The 'feel good' value of lifetime giving

Most advisers are acutely aware of the importance of taking a fundamentally intergenerational approach to financial planning.

Understandably, much concentration is focused on the importance of tax efficient accumulation, decumulation and wealth transfer.  Giving advice on all of those stages of the wealth advisory process falls into the sweet spot of many advisers.  This type of advice will incorporate smart, tax efficient wrapper choice, tax efficient decumulation and, of course, wealth transfer which is inheritance tax efficient.

In relation to all of these components there will usually (and understandably) be a strong focus on being financially smart and making tax smart decisions. This is true in relation to the wide range of investments available generally but also includes investments which have a specific intergenerational focus, such as Junior ISAs, pensions for children and investments held in trust. Putting appropriate protection in trust for the next generation can often be an intrinsic part of a comprehensive intergenerational financial strategy which is overlooked. It can deliver a truly superb and highly tax efficient means of providing for inheritance tax so that the full value of the estate is received or can even create or enhance a legacy on death. 

This “left brain thinking” is super important but it’s also as important to engage the “right brain,” to deliver a little more creativity.

All advisers will fundamentally understand that all of the smart financial planning strategies they create and execute for their clients are a means to an end. Understanding what is important to clients is where all good financial plans start.

Most clients who have a family and dependants they care for would instinctively consider that “looking after them” financially is something they want to do.

For many people there is strong competition for the available funds.  Whilst there are definitely some objective “best practice” strategies that are likely to be relevant to most clients, what is seen as important, and the “hierarchy of importance” will often vary from individual to individual. Big sources of variance will be:

• The relative perceived importance of looking after yourself and looking after others and,
• Providing for current financial needs and investing and providing for future financial needs

There is a real need for detailed, balanced financial guidance and advice so that individuals make these decisions in a fully informed way. They should start with what’s important to them but finalise a plan which includes an understanding of the tax and financial consequences of particular courses of action. The adviser has a fundamentally important role to play from start to finish.

As well as having to deal with and decide upon the relative importance of competing financial needs for each individual, it’s also interesting to consider that there is often a difference between what people say they would like to do and what they actually do.  Some of the potential differences have been discovered through research* carried out for Aviva.  For example, only 17% of those surveyed actually involve their children in financial decision making, while 53% express a strong desire to provide significant financial help for the next generation.

Ultimately, clients are seeking peace of mind – both that their own financial futures are secured and that the financial wellbeing of their family will be looked after.  A well-executed financial plan should lead to the removal of anxiety and instead a feeling of reassurance, wellbeing and satisfaction at having “looked after things”.

There have been a number of studies on the benefits that good financial advice delivers. The focus in these “Advice Alpha” studies has been on the considerable financial benefits of advice. However, it’s arguably as important to consider the aforesaid “non-financial” benefits of advice too.

The adviser of a client for whom maximising the wealth transferring to the next generation is important, will inevitably spend time considering how inheritance tax, essentially a tax on transferred wealth, can be reduced. Lifetime giving can have a strong impact on the overall liability to IHT and thus increase the amount that passes to the next generation. Essentially, if the value of the estate is low when it passes on to the next generation, the amount of inheritance tax to pay will be lower too.

Lifetime giving makes a lot of IHT sense, but it involves overcoming the powerfully effective gift with reservation (GWR) and pre-owned assets tax (POAT) provisions and giving due consideration to the CGT implications of giving away chargeable assets.  Your client would also need to live for at least seven years after the gift giving. However, as well as the “hard” tax benefit attached to lifetime giving, it’s also really important to appreciate the significance and real value to the donor of seeing the effect of their gift during their lifetime. This will be increasingly important as life expectancy (and thus the time to wait to benefit from a parent’s or grandparent’s estates) continues to go up. This is leading to “succeeding generations” waiting until their late sixties and even seventies before receiving an inheritance.

Don’t underestimate the power and value to both the done and the donor of making an “earlier” transfer of wealth – provided the donor’s financial wellbeing is not compromised by such an early lifetime transfer. In some cases, this dual objective of benefitting the next generation while not having the client’s own financial wellbeing diminished, can be achieved by taking a fixed interest rate lifetime mortgage on their home and using the released funds to make a gift.

You have to do the numbers carefully as there would be an impact of the residence nil rate band (RNRB) – to the extent that the RNRB is available the debt will have no “IHT value” but the debt may reduce the value of the estate to make the RNRB available. The donor would need to live for seven years after giving the gift, but the growth in the value of what’s given could combine to deliver a financially positive result for all parties.

It’s important to remember that with a lifetime mortgage the debt (incorporating rolled up interest) has to be repaid.  There are more than a few moving parts to this option, making it a classic case for the power of informed advice.  Another potential “value for donor” delivery strategy that will reduce the IHT liability could be to make and then see the benefit of a charitable donation during the donor’s lifetime.

Whilst financial estate planning in this way may be complex, the “feel good” factor for the donor in giving a living gift could be just as (possibly even more) powerful than traditional inheritance planning. 

*Source: Aviva Equity Release Research Report, June 2022