The art of giving it away
“People will say a lot of things about me when I die,” says Bill Gates. “But I am determined that ‘he died rich’ will not be one of them.”
The Microsoft founder has pledged to give “virtually all” his personal wealth away through his charitable foundation.
We can’t all be billionaires, but whatever amount of money we’re talking about, giving it away – how much and who to – is deeply personal.
There’s an art to getting it right.
Give now or give later?
One client, a retired couple, wanted to gift a portion of their wealth away now rather than leave it in their will. They hoped to split £150,000 equally between their three sons. The trouble was that their children didn’t really want the money. They’d prefer mum and dad enjoy their wealth instead – after all, they’ve earned it. Mum and dad are doing just fine, actually.
Another client found the total opposite. Their children initiated the conversation; they would much prefer their inheritance now, when they might put it to good use. ‘Number 1’ liked the idea of a family cottage in the Cotswolds that he could escape his London life to at the weekends. And ‘number 3’ had a nice idea for a business that might appeal to an angel investor. They’ll have less need for it in a few decades' time, and after all, mum and dad have got more than enough and don’t spend anything anyway (apparently!).
There’s no right or wrong in these situations. There are complex family dynamics and other factors to consider when deciding whether to gift during your lifetime or put it in your will.
As we’ve discussed before, lifetime giving lets you see the benefit of your loved ones using that money. The other side of this is that those on the receiving end may feel that they’re not free to spend the money as they choose, even if you’ve given it unconditionally. How would you feel if the wealth you passed on was burned up in one go on a holiday to Thailand? You might imagine you’d be happy the early inheritance has made some memories, but deep down you may feel slightly disappointed it’s not been spent on something more long term.
Everyone’s talking about inheritance
There are a lot more conversations about inheritance at the moment. Or more specifically, inheritance tax (IHT).
Changes announced in last October’s budget increased the scope of IHT. From April 2027, pensions lose their exemption, so anything left in this pot after you die is considered part of your estate. The government is also reducing IHT relief for other areas, including passing on a business property or on the proceeds from selling AIM shares.
If you were preserving your pension pot with the hope of passing it on to your children, you might want to change your strategy as on the face of it, the value of your pension now counts as part of your estate. The most obvious solution is to start drawing down more from your pension. But it can’t just sit in your bank – that will also be subject to the tax. You’ve got to spend it or give it away.
The rules on gifting
Many of you will have heard the rules on IHT from me already.
- It’s payable on anything over £325,000 (and a further £175,000 allowance for passing on your home to your direct descendants), thus £1million for many couples
- You can make annual gifts of £3,000, smaller gifts of £250 per person; and additional gifts for a wedding or civil partnership
- You can make unlimited regular gifts from ‘surplus income’
- Any other gift can be liable for IHT if you die within seven years of making it, or if you reserve the right to enjoy some benefit (so no giving your home away and continuing to live there without paying rent)
The part that’s possibly most relevant for pension changes is that drawing down additional money from your pension could be considered surplus income. As long as you can prove you’re not cutting back on spending or reducing your standard of living, then regular payments, such as paying into a Junior ISA or covering a grandchild’s school fees, could be exempt from IHT.
Without a specific intent in mind just yet, a great default position could, for example, be to set up an investment bond in a trust and fund it with the regular income from your pension.
Why we need to keep talking
What the latest government decision has done is force us to think harder about where we want our wealth to go. During our lifetime, not just after it. Maybe this could make us more open about our thinking?
That would be a good thing; for me, the key to getting the art of giving right is to talk more about it. I’m very happy to involve the whole family in these conversations. I’d encourage you to.
Then we can plan and put the right steps in place.
A reality check
Before we do anything drastic, a couple of important points.
Firstly, your pension, with its annual tax-free saving allowance of up to £60,000, remains far and away the most tax-efficient way of saving for the long term before retirement, and sometimes after.
Secondly, a reality check. Most of us will still not be affected by these changes. Many people underestimate their longevity, so before you start drawing down huge amounts from your pension pot, consider that it needs to last. How will the wealth you’ve accrued cope with the rising cost of living, or if you need to go into long-term care? You are my priority, let’s make sure you are ok before you give it all away.
IHT is complex and requires accurate record-keeping. Gifts, particularly large ones, need to be itemised, and you should keep logs of all income and expenditure. Helping you to keep a lifetime gifting log is one of the things we can do for you to make IHT planning less of a chore and make things easier for your loved ones when you’re gone.
But whether you want to give now or give later, or ‘spend, spend, spend’ leaving just enough to be buried in a clean shirt, please feel free to get in touch and we will talk about it.
My epitaph
I used to think I wanted ‘He ran every step’ on my headstone.
No longer is that important.