What to Consider if You Receive a Large Inheritance

Receiving a large inheritance can be both a blessing and a responsibility. While it provides a significant opportunity to secure your financial future, it also requires careful planning to ensure that you make the most of it. This article explores the key financial planning considerations across to help you navigate this complex process.

1. Assessing Your Financial Goals and Needs

The first step in managing a large inheritance is to take a step back and assess your financial goals and needs. Consider the following questions:

• What are your short-term and long-term financial goals? Are you planning any major purchases in the short term, such as a home or a car? How much of the funds can be set aside for longer term objectives?
• Do you have any outstanding debts that need to be paid off?
• What are your retirement plans, and how much do you need to save to achieve them?
• Do you have an emergency fund in place?

2. Creating a Financial Plan

Once you have a clear understanding of your financial goals, the next step is to create a financial plan. This should include:

Budgeting: Outline your monthly income, expenses, and savings. Determine how much of your inheritance you can allocate towards each goal.

Debt Management: If you have high-interest debts, such as credit card balances or personal loans, consider paying them off first. Reducing debt can significantly improve your financial health.

Savings and Investments: Determine how much of your inheritance you want to save and invest. Consider an appropriate level of cash savings alongside a diversified selection of investments across asset classes, regions and sectors, to help reduce risk. Utilise all tax allowances, such as the annual ISA allowance if you are in the UK, to invest tax efficiently.

Retirement Planning: Consider if it makes financial sense to contribute to retirement accounts such as UK SIPPs or Workplace Pension schemes. Take advantage of any employer matching programmes if available.

3. UK Tax Considerations

Inheriting a large sum of money can have significant tax implications. Understanding these and planning accordingly is important to preserving your wealth. Key UK tax considerations include:

Income Tax: While the inheritance itself is not subject to income tax, any income generated from inherited assets, such as interest, dividends, or rental income, will be taxable.

Capital Gains Tax: If you sell inherited assets, such as property or investment funds, you may be liable for capital gains tax on the increase in value since the date of inheritance.

Inheritance Tax: In the UK, inheritance tax (IHT) is charged at 40% on the value of an estate above the nil-rate band (£325,000 per person). However, if you inherit a family home, you may be eligible for the residential nil-rate band, which provides an additional £175,000 allowance per person.

Working with a tax expert can help you navigate these complexities and develop strategies to minimise your tax liability.

4. Investment Strategies

Investing your inheritance wisely is important to ensure long-term financial growth. Consider the following strategies:

Diversification: Spread your investments across different asset classes to reduce risk. This can include equities, fixed income, commodities (such as gold) and other investment types.

Risk Tolerance: Assess your risk tolerance and invest accordingly. Higher-risk investments may offer greater returns but come with increased volatility. Ensure your investment strategy aligns with your comfort level and financial goals.

Professional Advice: Consider working with a wealth manager to develop a personalised investment strategy. A wealth manager can provide a degree of separation to

a) suitably measure your level of risk; and

b) recommend an appropriate investment portfolio in light of this, providing valuable insights and help you navigating complex investment decisions.

5. Estate Planning

As you manage your inheritance, it’s important to think about your own estate planning. This involves:

Creating a Will: Ensure your assets are distributed according to your wishes by creating a will. Without a will, your estate may be subject to local intestacy laws, which may not align with your intentions.  If you have assets in multiple locations, consider obtaining advice to see whether it would be efficient to have wills in multiple locations.

Structuring: Consider obtaining specialist advice on the best way to structure your assets to ensure you are able to pass assets both tax-efficiently and as easily as possible to your beneficiaries.

Power of Attorney: Appoint a trusted individual to make financial and medical decisions on your behalf if you become incapacitated.

6. Philanthropy and Giving Back

If your inheritance exceeds your personal financial needs, you might consider giving to philanthropic causes. Charitable giving can provide personal fulfilment and offer tax benefits. Consider making individual donations or, if dealing with a significant sum of money, creating Charitable Trusts which can provide ongoing support to your chosen causes.

7. Maintaining Financial Discipline

Finally, maintaining financial discipline is important to ensuring your inheritance provides lasting benefits. This involves:

Regular Reviews: Periodically reviewing your financial plan and making adjustments as needed. We suggest speaking with a wealth manager at least annually for optimal results.

Stay Informed: Keep abreast of changes in tax laws and investment opportunities to make informed decisions.

What to do next:

This is just an introduction to some of the terms and questions that need to be considered when starting your succession planning. Bentley Reid will be sharing more content around inheritance and succession planning.

Need more advice? Reach out to our experts:

Anna Warren – Tax Director

anna.warren@bentleyreid.com

Mike Winstanley- Director, Wealth Management

mike.winstanley@bentleyreid.com