01 March 2024

We all know the pleasure of giving – even the smallest of gifts can prompt a smile from someone you love. And we’d all love to help our family members with the big ticket items, such as getting a foot on the housing ladder.

Many of us think we can’t afford to help financially until after our own death. But how much nicer to be able to be there when help is really needed: to pay university fees, contribute to a wedding, or top up the emergency fund when money is tight. A “living inheritance” can mean giving children or grandchildren a step up at the start of their journey, and equity release is one way of gifting money to family when they need it most.

But how generous can you be when it comes to gifting money to family members? How does inheriting a house with equity release affect inheritance tax? We’ll cover these questions in this article, and help you understand how gifting money to family and inheritance tax works.


How does inheritance tax affect gifting money to family?

Inheritance tax can seem complicated. It’s paid on the total value of your estate, which is calculated by adding up all your assets (such as your home, and any savings or investments you have) and taking off any loans or debts you owe. Equity release affects inheritance tax because it’s included in the amount you owe. Your heirs will have to pay 40% of anything over a set allowance, which at the moment stands at £325,000 (for 2024/25), plus up to £175,000 for a property that was your main residence.

Gifting money to family members before you die will potentially reduce the value of your estate. If the total value of the estate is worth less than £2 million and the property has been left to a child or grandchild, it could bring it below those all-important allowance thresholds. The catch is that you have to live for seven years after making large gifts for the money not to be included as part of your estate. It’s common to send money as gifts to family to celebrate life’s milestones though – we’ll talk about how much you can gift next.

How much money can you gift to family tax-free?

It’s good to know you can make some money gifts to family without thinking about your life expectancy! Each year you can gift up to a total of £3,000, divided up however you like; plus up to £250 to as many individuals as you like – as long as they haven’t received any part of your £3,000 annual gift allowance. If you haven’t used it up, you can carry over your £3,000 allowance for one tax year, but your £250 allowance can’t be carried over.

None of these will be included in the value of your estate for inheritance tax purposes.

You can also gift up to £5,000 to a child who is getting married or starting a civil partnership, £2,500 if it’s a grandchild or great-grandchild or £1,000 to any other person. Again, these gifts won’t count for inheritance tax.

If you’re feeling really generous, you can combine your gifting allowance. So if a child is tying the knot, you can gift them £5,000 plus your £3,000 annual exemption in the same tax year. And if wedding planning takes longer than expected, and rolls into the next tax year, and you haven’t gifted this £3,000 to anyone else, your allowance re-sets and you can gift a bit more.

And remember, you can directly give away as much as you like and if you live for seven years, it won’t count as part of your estate. If you die within seven years from the date of the gift then some or all of the value will be included in the value of your estate and the recipient may have to pay inheritance tax on the amount.

How to gift money to family with equity release

For many of us, our home is the biggest part of our estate. It’s also an important part of our emotional well-being; few of us relish the thought of moving, particularly as we age. But moving and downsizing was once thought to be the only way to release any of the value locked up in bricks and mortar if you wanted to pass it on before you die.

Now, you can use a lifetime mortgage, a type of equity release available for over 55s (or over 50 for our Payment Term Lifetime Mortgage). You don’t pay tax on equity release, and it’s becoming a common way of helping out – in 2023, one in 10 of our Lifetime Mortgage customers used the money to gift to a family member. Before gifting money to family, it’s important to think about how equity release and inheritance tax will affect them later down the line though.

Gifting money with equity release

Equity release is one way to access money from your home to gift money. In our article we answer common questions to help you decide whether it’s right for you.

How does equity release affect inheritance tax?

A lifetime mortgage is a loan secured against your home that’s usually repaid when you die or move into long-term care. So it reduces the value of your estate. For many, it makes sense for their financial planning but there may be cheaper ways for you to gift money to family members.

It also means you won’t be leaving as much to your heirs when you die, because you’ve given them some of their share while you were still alive. If someone is inheriting a house with equity release, the usual expectation is that the loan and the interest will be repaid by selling the house, and the beneficiaries will receive anything over and above the amount.

Of course, if they can afford to repay the loan by other means the house doesn’t have to be sold.

What is inheritance protection in equity release?

One important point to understand is that equity release will affect how much of your home’s value will be passed on when someone is inheriting a house with equity release. But there are ways to ensure you can still leave a legacy.  

You may be able to take out inheritance protection, which allows you to ringfence a certain percentage of the value of your home and ensure you will still leave an inheritance when you die. The protected amount will be part of your taxable estate, and you may be charged for this option, but if leaving a legacy is important to you it’s good to know you have that option. It will reduce the amount you'll be able to borrow though.

Remember too that, if you can afford to and aren't already, you can pay back some or all of the monthly interest on your equity release loan. This will keep the loan as low as possible, leaving more for your family to inherit.  

What to consider before gifting money to family

We all want to help when we see family members struggling financially. But it’s worth remembering your own needs; you may need the money at a later stage, such as if you need care. A financial adviser can help you think through all the options – though the cost-of-living crisis might mean your money gifts to family will be more welcome than ever, it also means you need to be extra careful. One recent survey found two-thirds of financial advisers felt they would need to challenge a customer’s wishes, which might leave them short of income in later life.

You might want to bring a family member to an appointment, so everyone understands the financial implications.

There’s a lot to think about when it comes to gifting money to family, equity release and inheritance tax, but by taking it one step at a time it’s possible to help out your family at a time that’s right for everyone.

If you want to learn more about gifting and equity release, you can read:


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