Here we are at session number 52, and we’re going to be talking about How To Give Money Away. I know, right? You thought this podcast was about helping you to become and stay wealthy. Well that’s exactly it.

I mentioned in Session 48 that being rich is about having lots of money, whereas being wealthy is having the ability to fully experience life. No idea who said that, but it sounds good to me. Also, back in Session 32 where I talked about the only three uses of money, the last and greatest of these was that money is for giving away. Even if you think this is irrelevant to you, I going to suggest you hang around…

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But first…

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Introduction

OK let’s talk about giving it away. I understand that for many people listening to this, you’re nowhere near in the position to make big gifts to family or to charity. But one day, you will be, and in the meantime, you will likely have opportunity to make small gifts here and there.

For other people, like for many of my clients, they do need to give money away to help their children now when they need it, or to reduce their inheritance tax bill.

I often get asked by my clients: “Can I give some money to my daughter to help them with moving house?” The way that is phrased always inwardly amuses me even if I don’t always show it. But I’m jumping ahead…

Before we get into things, remember the show notes are at meaningfulmoney.tv/session52. It’s the only link you need to remember: all the notes and links I mention are right there, plus you can comment on the topic and ask further questions there too.

Everything you need to KNOW

1 – Your money is your money

This is why I get amused when people ask me if they can give money away. I often answer: “Of course you can; it’s your money!”

The fact is, you can give as much or as little to whomever you want, whenever you want and no-one can do a thing about it. It’s yours to do with as you wish. Give it to me if you want; I’ll put it to good use!

Of course, I understand what they are usually getting at, which is hidden in their question. They’re really asking: “What are the implications of my giving money away?” Which leads me nicely onto the second thing you need to know…

2 – Giving money away has implications

There are three main implications to giving money away, at least three that I can think of. Doubtless there are more…

i. You can’t spend it any more

It’s really important that if you’re going to give money away that you have actually given it away. There can be no strings attached; you’re not planning to ask for it back. Usually a gift is irrevocable. That means the money isn’t yours anymore, and so you can’t spend it any more!

ii. It takes seven years to fall out of your estate

This is an Inheritance Tax (IHT) point. When you die, everything you own is added up, then everything you owe is taken off that. Everyone gets a tax-free amount called the Nil Rate Band which is currently £325,000 and this can be shared between spouses and civil partners, so if that’s you, the second of you to die would get a tax-free allowance of £650,000. Anything you have in excess of this would be taxed at 40%. *Note: there are more subtleties to this than I allowed for here*

Of course, many people don’t want to pay Inheritance Tax. But when the calculation is being done when you have died, your executors will need to factor in any gifts you made in the seven years leading up to your death. The value of those gifts is added back into your estate on a sliding scale, as follows:

If I make a £100,000 gift now, the value of that gift is added back into my estate

– In full if I die within three years

– 80% if I die in year four

– 60% if I die in year five

– 40% if I die in year six

– 20% if I die in year seven

After seven full years the value will be completely outside my estate. This all means that depending on how old you are, you might want to give money away sooner, rather than later…

iii. It may come back to bite you if you ever need long term care

If you need Long term Care in the future, whether or not you are eligible for help from the local authority will depend on what your assets are. In other words, it is means-tested.

If you have given money away, and the Local Authority has any suspicion that you gave that money away in order to claim help with paying long term care fees, then that could cause you problems. It depends on timescales again but is more wooly than the Inheritance Tax rules above. Listen back to Session 29  for much more on Long Term Care planning.

3 – There are different ways to give money away

Either you can write me a cheque and give me your money directly, or you can take a more indirect approach to giving the money away and use a trust. Essentially the net result for you the donor is the same: the money is gone.

I’m not going to talk much here about the difference between absolute gifts and trust. Session 22 is all about trusts and there’s much more there.

So, bearing those three things in mind, what do you actually need to do to give money away effectively?

Everything you need to DO 

1 – Do a cashflow

This process might be beyond many lay-people, but is a bread and butter process for a Certified Financial Planner.  If you’re going to give money away, how do you know that you’re going to have enough money left to live the life you want to lead for the rest of your life? A Cashflow is the only way to do that. Even then it is at best educated guessing, but it does serve to indicate how the future might pan out.

A cash-flow involves some simple enough maths. First of all it asks how much money you have now, not including  your home or your pension fund because you can’t take these assets out and spend them.

Then you need to look at what income or lump sums are expected to come in over the course of the rest of your life. This might be pensions or other incomes, and lump sums like possible inheritances.

Next you need to look at what will be going out over the next few years. You have to express this in today’s money. What are you spending and what would you like to spend?

Basically that maths says that if you have more going out each year than you have coming in in income, then you’re going to dip into your capital. If you have to do that every year, will your capital last the rest of your life?

I haven’t found an online tool to enable you to do this. You could probably knock up a spreadsheet if you’re nifty with Excel, but you must be careful to take inflation into account. Best idea: Seek help from a CFP.

2 – Use your exemptions

There are a number of exemptions you can use to give money away now with no implications for inheritance tax or the like.

i. Exempt beneficiaries

There are people to whom you can give as much money away as you like:

• Spouse of civil partner
• Registered charities
• National Trust, various museums etc

ii. Annual Exemption

Everyone can give one gift of up to £3,000 to one person in any one tax year. If you didn’t give any money away, you can use last year’s allowance too and make a gift of up to £6,000.

iii. Small Cash Gifts Exemption

You can give as many gifts of £250 to as many people as you wish. Each recipient can only receive one lot of £250, so you can’t give £25,000 to someone by writing 100 cheques for £250!

iv. Wedding gifts

There are special gifts you can make when a couple gets married or enters into a civil partnership.

• If you are a parent you can give up to £5,000 tax free
• Grandparents can give up to £2,500
• Anyone else can give up to £1,000

v. Gifts from income

This exemption means that you can give whatever you want away as long as it:

• Is taken from income
• Is regular (I.e. At least annual)
• Doesn’t affect your standard of living

Really important to make use of these exemptions to give money away efficiently

3 – Keep an audit trail

You need to keep good records so that if and when you’re no longer around to explain what you have done, those left behind have clear guidance as to what gifts you have made.

They don’t have to be fancy records, and you only need to report gifts which are six figures plus. Just keep a notebook with the date, the amount and the recipient of the gifts made, for anything, say over £250.

4 – Insure any Inheritance Tax liability

Finally, if you’ve made some gifts to someone and you’re concerned about inheritance tax implication, it is possible to insure the liability on any gifts you have made. Bearing in mind the seven year rule, there are little policies called Gift Inter-Vivos policies which just insure the potential liability for the seven years.

Of course it depends on whether you’re insurable due to health and age, but this is a useful option if it’s affordable.

Summary

Those four things should make it possible to give money away intelligently, intentionally rather than randomly and in such a way that you might come to regret.

Just a quick note. This week's show wasn't scripte as usual, but spoken ad lib from bullet points. I'd be interested to know what you thought…

This week’s reviews

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News

Lost a pound and a half! Now at 17st 6lbs – a long way to go!

Pre-announcing LearnHowToBudget.com – nothing there yet, but watch this space. It’ll be a four-week course on how to set up and stick to a budget.

The 2014 Budget is being given by the Chancellor today – I’m not expecting anything radical to be announced. If it is, I might devote next week’s show to it, but if not…

Next Session Announcement

Next time I’ll be clearing up some of the mystery surrounding investment in shares. There are so many confusing terms, concepts and ideas when it comes to share investing and I’m going to do my best to clear all that up for you. This is in answer to MW4224 who was kind enough to leave a review this week. So if you have a question on this subject, or any other financial query that you want answering here on the show, then the best way to do that is to leave me a voicemail at meaningfulmoney.tv/feedback

Outro

That's it for this session of the MM podcast, I hope it was helpful. Did I miss anything? Do you have any questions? If so, please leave them in the comments section below.

I hope you enjoyed this session. Thanks for listening – I'll talk to you next time.