Using Your Inheritance Wisely

If you’ve received an inheritance – no matter big or small – using it effectively and sensibly is essential. Here’s our handy guide to what to do, and a little of what not to do as well.

4 different sized piles of coins. The largest on the right has a small toy house on top, the others have a variety of toy figures

Inheritances come in all shapes and sizes, from little nest eggs to huge fortunes – but both require a lot of thought. If the inheritance is a surprise, you could find yourself with a large asset and no idea what to do with it. Even if you’ve been expecting an inheritance, you’ll still need to sit down and do some planning?

Why? Firstly, you don’t want to squander what could be a life-changing bequest. Secondly, you’ll want to maximise your return on it while also being across the tax liabilities that may have come with it. As ever, informed decisions are better than just hoping for the best. That is where this guide comes in.

Is all inheritance inherently complicated?

Short answer, no, longer answer size is important (sorry).  If you’ve received a small bequest, particularly a cash one, then your options are probably straightforward – starting an ISA or topping up a pension.  The bigger it gets the more likely you are to benefit from professional help around tax, property and investments.

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What is best to do with inheritance money?

Many people would advise you to pay off any debts or loans you may have before you consider any purchases or investments, but it’s not as simple as that. For example, your debts might be at lower interest rates than some of the high-yield saving accounts on offers. The same goes for your mortgage rate, should you have one.

Instead, the first thing you should do is get a complete picture not just of your new assets, but of your existing ones too, as well as any debts or overheads. Set down your cash flow – what comes in, what goes out – and you can see how your inheritance will impact it. Look at your assets and goals too, and these will all help inform a lifetime cash flow model.

What’s a lifetime cash flow model?

It’s an approach to budgeting that gives you a complete picture of your assets, expenses, income and debts but also includes forecasting what they may be in the future. Do you have children who you need to budget for? Will they go to a private school or university? Do you want to ensure you have a comfortable retirement, even if it’s very far away.

If you have a sizable inheritance, it can really help with planning your financial future and making it more secure. You can earmark pots of money for different expenses, and then lock them away – you may need to make some assumptions about interest rates as well, which may rely on some educated guesswork or informed advice.

What investments should I consider?

Your approach to investing will be unique, and may be low risk or more daring, depending on your personality. Key to it all, however, is maintaining a diversified portfolio. By spreading your investments across the likes of cash, funds, shares and property, you’re preventing yourself from being exposed to poor performance in one particular investment class.

You may want to use some of your inheritance for a house – or a second one – or you may want to spread it across several bank accounts that accrue interest. If the latter, ensure you invest with banks that are UK authorised and thus protected up to £85,000 in the event the bank fails. Elsewhere, you can consider ISAs, stocks and shares to help ensure a steady future income beyond your salary.

What are the tax implications from my inheritance?

Inheritance tax can be complicated, and is often a political football between the major parties, so it’s worth keeping an eye out to see if there’s any change to the current state of affairs. At the time of writing, any inheritance under £325,000 isn’t taxable. Over that, the base rate is 40%, but only payable on the amount over the threshold, not the whole.

That makes it sound simple, but there are all manner of caveats to be aware of, such as additional transferable allowance when you leave property to a member of your family. Spouses and civil partners don’t pay inheritance tax at all, as long as they’re domiciled in the United Kingdom. If you’ve inherited over the threshold, or think you might be close to it, it’s a good idea to get some professional advice.

Should I think about my retirement

What kind of wealth managers would we be if we didn’t say yes? If you’ve worked out a lifetime cash flow plan, then you should know what you’ll need for a comfortable retirement. Whether you have a degree of financial independence or even just a monthly excess of money, it’s wise to think about your pension.

The earlier you invest in a pension, the better, as it gives the money longer to grow. At the same time, you should also consider estate planning, and what kind of inheritance you plan to leave to your family and loved ones. Adequate planning in that area can also help to minimise their exposure to inheritance tax.

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