence relief on a gain attributable to the disposal of a dwelling house, or of an interest in it, that has been the owner’s only or main residence, together with garden or grounds up to the permitted area of half a hectare (or more if needed for reasonable enjoyment of the house). Selling a 40% share of your home to a reversion provider is a disposal of an interest in it, so the relief can apply.

Relief may be restricted if the home has not been your main residence throughout your ownership, if part has been let or used exclusively for business, or if the grounds are larger than the permitted area. See private residence relief and gardens and grounds. A lifetime mortgage involves no disposal at all, so capital gains tax does not arise when you take it out.

What happens if I invest the money?

The lump sum is tax free, but what it earns is not. Interest on savings and dividends on investments bought with the money are taxable in the normal way, subject to the personal savings allowance and the dividend allowance. Investing through an ISA keeps the income tax free within the annual subscription limit.

A common trap is taking a large lump sum on a lifetime mortgage and leaving it in a deposit account. The rolled up interest on the loan can easily exceed the interest earned, and the interest earned may be taxable. A drawdown facility, where available, avoids borrowing money before it is needed.

What if I give the money away?

Giving equity release money to children or grandchildren is a gift for inheritance tax like any other. GOV.UK explains that gifts made less than seven years before death may be taxed, and that some gifts are exempt:

• the annual exemption of £3,000 a tax year, with one year’s unused amount carried forward,
• small gifts of up to £250 per person,
• wedding or civil partnership gifts of up to £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else,
• gifts to a spouse or civil partner and to charities.

The exemption for normal expenditure out of income is unlikely to help. It requires gifts to be made out of income, and IHTM14250 says income is judged by normal accounting rules and that regular receipts can still be capital. Drawdowns from a lifetime mortgage or reversion plan are capital, not income, so regular gifts funded from them will usually be potentially exempt transfers. See the seven year rule and normal expenditure out of income.

How does equity release affect inheritance tax on death?

With a lifetime mortgage, the home stays in your estate but the debt, including rolled up interest, is deducted from it. GOV.UK guidance on valuing an estate lists mortgages among the debts to identify. Under section 175A of the Inheritance Tax Act 1984 a liability is deducted to the extent it is repaid out of the estate, which is the normal position when the lender is repaid from the sale of the home (IHTM28029).

With a home reversion plan, the share you sold no longer belongs to you, so only your remaining share is in your estate. The money you received is in your estate to the extent you still have it.

Spending or giving away the money does not create an inheritance tax problem in itself; it just changes what is left. Gifts are tested under the seven year rule above.

Does the pre owned assets charge apply?

Not to a commercial plan. The pre owned assets income tax charge can apply where someone continues to live in a property they have disposed of. HMRC’s manual at IHTM44059 says a sale of a part share at arm’s length to an unconnected person is exempt whenever it took place, so a sale to a commercial equity release provider is not caught. A sale of your entire interest at arm’s length to an unconnected person is an excluded transaction (IHTM44031). Family arrangements, such as selling a share of the home to a child for cash, need more care. See pre owned assets tax.

How does this work in practice?

Illustration only. Margaret, aged 74, takes a £60,000 lifetime mortgage on her £400,000 home. She gives £30,000 to her son towards a house deposit, spends £10,000 on home improvements and puts £20,000 in a savings account.

• The £60,000 is not taxable when received.
• The £30,000 gift to her son is covered by £3,000 of annual exemption (or £6,000 if last year’s was unused); the rest is a potentially exempt transfer that falls away if she survives seven years.
• Interest on the £20,000 is taxable savings income, though it may fall within her personal savings allowance.
• If she dies, the outstanding loan and rolled up interest are deducted from her estate when repaid from the sale of the house.
• Holding more than £10,000 in savings would affect Pension Credit if she claims it: GOV.UK says every £500 over £10,000 counts as £1 a week of income. Universal Credit generally requires savings of no more than £16,000.

What mistakes come up most often?

• Declaring equity release money as income on a tax return, or worrying that it pushes you into a higher tax band.
• Assuming regular gifts from drawdowns qualify as normal expenditure out of income.
• Releasing more than is needed and paying tax on the interest it earns while the loan interest rolls up.
• Forgetting the effect of a cash lump sum on means tested benefits.
• Selling a share of the home to a family member as a private equity release without considering the pre owned assets charge and gift with reservation rules.

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Related Accountapedia entries

• Return on equity
• Tax on payments to release a restrictive covenant
• Is money raised on a crowdfunding page taxable
• Client money rules for accountants
• Debt for equity swaps: tax for the company

Sources

• legislation.gov.uk: SI 2001/544, article 63B
• GOV.UK: Manual page IHTM14250
• legislation.gov.uk: Act 1992 c. 12, section 222
• GOV.UK: Gifts
• GOV.UK: Print
• GOV.UK: Manual page IHTM28029
• GOV.UK: Manual page IHTM44059
• GOV.UK: Manual page IHTM44031
• GOV.UK: Eligibility
• GOV.UK: Universal credit money savings and investments

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.