The 5 steps for spending your inheritance wisely
8th March 2019
If you’ve received money in a will from a relative or close friend, it can be difficult to have a clear idea of what to do with it. Of course your personal circumstances and the amount that you receive will play a big role in your decision, but whatever the case, these are five things you should always consider.
1. Be patient with it
Whatever you do, don’t rush into making a decision. Receiving a windfall is always a blessing but in the case of inheritance, it can be extremely bittersweet. When receiving inheritance due to the loss of a loved one, it’s totally understandable for your emotions and grief to cloud your judgement, so be patient. Charlie Parker at Sanlam UK Wealth Management describes it like this; “Just like you should never go shopping hungry, don’t walk into a travel agent after receiving an inheritance.” Take your time; under the Financial Services Compensation Scheme an inheritance balance of up to £1million is protected for 6 months, so you don’t have to do anything with it straight away.
2. Don’t be afraid to ask for help
It’s always a good idea to get some advice when you receive any unexpected money. Investing in a financial adviser at this time may be just what you need to help develop the clarity of how best to use your inheritance. They can look at your personal situation and help you make the best decision for you.
3. Clear your debts
A great place to start is by considering any money you owe, and whether your inheritance can help you pay off any credit cards or personal loans. You’re best off prioritising debts of the smallest value and debts which are costing you the most interest. MD of Portafina, Jamie Smith-Thompson, explains, “A loan or credit card balance with a high interest rate can feel like a burden, which is all the more reason why it should be the first to go. Once cleared, it saves you paying back more than you owe in interest and increases your disposable income.”
4. Savings, investments and paying it forward
After paying off any debts, aim to put away enough for an emergency fund to cover three to six months of your normal outgoings. At this point, there are countless routes to go down with your remaining windfall, so it’s best to seek professional advice for your unique circumstances. One option to consider is bolstering your savings, but don’t just assume that you’re best putting it all into Cash ISAs. A good mix of easy-access and fixed-rate savings of between one and five years is generally a good idea.
Any money that you won’t need to access for the next five to ten years could be invested in stocks. There will always be risk involved, but diversifying your investments and investing over long time periods can minimise the risk, providing you with some level of protection.
5. Inheritance Tax
When you receive an inheritance generally any inheritance tax liability has already been paid. But many people don't think about the impact of that inheritance on their own future inheritance tax position.
Those with their own inheritance tax liability can, in effect, see any inheritance they receive being taxed again when it's later left to their loved ones.
For example, if you're left £500,000 from someone's estate, but that bequest is subject to the full 40% inheritance tax, you might only receive £300,000. If you also have an inheritance tax problem then, when you eventually leave this £300,000 to your beneficiaries, there could be another £120,000 in inheritance tax payable, meaning your heirs might only receive £180,000.
However if you've received an inheritance within two years of the date of death there is the option to amend the will, establish a trust for the benefit of you and your family, and avoid your heirs incurring this 'second' inheritance tax hit on your death. This way you can effectively retain full access to your inheritance but save your children a significant inheritance tax bill later.
Whatever you decide to do, consider speaking to us before making a decision you might regret.