How come the bool value isn't turning false after the time ends?

I made a solution for you.

Firstly you made the script set the Arrest.Value to false if it where true:

if Arrest.Value == false then -- Arrest is false, setting arrest to true
Arrest.Value = true
elseif Arrest.Value == true then -- Arrest is true, setting arrest to false.
Arrest.Value = false
end

elseif Arrest.Value == true then makes it possible for the script to skip the 8 seconds wait. Since you called the function with an :connect() it would be called, and thus start from the top, again each time the event fired. That's the explanation on why you kept being thrown in jail.

I removed that part and the script should now work as intended

tool = script.Parent
Arrest = script.Parent.Arrest

function touch(hit)
h = hit.Parent
g = h:findFirstChild("Humanoid")
	if Arrest.Value == false then
	Arrest.Value = true
		if g ~= nil then
			if g.Health > 0 then	
				h:MoveTo(game.workspace.Jail.Position)
				wait(8) -- after 8 sec, set Arrest.Value to false
				Arrest.Value = false
			end
		end
	end
end

function sel()
tool.Handle.Touched:connect(touch)
end

tool.Equipped:connect(sel)

Besides that you had some misplaced code snippets, look at this part:

if Arrest.Value == false then
Arrest.Value = true
elseif Arrest.Value == true then 
Arrest.Value = false
if g ~= nil then
if g.Health > 0 then
h:MoveTo(game.workspace.Jail.Position)
wait(8)
Arrest.Value = false
end
end
end

You told Arrest.Value to be false twice, because you put the if g ~= nil then part inside the elseif Arrest.Value == true then