Using Equity Release to Gift Money

One of the fastest-growing reasons people release equity from their homes is not to spend on themselves, but to give to the people they love while they can enjoy watching the difference it makes. A grandchild’s house deposit, a child’s wedding, help through university or simply easing the pressure on a family stretched by the cost of living, the idea of a “living inheritance” has genuine emotional and financial appeal.

But gifting money raised through equity release sits at the intersection of several rules, inheritance tax, deprivation of assets and the long-term cost of compounding interest, and it pays to understand all of them before you sign. This guide explains how gifting from released equity works, where the tax and benefit traps lie, and how to gift in a way that helps your family without storing up problems. It is information, not personal advice.

Why people gift a living inheritance

For a generation of homeowners whose properties have risen sharply in value, much of their wealth is tied up in bricks and mortar while their children face the hardest housing market in decades. Passing wealth down earlier, when a deposit or a debt repayment changes a young family’s life, is often more useful than leaving it in a will. Being alive to see the benefit is, for many, the whole point.

The trend has a name in the industry: the “bank of Mum and Dad”, now one of the largest sources of deposit funding in the country. A typical example might be a couple in their seventies, sitting on a home worth £500,000 with no mortgage, releasing £60,000 so that two grandchildren can each put down a meaningful deposit. The emotional reward is immediate; the financial consequences, by contrast, unfold slowly over the years that follow, which is why they are so easy to overlook in the moment.

Equity release makes this possible without selling up and moving. Because the cash you release is a loan secured on your home rather than income, it is tax-free in your hands and can be paid directly to the people you want to help. The complications arise not from receiving the money but from giving it away, inheritance tax, care-fee rules and the long arithmetic of compound interest, so that is where careful planning matters most.

How gifting from released equity works

Mechanically, gifting released equity is simple: you take a lump sum or drawdown from a lifetime mortgage and pass some or all of it to family. Everyone in the UK can give away certain amounts each year with no inheritance tax consequences at all. The main exemptions are set out below, and using them is the most efficient starting point.

Larger gifts are still allowed, but they are treated differently. Anything above these exemptions is a potentially exempt transfer: it leaves your estate for inheritance tax purposes only if you survive seven years. Since a lump sum released for a house deposit will usually exceed the annual exemptions, most meaningful gifts fall into this category, which is why the seven-year rule dominates the planning.

One exemption deserves special attention because it is so often missed: regular gifts out of surplus income. If you make gifts from income you genuinely do not need to maintain your usual standard of living, and you make them regularly, they can be immediately exempt from inheritance tax with no upper limit and no seven-year wait. This works less naturally with a one-off equity release lump sum, but if you use a drawdown facility to make modest, regular payments to family, it can be a powerful and underused route, provided you keep clear records showing the payments came from income and were part of a normal pattern.

The seven-year rule and taper relief

Under the seven-year rule, a large gift only falls completely outside your estate once seven years have passed. Die within that window and the gift is added back when calculating inheritance tax. If the total of your estate and such gifts exceeds the nil-rate bands, £325,000 each, plus up to £175,000 of residence nil-rate band, frozen until 2030 and giving up to £1m for a couple: the excess is taxed at 40%.

Taper relief can soften the blow. If you die between three and seven years after making a gift that exceeds the nil-rate band, the tax on that gift reduces on a sliding scale. It is widely misunderstood: taper reduces the tax on the gift, not the value of the gift itself, and it only bites once the nil-rate band is already used up. Our complete guide to inheritance tax planning walks through the mechanics with worked examples, and it is worth reading alongside this one.

Deprivation of assets: the care-fee trap

A less obvious risk is deprivation of assets. If you later need care and your local authority believes you gave money away deliberately to reduce what you would have to contribute, it can assess you as though you still held that money. Crucially, there is no fixed seven-year cut-off here as there is for inheritance tax, councils look at your intention and the timing, so a gift made shortly before needing care is far more likely to be challenged.

This does not mean you can never gift. It means the reason for the gift, and your health and circumstances at the time, matter. Gifting to help a grandchild onto the housing ladder while you are fit and well is very different from emptying your estate as care looms. Because the interaction between gifting, care funding and housing wealth is genuinely complex, it is worth reading our guide to paying for care in later life before making large gifts.

The real cost of a gifted pound

The final consideration is cost. Money released to gift is borrowed money, and the interest rolls up and compounds for as long as the plan runs. A £50,000 gift made at 68 could, at around 5% interest, represent well over £100,000 of debt against your home by your late eighties. In effect, you may be gifting £50,000 today at a long-term cost of double that to your estate.

There is a subtle upside hiding inside that cost, however. The rolled-up loan is a debt against your estate, so it reduces the net value of your home for inheritance tax purposes, and if you survive the gift by seven years, the gifted cash also falls outside your estate. For a family whose estate would otherwise be taxed at 40%, that combination can make gifting through equity release genuinely tax-efficient, provided you live long enough and plan the timing with care. The key word is “provided”: the benefit depends on assumptions about longevity and interest that no one can guarantee.

Alternatives to gifting from equity

Before releasing equity to gift, it is worth asking whether the money could come from somewhere cheaper. Gifting from surplus income, regular payments out of income you genuinely do not need, which leave your standard of living unchanged, is immediately exempt from inheritance tax and, crucially, costs nothing in rolled-up interest. Existing savings, ISAs or a tax-free pension lump sum can all fund gifts without borrowing against your home at all.

Downsizing is another route: moving to a smaller property can free up a substantial sum to gift outright, though the practical and emotional costs of moving are real. For homeowners with reliable income, a conventional later-life mortgage where you service the interest keeps the debt flat rather than letting it compound. The right answer depends on your income, your health and how much of your own security you are willing to trade, which is exactly the sort of judgement a regulated adviser is there to help you make.

How to gift well

None of this should put you off: it should shape how you do it. Gift within your annual exemptions where you can, use drawdown to release money in stages rather than a single large sum, keep clear records of what you gave and when, and make sure your own income and care needs are secured first. Above all, take advice: equity release can only be arranged through a specialist adviser, and gifting adds tax and benefit layers that reward professional modelling. The free matching service at Vetted Wealth connects you with independently vetted, FCA-regulated advisers who can model the whole picture. If keeping money invested for later flexibility is part of your thinking, our guide on how much you need to retire is a useful companion, and remember that investment values can fall as well as rise.

Common questions on equity release