If you’ve recently been the beneficiary of a large inheritance, you might be mourning the loss of someone close to you. It might not be the best time to make big financial decisions.
Once you’ve begun to process your grief however, you’ll want to give thought to the amount you received.
You’ll have some important decisions to make. Decisions that could make an enormous difference to your standard of living and have large tax implications for you and your loved ones.
Estate planning is crucial, especially where large sums of money are involved. It’s a complex issue but one that we can help you with.
When is Inheritance Tax (IHT) payable?
You pay Inheritance Tax on the value of your estate above the £325,000 threshold, at the standard IHT rate of 40%.
If your estate is valued at less than £325,000 – or you leave everything above the threshold to your spouse, civil partner, a charity or a community amateur sports club – there will be no IHT to pay.
If you give away your home to your children or grandchildren your threshold can increase to £500,000. And, if you’re married or in a civil partnership and your estate is worth less than your threshold, any unused amount can be added to your partner’s threshold when you die.
There are also HMRC exemptions that allow you to gift certain amounts tax-free in a single tax year.
Understanding gifting rules and thresholds mean we can help you effectively manage your estate.
Be sure to speak to us
Coming into a considerable sum of money can be exciting but daunting too. We can help put together a financial plan that makes the best use of the funds you have, based on your circumstances and aspirations for the future.
Making bad decisions with large sums of money could see huge amounts lost to tax or poor investments.
Speak to us and you’ll have the peace of mind that your loved one’s inheritance has been used in the best possible way, to help you and the next generation too. Here are some options that may form part of the advice we give you.
Possible ways to use your inheritance
1. Pay off high-interest debts
If you have high-interest debt like credit cards or personal loans, this could be a great opportunity to pay them off.
Debt-free, you’ll be in a much better position to save or make investments with the money that remains, and your outgoings will be decreased.
Your current financial plan will no doubt include an emergency fund. But check in on it and top it up if need be. Preparing for the unexpected and putting money aside when you have the disposable income ensures it will be there when you need it.
2. Pay off your mortgage or other debts
Be sure to pay off high-interest loans first – the APR on a credit card could be over double the interest you pay on your mortgage – but once they are gone, consider paying off your mortgage too.
Heading into retirement without a mortgage or other debt means that all your retirement income can go on providing you with your desired standard of living.
You might consider putting money into a savings account.
With interest rates low at the moment, this is probably only a good idea if you expect to access the money quickly. Leaving a large sum in a low-interest account for a long period risks your money losing value in real terms, once inflation is taken into account.
Be sure to shop around for the best interest rate, even if you only intend to save for a brief period.
Topping up current investments, or investing for the first time, is a great way to see returns over the long term.
We can help you match your investment portfolio to your aspirations, timescales, and risk profile.
5. Top up your pension
Pensions are tax-efficient. You can contribute up to £40,000 in a single tax year and benefit from tax relief. The amount is across all pensions you – excluding the State Pension – and you can usually carry unused allowance over from the last three years too.
Making the most of available allowances puts you in a better position for retirement but be sure not to forget the Lifetime Allowance (LTA).
The LTA is an overall limit on the value of your pensions. In the 2020/21 tax year, it is £1,073,100. A large LTA charge could apply if your pension funds exceed this amount.
6. Put your business property into a pension
You can use certain pension products to help buy your business’s commercial property, effectively bringing it into your pension.
You can use up to 50% of a SIPP or SSAS’s value for the purchase and then lease the property back to your business. Rent payable – that you might previously have seen as ‘lost’ money – is now payable into your pension.
This is tax-efficient, and could have other benefits too:
- Additional contributions made to help with the purchase are likely to qualify for tax relief
- Rent is tax-deductible as a business expense, although it must be charged at a commercial rate
- If the value of the property goes up, that growth is owned by the pension and therefore there is no Capital Gains Tax (CGT) to pay
- Assets held in a pension are outside of your estate for IHT purposes
There could be disadvantages to tying your business into your income in retirement and the option won’t be right for everyone.
Speak to us if you are considering placing your business property into your pension. We can weigh up your finances and be sure it is the right choice.
Advice individual to you
There are many things to think about when you inherit a large sum of money. And we understand that everyone is different.
Our advice will consider all of the factors relevant to you. We’ll then put together a plan based on your individual needs and circumstances.
Managing your inheritance might mean paying off debt, topping up your investments, or placing your business property into your pension – and out of your estate.
Whatever your circumstances, we can help you make full use of tax-efficient savings, helping you achieve your long term financial goals, and giving you the retirement you want.
Get in touch
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.