What Is The Best Thing To Do When You Inherit Money?

At first sight news about inheritance and a large amount of cash or, in fact, other assets, such as property or stocks, will bring sadness at the passing of a loved one, are often followed by joy for the beneficiary. If those assets are not appropriately managed, they will quickly diminish and become a burden instead. With the focus on UK Nationals, or those inheriting UK-based assets, this article tells you the most sensible considerations and answers the questions “What is the best thing to do when I inherit money?”  

Declare your inheritance

You’ve received your inheritance either through it being stated in a Will or if a Will was not present, through a more complicated process of probate. Typically, before you get access to your inheritance, the Executor or an Administrator of the deceased estate will help with all formalities, including declaring the estate’s value and filling certain forms to HMRC’s Inheritance Tax bill. 

It is the estate of the person who died that usually pays Inheritance Tax. You may need to pay Inheritance Tax if the estate can’t or doesn’t pay it. What’s left after this process is your inheritance, which you can use as you wish. 

Spend and plan wisely

Especially if you are young and inherited a large amount of money, you may be tempted to splurge on travelling, the latest technology gadgets, latest fashionable clothes or a shiny new car, but before you go on enjoying your inheritance, it is good to take a step back and evaluate your finances first. 

Receiving an inheritance is a good moment to engage with a financial or wealth planner, who will objectively advise on how to manage your wealth so that you can both enjoy it, but also grow at the same time. Assess your inheritance and establish your goals. Are you behind on saving for retirement? Are you looking to save money for your children’s education? 

Pay off any debts first

At the time you receive your inheritance you may have some debts accumulated. Paying your debts down or off completely is a smart move to open up a future cash flow and free you from paying interest rates on your debts. There is, of course, the notion of “good debt” which is secured against an appreciating asset, for example, a mortgage on investment property, vs “bad debt” which is a loan against a depreciating asset such as a car or items of clothing bought with your credit card. It’s rare to hear of people who have no debt getting into financial troubles and so given their newly sourced wealth it makes sense to bring debt down to a lower level or eliminate it totally.  So, given the opportunity, it is a wise strategy to eliminate debts.  

Invest 

Once you have taken care of any potential debts, a wise move would be to invest the inheritance so you can multiply your money. As a wise saying goes “don’t put all eggs in one basket” it is recommended to consider different asset classes and ways to diversify your investment portfolio. 

Typical items people invest in include: 

• Investment Property 
• Stocks
• Insurance 
• Private Retirement Plans
• Funds
• Money Markets
• And others…

However, as it is with any advice, make sure you make the right choices by either educating yourself or engaging with a professional financial advisor to help you with that. Remember, that by investing the inheritance, you give it an opportunity to grow, yet investments always come with varying levels of risk, therefore, we recommend that you seek professional advice in that matter. 

Enjoy what’s yours to enjoy

Yes, we started off this article with words of caution, but at the end of the day, all we do in the above steps with the money is to ensure you don’t have any liabilities and that the money you got gets a chance to grow, so you can use it when you need it. But besides saving and investing for later in life, we do live in the now. 

You can splurge sensibly though: if you can really afford to buy that summer house, or an expensive car, then do it and enjoy it. But also look at the inheritance as a chance to perhaps change your career? With extra money secured you can invest in yourself or your own business now. How much extra money can you spend on yourself? Well, that depends on all of the above factors. If you have a financial advisor, ask him or her about that. 

Secure the wealth for your heirs

As a forward-looking parent, you can make a significant change in your children’s life if you think about their inheritance beforehand, and engage with estate planning specialists, such as Soteria Trusts, to help you grow and secure your wealth for the future generations. 

In the UK, Inheritance Tax is charged at 40% above a threshold of the net value of assets over £325,000, or £650,000, if you are married or in a civil partnership. If your inheritance is large enough, you can, and should, honour the benefactors for their hard work and be the guardian and overseer of what you received. Safeguard the wealth and estate for future generations by ensuring that the money or other assets grow and are not a liability to your heirs. 

Trusts in IHT Planning

Ever since their first appearance in the 12th century, Trusts have played an important role in shielding assets from unwanted predators as well as bringing certain tax efficiencies to the fore.

That is especially so for UK Nationals and the growing number of non-UK Nationals who own UK assets with values in excess of £325,000 & £650,000, and who have a liability to IHT on their death. 

There are 1,000’s of non-resident Asian, Eastern European and Indian investors who over the last 25 years saw the potential for growth by investing into the UK property market and who paid little or no attention to CGT or IHT when acquiring their assets. Subsequent changes in legislation and a general tightening of the tax net for all find them either accepting of the tax bill they have or scrambling to restructure the way their assets are held so as to avoid IHT so that their loved ones, rather than the taxman, can benefit from the gains they have made. 

There are several after the event measures that can be taken to reduce or mitigate IHT in full and none more efficient than an HMRC recognised Pension Trust which ensures that the beneficiaries don’t end up paying 40% of their inheritance away upon the member’s death. For more information, visit our IHT Planning Service page, or contact us directly to learn more about your options.