What would you do with a substantial inheritance?

02/09/2022

None of us are immortal.

While you clearly don’t like to think about the eventual death of a family member, it’s something that is often worth at least having outline plans in your mind for.

It will clearly be a distressing time for you and your loved ones, so advance planning can also help relieve some of the stresses involved and give you less to worry about.

It is possible to plan for financial issues, such as the receipt of an inheritance. It’s even more important if the sum of the inheritance is likely to be substantial.

So, read on to discover some of the key things you’ll want to consider as you put plans in place to deal with a large inheritance.

The tax implications of a large inheritance

UK Inheritance Tax (IHT) is typically charged at 40% on the value of an estate in excess of £325,000. This figure can rise to £650,000 if the deceased was married, or in a civil partnership, and dies after their spouse or partner.

The residence nil-rate band (RNRB) of £175,000 usually applies if the deceased wants to leave their home to a child or grandchild. This can increase this threshold further meaning a couple can potentially pass on £1 million to their heirs, free of IHT.

Note that pension assets aren’t normally assessed for IHT purposes.

Given the potential impact IHT can have on a large inheritance, it does make sense, if possible, to encourage any potential benefactor to ensure their financial affairs are well organised, and to take steps to mitigate the effect of IHT.

On the Charlton House website, you’ll find articles about gifting assets and trusts that you may find useful in this regard.

However, if you’re concerned that IHT will be a substantial issue, you should think about using a deed of variation.

A deed of variation can help reduce the amount of IHT chargeable

A deed of variation allows you to make changes to your entitlement from a will after your benefactor has died.

For example, you could adjust the distribution of your benefactor’s estate to make it more tax-efficient. This might be by making the best use of available reliefs and exemptions or spreading large amounts out more evenly between beneficiaries.

As well as being an effective tax mitigant, it’s also something you may want to consider if you don’t need all your inheritance and would like it to go to someone else.

The application for a deed of variation must be made no later than two years from the date of death of the deceased. You should bear in mind that there are restrictions around the setting up of such deeds, and I would always strongly recommend you get expert legal advice concerning this issue.

Clearing your debts should be a top priority

Having considered the IHT aspects of a substantial inheritance, it’s worth then thinking about how you want to use the money you receive.

If you have substantial outstanding debts, clearing these could be a good use of some or all of your inheritance.

Not only does clearing debt give you valuable peace of mind and remove some dark clouds from your horizon, but it also obviously frees up the cost of servicing it – which can be a substantial hit to your finances each month.

Managing your savings and investments

After making plans to clear debts, your next step should be to consider how to save and invest the assets you’ve been given.

One key word of advice I’d offer is not to rush into things. Going on an instant spending spree may well give you a short-term lift, but it’s always advisable to ensure your plans are thought out and can have a long-term impact.

For example, if stock markets are at record highs, immediately investing substantial sums may not be the best course of action.

Another issue will be the make up of the non-cash assets you’ve received. You should check these against assets you already own to see how the overall mix is made up.

For example, if you’re given a substantial amount of shares in a particular sector that matches your own holdings, you may want to consider amending the balance of your overall portfolio to ensure you’re not over-exposed in any area.

Your timescales will affect your decision-making

How old you are is likely to be a big contributory factor in determining how you manage a substantial inheritance.

You’ll face various big financial landmarks as you go through your financial journey. When you’re in your 30s and 40s, a large inheritance is likely to represent a significant proportion of the assets you own.

As you get older and have accumulated significant assets the sum you inherit may account for less of your total wealth.

In each case, you should look to review your overall asset holdings to ensure you’re still comfortable with their distribution and your overall investment strategy.

Your own IHT planning process will be affected

Once the assets have passed to you, you should then consider future IHT implications on your own estate and how that could affect your beneficiaries.

You’ll very likely want to take steps to ensure your family aren’t faced with a big tax bill in the event of your death. There are various ways of mitigating this through careful financial planning involving the use of trusts, gifting, and making full use of all your allowances.

You should also bear in mind “quick succession relief (QSR)”. This can potentially reduce the IHT burden on your estate if it includes assets that have previously been subject to IHT.

Bear in mind that mistakes can be costly and often irrevocable, so I would always recommend that you seek expert advice so as to avoid unnecessary complications.

Don’t forget to update your will

Finally, it’s highly likely that you’ll need to make changes to your will to reflect the assets and wealth you’ve received.  Clearly, if you haven’t already written a will, making one needs to become even more of a high priority for you.

Dying intestate means that your assets will be divided up according to strict rules that might mean your assets don’t pass to the people you’d like them to. By making a will you can ensure your wealth passes to who you want it to in a timely and efficient manner.

Get in touch

If you’d like to talk through your inheritance planning arrangements, please get in touch.

You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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