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Received an inheritance? Here’s the one thing to consider

5 min read
David Little, Financial Planning Director28 Feb 2024

If you’ve recently received an inheritance, an online search on handling a new inheritance could easily drive you down a dangerous path. Financial advice for the masses is hardly the best someone could possibly follow, even though the best way to handle your inheritance could not be simpler.

The unfortunate reality is that receiving an inheritance is often timed with losing a loved member of the family, and that’s when we feel the least motivated to act1. But this is one of the moments where the words of Theodore Roosevelt ring true: “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”

Indeed, it’s a mistake to do nothing, especially when the right thing to do is follow an extremely simple and straightforward step. In this article, we’ll cover some of the implications of receiving an inheritance, and we’ll also provide guidance on how to manage a gift or inheritance.

Understanding the inheritance

When a person passes away, a will they might have left determines how their property should be distributed. If the deceased didn’t write a will during their lifetime, then intestate law will apply to the distribution of the person’s property.

An inheritance can take many forms, depending on a few factors, including the deceased’s will. But it could be that you’ve been left with real estate (property or land), a sum of cash, or a portfolio under the deceased’s name.
In some cases, there might be obligations passed along to the person entitled to receive the inheritance, such as debt.

Once you have identified what has been passed on to you, you might have at hand what seems to be a difficult task: what is the best way to leverage this new inheritance?

Taking the leap

Gifts and inheritances have been taxed on the estate of the deceased, or if gifted prior to death, they could be classed as a Potentially Exempt Transfer on the person who gifted – meaning they’re not taxed on the person on the receiving end.

Whenever someone is given a sum of money, they’re confronted with the question: “What should I do with it?”

And again, Roosevelt would rightly say, “do something with it”.

Early planning, if possible, is always the best approach. We can’t stress enough that the sooner you make a decision about what to do with your inheritance, the better the outcome will be.

And what some clients and prospects we speak to at 7IM haven’t realised is that deciding how to leverage that inheritance doesn’t have to take up significant energy and time!

If you have an idea of what you would like to do with your gift or inheritance, that’s great. If not, that’s absolutely fine too. Start by asking yourself whether you’d benefit from using it for the short term or if you’d like to put it somewhere for the longer term so you can benefit from it later in life.

Some questions to think about are: would you like to use the totality of a gift or inheritance for yourself, or would you like to gift some, or all of it to family (children, grandchildren)? Should you pay off any existing debt, like a mortgage? Is the inheritance large enough that it could enable you to retire?

Of course, all of these options have different ramifications. For instance, if you think the best course of action is to invest any of the inheritance for growth or income, looking closely at how to maximise tax efficiency is key.

Or if you’re thinking that you’d like to buy property, it is worth considering the current interest rate environment and the inflexibility of ‘bricks and mortar’ property within your own portfolio.

Similarly, if you believe accepting the gift or inheritance could create or increase an inheritance tax problem down the line, it would be useful to think about leveraging a ‘deed of variation’ to bypass the will and ‘shift the gift’ to someone close.

Indeed, deciding what to do with an inheritance requires some consideration. But don’t let this discourage you because the hardest step in the process is simple, easy, and straightforward: talk to someone who can help.

Putting everything in perspective

In the end, it comes down to what you think is the best way to use an inheritance. Seeking advice from a Chartered Financial Planner can help you validate and maximise the efficiency of your ideas.

In instances where someone receives a sum of money, it is extremely useful to run a professional cashflow model and place the inheritance in the grand scheme of the individual’s wealth planning.

It could be the case that you’d be happy using some of this inheritance to travel, or to buy a new property – and a cashflow model would help add clarity to how much you think would be appropriate in the context of any long-term plans you might have.

Talk to us

In situations where you’ve unexpectedly received an inheritance, speaking to a Chartered Financial Planner should enable you to build the confidence that you’ll be making the most of this change in your financial circumstances.

Whether you’d like to use your inheritance to invest, pay off debt, help other people, retire, or do a mix of any of these, engaging with one of our Chartered Financial Planners should enable you to have a full understanding of where the new sum should take you, and allow you to explore the possibilities under your circumstances.

At 7IM, we listen to your dreams and ambitions, then we discuss possible outcomes based on different scenarios, so you can make sure you’re given the reassurance you’re doing what’s best for you.

The hardest part is the first step: talk to us. We’ll guide you through the rest.

Please note that this article is intended for educational purposes only and should not be taken as investment advice. The value of investments can go down as well as up and you could get back less than you invested. Investment in funds will not be suitable for everybody and you should make yourself aware of the risks before investing and if you are unsure, you should seek professional advice.

Tax rules are subject to change and taxation will vary depending on individual circumstances.

1 If you have recently lost a member of your family who had a portfolio with 7IM, please visit our bereavement page, or get in touch with your financial planner for assistance.

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