Equity release can provide homeowners aged 55 and over with a valuable source of funds by unlocking the equity tied up in their property. However, it’s essential to understand how equity release may affect entitlement to benefits and taxes before making a decision.

Equity Release and Means-Tested Benefits

Means-tested benefits are financial assistance provided by the government to individuals whose income and savings fall below a certain threshold. Examples of means-tested benefits include Pension Credit, Universal Credit, Housing Benefit, and Council Tax Support. It’s important to note that means-tested benefits are based on an individual’s financial circumstances, including income, savings, and assets.

When considering equity release, homeowners should be aware that the lump sum or income received from equity release may affect eligibility for means-tested benefits. The cash released from equity release is considered as part of your assets and could potentially increase your overall wealth, which may impact entitlement to benefits. Depending on the amount of equity released and the specific benefit program, homeowners may see a reduction or loss of means-tested benefits.

However, it’s crucial to seek advice from a qualified financial advisor or specialist before proceeding with equity release. A financial advisor can assess your individual circumstances and provide guidance on how equity release may impact your entitlement to benefits, as well as explore alternative options to minimise any potential loss.

Equity Release and Taxes

Equity release itself is not subject to income tax, as the funds released from equity release are considered a loan rather than income. This means that homeowners do not need to pay tax on the lump sum or regular income received from equity release. Additionally, the funds released from equity release are typically not considered as capital gains, so homeowners do not need to pay capital gains tax on the proceeds.

However, homeowners should be aware that releasing equity from their property could have indirect tax implications, particularly if the funds released result in an increase in overall income or wealth. For example, if the additional income from equity release pushes homeowners into a higher tax bracket, they may be subject to higher income tax rates on other sources of income, such as pensions or investments.

Furthermore, any interest accrued on a lifetime mortgage, which is the most common form of equity release, is added to the loan balance and compounded over time. While homeowners do not need to make regular repayments on the loan during their lifetime, the accumulated interest will eventually need to be repaid when the property is sold, which could reduce the amount of inheritance left to beneficiaries.

As tax laws and regulations can be complex and subject to change, homeowners considering equity release should seek advice from a qualified tax advisor or accountant to understand the potential tax implications and plan accordingly.

Equity release can provide homeowners with valuable financial flexibility in retirement by unlocking the equity tied up in their property. However, it’s essential to consider the potential impact of equity release on entitlement to means-tested benefits and taxes before making a decision. Seeking advice from qualified financial and tax advisors can help homeowners make informed choices that align with their financial goals and objectives. Contact Us for more information on equity release.