Yes. Releasing equity to give your children a ‘living inheritance’, often for a house deposit, is one of the most common reasons people choose it. But the gift interacts with the seven-year inheritance tax rule, your own future needs and means-tested benefits, so plan it carefully.
The short answer
- Releasing equity to give a ‘living inheritance’ is a common and legitimate reason to do it.
- A gift to children is inheritance-tax-free only if you survive seven years after making it.
- Gifting released cash can affect means-tested benefits and later care funding.
Yes, helping your children or grandchildren is one of the most popular reasons people release equity. Rather than leaving an inheritance they receive only after you are gone, releasing money from your home lets you give a ‘living inheritance’ at the moment it is most useful: a deposit for a first home, help clearing debts, or support with school and university costs. It is an appealing idea, but it needs to be handled with a clear eye on the tax, the benefits rules and your own future security. Our guide to using equity release to gift money covers the ground in full.
The inheritance tax angle
A gift to your children is what the taxman calls a potentially exempt transfer. If you live for seven years after making it, the money falls completely outside your estate and no inheritance tax is due on it. Die within seven years and its value is counted back into your estate, although taper relief can reduce the tax on gifts made more than three years before death. Each person also has a £325,000 nil-rate band, plus up to £175,000 more where a home passes to direct descendants, up to £1m for a couple, all frozen until 2030. Our explainer on the inheritance tax threshold sets out how these allowances stack up.
There is a neat interaction here. Borrowing against your home creates a debt that reduces the taxable value of your estate, and if the released cash is then given away and survives the seven years, it leaves your estate too. Used deliberately, that can trim a future inheritance tax bill, but only if the money is actually gifted or spent, not left sitting in your bank account, where it remains fully taxable.
Several smaller exemptions can also help. Everyone can give away £3,000 a year completely free of inheritance tax under the annual exemption, and this can be carried forward one year if unused. Gifts of up to £250 per person, wedding gifts within set limits, and importantly, regular gifts made out of surplus income rather than capital can all be immediately exempt. For a steady drawdown used to fund regular help to family, the ‘gifts out of income’ exemption can be particularly valuable, though it needs careful record-keeping to satisfy HMRC.
Before you gift: what to weigh
- 1
Your own security comes first
Only give away money you are sure you will not need for your own living costs, health or later-life care.
- 2
Mind the seven-year rule
For the gift to escape inheritance tax entirely, you need to survive seven years after making it.
- 3
Watch means-tested benefits
Gifting released cash can trigger deprivation-of-capital rules for Pension Credit and other means-tested support.
- 4
Consider the interest cost
The released money still accrues rolled-up interest, so a gift today grows the debt against your estate.
- 5
Talk to your family
A living inheritance works best when everyone understands the plan and its effect on the eventual estate.
The most important of these is the first. Equity release is irreversible in practice, and money given to children cannot easily be recovered if your own circumstances change. If care costs later loom, released equity you have already given away will not be there to help, and our guide to paying for care in later life shows why that matters.
Doing it the smart way
A drawdown lifetime mortgage often suits gifting well, because you can release money in stages as your family actually needs it rather than handing over a single large sum that immediately starts accruing interest and may affect your benefits. Some families also combine equity release with a formal record of the gift and, where appropriate, life insurance written in trust to cover any inheritance tax that would fall due if the seven years are not met.
It is also worth thinking about the effect on your children directly. A gift can affect their own position, for example, money used towards a property may have stamp duty implications, and a large cash gift sitting in a young person’s account could affect their student finance or their own benefits. And if a child later divorces, money you gifted towards a jointly-owned home could be caught up in the settlement. None of this is a reason not to help, but it is a reminder that a living inheritance deserves the same care as any other part of an estate plan.
Because the tax, benefits and family dynamics all pull in different directions, this is firmly a decision to model with a professional. Vetted Wealth can match you, free of charge, with an independently vetted, FCA-regulated equity release specialist who can bring in inheritance tax expertise where it is needed. This is information, not personal advice, and equity release reduces the value of your estate.
In summary
- Releasing equity to give a ‘living inheritance’ is a common and legitimate reason to do it.
- A gift to children is inheritance-tax-free only if you survive seven years after making it.
- Gifting released cash can affect means-tested benefits and later care funding.
- Never give away money you may need for your own living costs or care.
- A drawdown plan lets you release money in stages as your family needs it.
Sources and further reading
- Equity release MoneyHelper
- Standards and safeguards Equity Release Council
- Check the Financial Services Register Financial Conduct Authority
Read the full guide
For the complete picture, see our in-depth guide: Using Equity Release to Gift Money.
Speak to a vetted equity release specialist
This is free information, not personal advice. When you’re ready, we’ll match you with an independently vetted, FCA-regulated specialist, free, and with no obligation.
