What is equity release?
Equity release is a group of financial products that let homeowners turn some of the value tied up in their home into cash, without selling up and moving out. It’s aimed at people who are “asset-rich but cash-poor” — a valuable home, but a modest pension or limited savings — and it’s most often used to top up retirement income, pay off an existing mortgage, help family with a house deposit, fund home improvements, or cover care costs.
The cash you release isn’t a gift or a benefit — it’s a loan (or, for home reversion, a sale of part of your property). It’s tax-free to receive, but it comes at a real cost: the amount you eventually owe (or the share of your home you’ve sold) reduces what’s left in your estate.
How does equity release work?
There are two main types of equity release product available in the UK.
Lifetime mortgage
You borrow against your home, either as a single lump sum, a smaller initial amount plus a drawdown reserve you can draw on later, or as a regular income. Crucially, you keep 100% ownership of your home throughout.
Interest is charged on the outstanding loan and, if you don’t make repayments, is simply added to the balance each year. This is the roll-up (compounding) effect: next year’s interest is calculated on this year’s larger balance, so the debt can grow substantially faster than it would under simple interest, especially over a long retirement. Equity Release Council standards require fixed or capped interest, so the rate can’t rise without limit — it is the balance it’s applied to that keeps growing.
The loan, plus every year of accrued interest, is repaid when the last surviving borrower dies or moves permanently into long-term care — typically from the sale of the home.
Home reversion
A much smaller part of the market. Instead of taking a loan, you sell all or part of your home to a reversion company at a discount to market value, in return for a lump sum or income, while retaining a legal right to live there rent-free (or at a low rent) for the rest of your life. Because you’ve sold that share outright, you no longer benefit from any future price growth on it — the reversion provider does. Most UK customers and providers use a lifetime mortgage instead.
How much can you release?
How much a provider will lend depends on its own criteria, such as your age, health and the value of your home, so get quotes from providers and take advice rather than relying on an average.
Run your own numbers, including the compounding effect over time, in our Equity Release Calculator.
Advice and protections
Equity release is a significant, long-term decision. MoneyHelper says you must speak to an equity release specialist about the risks before deciding, and you will also need legal advice from your own solicitor: the provider can’t release the money until you’ve taken it. Equity Release Council members must meet standards that include staying in your home for life or until you move into care, a no-negative-equity guarantee and fixed or capped interest, and must tell you if a plan doesn’t meet one. If a lifetime mortgage has no no-negative-equity guarantee, your estate pays off the rest of the loan. A calculator or comparison site can help you plan, but it isn’t a substitute for that advice or a genuine provider quote.
Equity release and Inheritance Tax
Released cash is a loan, not income, so there’s no Income Tax or Capital Gains Tax due when you receive it. It does, however, shrink your taxable estate for Inheritance Tax purposes in two ways: anything you spend or give away is no longer part of your estate when you die, and the outstanding loan balance is deducted from your property’s value when your estate is valued for IHT. Every estate still has its nil-rate band and, where a home passes to direct descendants, the residence nil-rate band, before the standard rate applies to the remainder — see our Inheritance Tax Calculator for the full breakdown, including the 7-year gift taper if you give some of the released cash away.
Equity release and means-tested benefits
Because released cash counts as capital, a large lump sum sitting unspent in your bank account can reduce or remove entitlement to means-tested benefits such as Pension Credit — which disregards a set amount of capital before assuming a weekly “tariff income” on anything above it. If you’re claiming, or might claim, means-tested support, check the effect on your own numbers with our Pension Credit Calculator, and discuss with your adviser whether a drawdown facility — releasing smaller amounts only as you need them — better protects your entitlement than a single large lump sum.