Equity Release – who wants more money?

November 24, 2021

In April 2020 the Government released (sighs) yet “more new rules” which means higher tax bills for some landlords. Rubbish hey.

Borrowing money through a buy-to-let mortgage was once a major tax advantage but not anymore. Were you aware that since  April 2020, you’ve no longer been able to deduct any of your mortgage expenses from your rental income to reduce your tax bill. Instead, you now receive a tax-credit, based on 20% of your mortgage interest payments. It’s less generous than the old system for higher-rate taxpayers, who used to receive 40% tax relief on mortgage payments.   What’s not so obvious is that the rules (when obeyed!) could force some landlords into a higher or additional rate tax brackets, because they’ll need to declare the income that was used to pay the mortgage on their tax return.

Fear not my/our friends it’s not all doom and gloom. I/we can tell you how to release some tax-free money from your home. Let me/us introduce you to Equity Release.  Doesn’t sound inviting does it but it’s a good thing, honestly 😊

You can release some of the money tied up in your property with equity release, the cash lump sum of money is completely tax-free and without any need for monthly repayments! I’ll/We’ll explain more …

Equity release is exempt from Income Tax as it’s not classed as a form of income. Even if you’re planning to use equity release to top up your income, you’re still not subject to any taxation. Think of it like a loan. Now you might be thinking “what about capital gains tax?” as I’ve made money on my property and yes, you’re right that capital gains tax is normally paid on profit when you sell and your asset has increased in value but there’s a full exemption on your primary residence called ‘Private Residence Relief’.

Did you also know that you can get equity release on second properties or buy-to-let properties which would be classed as tax free? How? I/we hear you cry. Well, you only pay capital gains tax if you sell the property so you can release the equity and still not pay tax as you’re not selling the property, just releasing the equity. How good is that!

An additional feature which people often add to equity release plans is a reserve facility. Equity Release plans with reserve facilities are commonly referred to as draw-down plans. A draw-down plan allows you to release money from your property in stages, as and when you need the funds. The reserve facility holds money which you don’t need right away. Think of it a bit like a savings account (.(it doesn’t attract interest though ☹) You can withdraw money from it as and when you need it, typically in a minimum £2,000 portions. Just a word of warning though,  although the funds released are free of income tax, if you invest the money, for example into a savings account, any interest could be subject to tax.    

Wow!  Real brain hurting stuff right there isn’t it and in a future blog, I’ll/We’ll  be sharing how equity release can help you with inheritance tax.

Equity release can be tricky if not set up correctly and I’d/ We’d always advocate anybody wanting to know more should speak with a Wealth Management Consultant and we have a trusted partner who can have those conversations with you and make sure you are making the best choices you can for yourself and your relatives if you don’t already have access to that person. 

Just one of the added benefits that our clients experience being with Aspire Accounts. Contact us to find out more about the benefits of being on our Team and us on yours!