Do you want to support a charity, community cause or family members now, rather than simply accumulating more wealth? Knowing you have substantial assets isn’t the same as knowing how much you can comfortably give away. We look at how cash-flow modelling and stress-testing your financial plan can determine your gifting strategy in a tax-friendly way.
Cash-flow modelling
For some wealthy individuals and families, the desire to give can grow as their financial position becomes more secure. However, before you decide on how much you can comfortably give away, you will need to carry out a cash-flow modelling exercise. A key part of a financial plan, cash-flow modelling gives you a clearer picture of your finances.
Cash-flow modelling can help you plan the following:
- Lifestyle spending: How much do you need to maintain your desired lifestyle? This includes essential costs, emergency costs (e.g. repairs) and family support.
- Different life expectancies: Most of us are unaware of how long we will live so your plan would look beyond the average life expectancy.
- Changes in inflation: This can erode the value of our cash savings, resulting in less income to live on than we had previously expected.
- Investment returns: A financial plan helps you prepare for reasonable gains, as well as the impact of market shocks.
- Unexpected expenditure: Nobody can predict the future, so it’s important to make sure you have a rainy-day fund for any urgent spends.
- Later-life care: Health and social care costs can be expensive if your savings exceed the local authority funding thresholds.
- Tax and estate planning: A financial plan enables you to manage your current tax liabilities, while helping you minimise future inheritance tax.
Stress-testing your financial plan
A key part of a cash-flow modelling exercise involves stress-testing your financial plan:
- Would you have enough income if you lived much longer than expected?
- What would happen to your savings if there was a period of high inflation?
- Would you be financially prepared for a market fall after gifting a large sum?
- What happens if you need to go into a long-term residential or nursing care setting?
- Can you afford to make ongoing charitable commitments and for how long?
Once you have stress-tested your financial plan, you can create your gifting strategy.
Financial planning and gifting strategies
Depending on your findings, you might decide on a one-off gift versus regular charitable giving. You can also reduce your family’s inheritance tax bill to 36% if you leave 10% of your estate to charity. Whether you make a gift today or as part of your legacy, this will have an impact on your financial planning, so make sure you have enough money to support you.
If you’re thinking of making a large gift, the difference of £50,000 or £100,000 can reduce your margins. It’s important to factor in underperforming investments, if you needed care, or if you had to fund emergency medical treatment. Therefore, you would need to balance what you give today and how much, while leaving sufficient financial flexibility for your future.
From a tax perspective, there are gifting rules in the UK and inheritance tax gift exemptions. The gifting allowance is £3,000 or less per year, and you can carry this forward from the previous tax year. You can also make small gifts of £250 or less to family and friends (if you haven’t used your allowance on the same person). The seven-year gifting rules will apply for anything above these thresholds with tapered relief if you were to die during this period.
You can make regular gifts using surplus income to charities and certain organisations. For more information, see our blogs Tax Efficient Gifting: Giving Assets vs Cash and Charitable Giving & Legacy Planning: Preserving future wealth.
Wealth Management, Nottingham
Affordable giving is more than just calculating a percentage of your net worth to give away. It’s about understanding how your money will be impacted by your future spending needs, care costs and contingency planning. Without suitable financial planning, your charitable donations may not be tax-efficient or impactful. Cash-flow modelling helps you focus your gifting strategy so you can give generously without impacting your lifestyle or retirement.
At Balance: Wealth Planning, our financial planners will help you decide what you can afford to give away today, in the future, or on an ongoing basis. We will carry out a cash-flow planning exercise, giving you a Lifetime Wealth Forecast to help model your financial future. Our aim is to help you make smarter decisions around philanthropy to maximise impact, while ensuring your financial security.
Need advice on suitable gifting strategies? Get in touch to speak to our financial planning team.
Sources:
https://www.gov.uk/guidance/work-out-inheritance-tax-due-on-gifts
https://www.aviva.co.uk/financial-advice/knowledge-centre/gifting-in-the-uk/
