For those of us with grown up children or grandchildren trying to make the great leap into home ownership, we know only too well the struggle facing our younger generations. And with gifting money becoming increasingly popular with families to offer financial assistance to our loved ones, equity release can be a great option to unlock property wealth for family support, without breaking the bank of mum and dad, or even grandma and granddad.
Recent research highlights that homeowners aged 60 and over hold a substantial amount of property wealth, making it a significant resource for gifting or financial planning.
Whether you’re looking at the option of planning ahead for the future with estate planning, or wanting to provide your loved ones with an early inheritance to support for major expenses before the estate is formally passed on, it is important to understand your estate’s value when considering gifting and potential inheritance tax implications. Our independent equity release advisers have put together some information about using equity release to gift money.
What is equity release?
If you’re looking to release equity from your home, it’s important to understand if you are eligible and the Equity release is a type of financial product that allows you to access the equity tied in your home, releasing equity without moving out.
Releasing equity can provide flexibility for homeowners seeking to support family or meet other financial goals.
There are two main types of equity release: lifetime mortgages and home reversion plans.
Lifetime mortgages
A lifetime mortgage is a type of equity release loan secured against your home which allows you to release tax-free cash from your home as a cash lump sum upfront or in smaller lump-sums using a drawdown facility for flexibility. The original loan is the amount initially borrowed against your home. With a lifetime mortgage, you maintain ownership of your home and the loan will need to be repaid, in addition to any accrued interest, when you pass away or move into long-term care. With most lifetime mortgages, interest rolls up over time, meaning the interest accumulates and is added to the total amount owed.
Learn more about lifetime mortgages.
Home reversion plans
A home reversion plan allows you to sell part or all of your home to a provider in exchange for tax-free cash. The amount you receive from a home reversion plan depends on your property value and the percentage of your home you choose to sell. Your home will be sold to the provider at a discounted rate and you can remain in your home rent-free until you pass away or move into long-term care. When it is time for the provider to be repaid, they will reclaim the percentage they own at market value through the sale of the home, and what remains will be passed to your estate.
Learn more about home reversion plans.
Supporting your loved ones with a gift
Supporting family members, especially children, is a priority for many families, particularly as the dream of home ownership becomes more challenging in today’s market. With house prices rising faster than salaries, younger generations often struggle to save enough for a deposit or cover education costs. One way to provide meaningful support is by gifting money, which can help with everything from university fees to stepping onto the property ladder. However, it’s important to consider the potential impact on inheritance tax, as well as your own financial security.
For many homeowners, equity release offers a way to access tax-free cash tied up in their property. This can be a practical solution for gifting money to family members, helping them achieve their goals while making the most of your own assets. Whether you’re looking to help with education costs, provide a living inheritance, or simply give your loved ones a financial boost, understanding your options is key to making the right decision for your family. Before deciding to gift money through equity release, make sure to carefully consider your own needs and how your living costs may change in the future, as these factors can impact your long-term financial stability.
Understanding Ways to Help
There are several practical ways to help family members financially, each with its own benefits and considerations. Gifting money is a straightforward option, but it’s important to be aware of the tax implications, particularly regarding inheritance tax.
Whilst releasing equity from your property can provide access to tax-free cash, which can be gifted to loved ones or used to support their financial needs, it’s important to understand how inheritance tax may affect your loved ones in the future.
Lifetime mortgages are a popular equity release product, allowing you to borrow money against the value of your home, with the loan typically repaid when you pass away or move into long-term care. Exploring different mortgage options, such as joint mortgages or family offset mortgages, can also be effective ways to help children buy their first home.
Whatever route you choose, it’s essential to seek expert advice and equity release advice from a qualified financial adviser or equity release adviser. This ensures you fully understand the implications of releasing equity, and that your approach fits your personal circumstances and long-term goals.
Reasons for gifting money with equity release
Gifting money to children can be a powerful way to support their future, whether it’s helping with university fees, a house deposit, or other important milestones. However, it’s crucial to understand the tax implications before making any gifts.
You’ll also need to be aware of the 7 year sliding scale tax rule regarding gifting money. If you pass away within 7 years of gifting money, any gifts made may still be considered part of your estate for inheritance tax purposes. This means the gifts may be subject to inheritance tax, which could mean your children have to pay tax on the money they receive. Please take professional tax advice before you gift any money so that you are aware of any tax implications.
Helping loved ones get on the property ladder
If you’re considering helping your children or grandchildren onto the property ladder, equity release could be an option. The amount you can borrow depends on factors such as your age, the value of your property, and the lender’s criteria. Equity release can provide a significant amount, which may be used to help your loved ones with a deposit for their first home.
Read more about helping your children onto the property ladder.
Gifting Money and Mortgage Affordability
Gifting money can make a real difference when it comes to helping a family member secure a mortgage. By providing a larger deposit, you can boost their mortgage affordability, potentially allowing them to access a better mortgage deal with lower interest rates or more favourable terms. This can be especially helpful for first-time buyers struggling to get onto the property ladder.
It’s essential, however, that any gift money used for a deposit is properly declared to both the mortgage lender and the solicitor handling the purchase. Lenders need to know the source of all funds to comply with regulations and to process the mortgage application smoothly. There may also be tax considerations depending on the size of the gift and your personal circumstances, so it’s always best to seek advice from a qualified mortgage advisor. They can guide you through the process, help you understand any potential tax implications, and ensure that your financial support is structured in the best way possible.
Saving for the future of your grandchildren
More and more grandparents are choosing to use equity release to help give their grandkids a head start in life. By unlocking some of the money tied up in their home, they can put savings into Junior ISAs and set aside funds for big moments down the line, such as buying a first car or heading off to university. If you are planning to gift in stages, a drawdown facility may be worthwhile as the interest will only accrue on the funds released.
If you or your grandchildren receive means tested benefits, it’s important to consider how equity release or gifting could affect eligibility. If you plan to leave your estate to your family to help fund their future, it’s important to discuss this with a qualified equity release adviser to learn more about the impact equity release will have on your estate. Making partial repayments on your equity release plan can also help preserve more of your estate for your grandchildren.
Helping to fund a wedding
With the cost of weddings on the rise, many couples are leaning on family for a little extra help to make their big day special. Some parents and grandparents are choosing to use equity release to gift money towards a family member’s wedding or civil partnership, helping cover expenses like the venue, dress, or honeymoon.
In this case, if the gift is to be effective for Inheritance Tax purposes, it has to be made before, not after, the wedding or civil partnership and the event has to happen, and it has to be:
- given to a child and is worth £5,000 or less, as well as £3,000 using your annual exemption in the same tax year;
- given to a grandchild or great-grandchild and is worth £2,500 or less, or
- given to another relative or friend and is worth £1,000 or less.
School and University fees
Equity release can be a useful way for grandparents or parents to help cover the cost of education, whether it’s paying private school fees, supporting university expenses, or helping with student loans. If you still have an outstanding mortgage on your property, this will affect how much equity you can release. It’s a generous way to ease the financial burden on younger family members, but it’s important to be aware of the tax rules and any inheritance tax your family may be subject to.
If you’re planning to make regular payments, it’s also wise to prepare for any unexpected changes in your finances down the line.
Understanding the inheritance tax (IHT) implications
Gifting money with equity release is becoming a popular way for homeowners to support their family, whether it’s helping with a house deposit, school fees, or other major life events. However, it’s important to understand the inheritance tax (IHT) implications before making any decisions. IHT is calculated based on the value of your estate, which includes your property, savings, and investments, minus any outstanding debts or loans.
There are also specific gift allowances to keep in mind, such as the £3,000 annual exemption per person, the £250 small gift exemption, and other exemptions for gifts towards wedding costs. It is worth noting that the £3,000 annual exemption and £250 small gift exemption cannot be used for the same recipient. You can also carry any unused annual exemption forward to the next tax year, but only for one tax year. This information is correct at the time of this publication however we advise that you should always take professional tax advice before gifting to understand your personal circumstances and any tax implications.
It’s also important to consider the 7-year gifting rule, if a gift falls outside these exemptions and you pass away within seven years of making it, the gift may still be subject to Inheritance Tax. To ensure you’re making the most of these allowances and protecting both your own finances and your family’s future, it’s essential to speak with a specialist adviser. They can help you navigate the rules, structure your gifting tax-efficiently, and make sure that using equity release to gift money is the right move for your circumstances.
Learn more about equity release and inheritance tax planning.
Should I release equity to help my family?
Equity release is a big decision and should not be rushed. At Bower Home Finance, we encourage you to include your family in your meetings with our advisers so any questions you or your family might have can be answered.
If you’re considering releasing equity to help your family, it could be to help fund their university fees or help them get onto the property ladder, but it’s important to consider how equity release will impact you and your circumstances.
Releasing equity from your home to help your family could provide you with a way to support your family without the risk of losing your property or savings. However, you could also be giving away funds you might need in the future or impacting your eligibility for means tested benefits.
If you’re looking for flexibility, equity release may be able to offer that with a drawdown facility to access further funds in the future, however, releasing equity from your home reduces your estate and can therefore reduce the amount of inheritance for family members in the future.
Our specialist equity release adviser will discuss your options and help you consider the impact taking out equity release may have on your lifestyle.
Common Mistakes to Avoid
When using equity release to gift money to family members, there are a few common pitfalls to watch out for. One of the biggest mistakes is not seeking advice from a financial adviser, which can lead to misunderstandings about the tax implications or the impact on your own financial security. Another frequent error is failing to declare the gift money to the mortgage lender or solicitor, which can cause delays or even jeopardise a mortgage application.
It’s also important to consider how using equity release might affect your eligibility for means tested benefits or other forms of financial support. Overlooking these factors can have unintended consequences for both you and your loved ones. To avoid these mistakes, always seek advice from a qualified financial adviser, be transparent with all parties involved, and carefully consider the long-term impact of gifting money through equity release. This way, you can ensure your generosity benefits your family members without creating unexpected challenges down the line.
Do you pay capital gains tax on equity release?
When releasing equity from your home, the funds you release are not taxable. This means you will not need to pay income tax or capital gains tax on it, and you are free to spend your tax free cash as you wish.
However, if you are choosing to use your equity release to gift money to your friends or a family member, inheritance tax may need to be paid. The amount of tax that may need to be paid will depend on how long you live after the gift and the amount gifted.
Your equity release adviser will discuss the implications of equity release and using this to gift to friends and family.
Considering the alternatives to equity release
With property values on the rise, it’s no surprise that the young people in our lives may need a helping hand getting on the property ladder. However, equity release isn’t always the right option.
We all wish to see our families succeed, which is why many parents in later life are choosing to help their children buy their first homes through various options and whilst equity release could provide you with the funds to do so, it’s important to consider the alternatives to help first time buyers.
The alternatives to equity release can include:
- Taking out a joint mortgage with your child or guaranteeing a mortgage
- Downsizing your current property to release equity
- Remortgaging your home
It’s important to consider the implications of giving money to help your child buy a home, including how this may impact their choice of mortgage. Some mortgage providers do not accept gifted deposits so it’s important to speak to a mortgage adviser about their options.
Our advisers will never recommend equity release if it will negatively impact your personal circumstances or if there are better suited alternatives.
Independent whole of market equity release advice
At Bower Home Finance, our independent, whole of market equity release advisers are here to help you explore all your options with expert, unbiased guidance. We take the time to understand your personal circumstances and long-term goals, then search the entire market to find the most suitable solution for you. Our advice is provided with no obligation, and you will only pay our advice fee upon completion of your equity release plan. Whether you’re thinking about gifting money, boosting retirement income, or funding a big life event, we’ll clearly explain what equity release could look like in your situation and support you every step of the way.
Find out how much equity you could release from your home today with our free online equity release calculator or contact our team today.
