Equity Release and Tax

• The lump sum produced from releasing equity via a cash release or reversion scheme is free of both Capital Gains Tax and Income Tax.
• Should, however, you put the money into a deposit account you will be taxed on the interest you receive from it
• If you wish to invest some of the equity released for income, further advice on how to achieve this in a tax efficient manner is normally required
• The income produced by a reversionary scheme is normally provided by an annuity
• This allows a percentage of each income payment to be regarded as a return of the capital used to purchase it, and therefore tax-free
• The balance however, is deemed as interest and is taxed at source at 20%, unless you are not liable to tax because of low income
• Higher Rate taxpayers would have additional tax to pay on the annuity's income
• Any income received either as investment income or an annuity may also reduce any extra age allowance you may be entitled to
• Personal tax issues can be complex and it is out of the scope of this guide to provide advice so seek professional advice where necessary

Equity Release and Inheritance Tax Planning

• Under current tax rules, everything above the Inheritance Tax (IHT) free threshold is subject to IHT at 40%
• For the tax year 2004/5 this has been set at £263,000 up £8,000 from the previous year
• Note that this threshold has failed to keep pace with soaring house prices in recent years

Inheritance Tax and its implications are well worth studying as they help to concentrate your thoughts on estate planning especially if your house has a net value of over £250,000. Add to this your other assets and then look around for some simple but effective advisors who can minimise your affairs and hopefully the likely tax bill.