What to do when you inherit

Rising levels of household wealth over recent decades mean that more and more of us are likely to inherit. In fact, the Office for National Statistics predicts that gifts, loans and bequests will likely have an increasing influence on household wealth¹ and its distribution in the future. If you find yourself the beneficiary of a loved one’s will, should you treat yourself to a blowout holiday of a lifetime, use it to pay off some (or all) of your mortgage, or invest it?

Inheritance in the UK – the facts

According to data from the Office for National Statistics (ONS), over the two years from July 2014 to June 2016, 4% of UK adults received an inheritance of the value of £1,000 or more, while 6% of adults were given loans or gifts over the value of £500. The median inheritance was £11,000, while the media value of a gift or loan was £2,000.

The generational differences of inheritance

How much you inherit is not only linked to the wealth of your family, but also your age and who you inherit from, according to the research by the ONS.

Younger generations, those aged 16-34 years old, who receive an inheritance of £1,000 or more are likely to have received it from a grandparent. In many cases, a larger proportion of the estate is received by their parents; the median inheritance received from a grandparent is £5,000, while it is £22,000 from a parent.

55% of those who have inherited between the ages of 35 and 54 years old have received from a parent, and this increases to 62% in the cases of those who are 55 years old and over.

The largest inheritances are received from spouses – the highest median value of inheritances is for spousal inheritances at £80,000, and in 79% of cases this was received by those 55 years old plus. Those in this age category are also most likely to inherit from non-relatives and other relatives, with the median value for this type of inheritance being £10,000.

Inheritance tax rules

It is possible to manage your estate to minimise the inheritance tax due, but the rules are complicated, so it is important to work with an expert financial planner and solicitor, to ensure the estate is managed in the most tax efficient way to help maximise the legacy.

When someone dies, their estate is assessed for inheritance tax. The estate will be exempt from inheritance tax if either:

• The estate is valued below the £325,000 Nil Rate band threshold
• Everything above the £325,00 threshold has been left to a spouse, civil partner, community amateur sports club or a charity.

This means that if a married person dies and their spouse or civil partner inherits, the estate is not assessed for inheritance tax until the surviving spouse/partner dies.

If the estate includes a home which is inherited by the spouse, the deceased’s children or grandchildren, the Nil Rate Band threshold per person can increase to £500,000.

So, if you receive an inheritance, there is no tax to pay by you personally. The estate will already have been taxed, if that is required.

The tax implications for different types of inheritance

Inheritances come in different shapes and sizes; what you inherit can affect the tax the estate has to pay:

• Money, savings and investments: these form part of the taxable estate, so can be subject to inheritance tax if the estate exceeds the Nil Rate Band. The current rate of inheritance tax is 40%.
• Trusts*: assets within a trust are outside of the estate and not subject to inheritance tax, as long as the deceased has lived for more than 7 years since setting up the trusts created in lifetime.
• Shares: if you inherit shares, any capital gains i.e. increase in value since the shares were purchased, is rebased to zero i.e. its wiped out. However, shares are investments and so form part of the estate for inheritance tax purposes.
• Property: if you inherit a property (unless it’s from your spouse or civil partner) the value forms part of the taxable estate. However, there may be an additional Nil Rate Band that can be applied if the value of the estate does not exceed £2.7 million, reducing the inheritance tax liability .
• Household and personal goods, such as jewellery, cars or art: these assets form part of the estate value so will play a role in determining whether the estate is over or under the taxable threshold.

What to do with your inheritance

Once any tax has been paid and you know exactly how much you have inherited, you now have the fun task of deciding what to do with it. 

As with most financial planning, there is no one-size-fits-all solution. Your best course of action will be influenced by how much you've inherited, where you are in life, your long-term goals, and the tax implications of the different courses of action.

If you’re young and inherit a modest amount – say between a few hundred and a couple of thousand pounds – you may want to put it towards a deposit to help you get on the property ladder, to help fund your university fees or achieve some other life goal. But such a sum is not life-changing, so you shouldn’t feel guilty if you decide to use it to go travelling or to have an experience that you wouldn’t have been able to afford otherwise.

But if you inherit a substantial amount, there are more things to consider. Should you use it to pay off your mortgage or other debts? Should you use it to fund school fees? Should you invest it to help supplement your pension? Or should you plan to pass it on to the next generation?

It’s a big decision, and you need all the pieces of the jigsaw to see the full picture to help you decide the answer. Most of us receive life-changing windfalls only once or twice in our lifetime, so it’s important to work with an expert who can help you identify and fit together all the different pieces to determine your best course of action.

This is particularly important if your legacy is from a loved one. It’s hard to know how you’ll feel about inheriting from someone who was important to you; some people are afraid to touch their inheritance, while others may spend emotionally to help manage their grief.

It's a good idea not to make ANY big decisions for the first 6-12 months after a bereavement, to give yourself time to make decisions rationally rather than emotionally.

Working with a Financial Adviser can help ensure you don’t make any rash decisions at this emotional time. They can help you create a financial planning strategy that best supports your long-term goals, while aligning with the important emotional question: “Would the person who left you this money think it was a positive use of their legacy?”

An inheritance is usually gifted with love, to support you to enjoy your best life. An expert financial planner can help you achieve this.

SOURCE 

Office for National Statistics, 2014 to 2016

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The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. 

The levels and bases of taxation, and reliefs from taxation, can change at any time.  The value of any tax relief is generally dependent on individual circumstances.

*Trusts are not regulated by the Financial Conduct Authority.