Equity Release Taxation – is there Any Liability to VAT or Taxes?

For many people considering equity release, taxation is one of the last considerations they think of. The cash lump sum received through an equity release scheme is classified as a withdrawal of the capital from your home rather than an income; it is not subject to income tax. However, there are still a number of financial implications involved in this type of arrangement.

While there is no liability for income tax on the lump sum received from equity release, taxation can still be an issue. Once you have received the funds, there are several possibilities for tax to be levied. The prime consideration in this instance should be your tax status. Many people place their lump sum into a bank or building society account which may incur tax on the interest. This can also apply to any other investments such as share dividends. However, if you are a non-tax payer, upon completion of the R85 Inland Revenue form, there would be no further tax levied on the funds.

Within the equity release industry, the majority of the costs are associated with professional advice. This form of charge is not generally subject to VAT. This can, therefore, eliminate VAT on advice fees charged and lender application fees.

Taxation Mitigation
There are a number of circumstances where it is beneficial in equity release taxation mitigation. Many people opt for an equity release scheme to provide taxation mitigation regarding inheritance tax. Inheritance tax is applied to the possessions or money which you leave behind upon your death. While there is a certain threshold for a tax free allowance, for many people with a property as their main asset, this represents a worry that their beneficiary will need to pay a large tax bill out of the money left to them.

Many people try to mitigate this tax by planning for their beneficiaries while they are still alive. There are a number of provisions which allow tax free gifts during your lifetime which can allow for you to pass on your inheritance to your beneficiaries while you are still living. Equity release allows for people who have the majority of their assets tied up in their home to pass on an inheritance from their lump sum eliminating inheritance tax.

There are some restrictions to this form of inheritance planning. The main restriction is that you must survive the giving of this type of cash gift by at least seven years, in order for it to remain tax free. This can be a major consideration for anyone looking at equity release.

Planning an Equity Release Scheme
When planning equity release, taxation should be a major consideration. It allows the opportunity to release the equity tied up in your property to be distributed among your beneficiaries or spent yourself to avoid future inheritance tax. It can be a good idea to discuss your equity release plans with your family or other beneficiaries before proceeding further with an application. It can be possible to avoid inheritance tax completely by ensuring that the value of the possessions and money left upon your death is well within the tax free threshold. This is currently frozen at £325,000 until 2017 but after this date, it may be subject to change in the annual government budget.

If you are considering equity release, taxation should be among the primary considerations before making your decision. It is important to assess all your options and ensure that you are making the decisions which are best suited to your specific circumstances. Your specialist equity release broker will be able to provide advice on the actual schemes but you should consult professional advice in order to maximize tax mitigation.