Will I pay tax on drawdown equity release?
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I am retired and live off my pensions, but I don’t have much to spare for any extras. After the pandemic, I’d like to take some holidays later this year, if the rules allow it. I think equity release could be the answer, but I’m very worried about getting into debt. I read in your answer to a question a few weeks ago that you can set up a “drawdown facility” to take small amounts from an equity release contract. Can you explain how that works, please?
Diane Fish of Smith & Pinching responds:
The first thing to say is that money you receive from an equity release arrangement isn’t taxed as income. You are not making money from the arrangement – you are borrowing it.
As for getting into debt, I appreciate that you may not like the feeling of owing money to an equity release provider, but please be assured that you won’t need to repay the borrowing until your home is sold, which might be when you move into a care home, or when you die. If you did want to move, most arrangements can normally be transferred to your new home.
When you set up the equity release drawdown facility, you and the equity release provider will agree a maximum figure that you can draw. The amount on offer will depend on factors such as your age, state of health and the value of the house. You take an initial lump sum and the remainder will be allocated to you to be withdrawn as and when you need it.
There will probably be a minimum amount you can draw at any time, and there will normally be no further arrangement fees to pay. You will pay interest on the money that you have taken, not for the whole amount that is available to you. The interest rate applied to each subsequent withdrawal will be set to the prevailing rate at the time.
It’s important to bear in mind that it may take a few days to arrange new withdrawals, so you must plan ahead when you want to access more money.
An Equity Release/Lifetime Mortgage arrangement will mean that the value of the estate you leave to your family when you die will be reduced. It may also affect your entitlement to any means-tested benefits both now and in the future. Equity Release can be more expensive when compared to a normal residential mortgage. In addition, you will still be responsible for maintaining the property.
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This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration. There will be a fee for the Equity Release/Lifetime Mortgage advice. The precise amount will depend upon your circumstances, but we estimate that it will be a minimum of £1,100. Any opinions expressed in this article do not constitute advice.
For more information please visit www.smith-pinching.co.uk