Inherited Money? A Practical Guide to Managing an Inheritance
Receiving an inheritance is a significant moment. Learn how to navigate this responsibly and make decisions that honour both your future and the wishes of your loved one.
What to Do First
Take a breath. The most important thing is to not make hasty decisions.
When someone passes away, their estate goes through probate - the legal process of validating their will and distributing assets. This can take anywhere from weeks to over a year, depending on the complexity of the estate.
Paying Off Debts
Before investing or gifting, address any outstanding debts owed by the estate.
Priority Debts
These include mortgage arrears, council tax, and utility bills. They must be settled before any inheritance is distributed to beneficiaries.
Your Own Debts
If you have received an inheritance, consider using some to clear high-interest consumer debts like credit cards or personal loans. The interest savings alone can be substantial.
Tax Considerations
Inheritance Tax Basics
In the UK, inheritance tax (IHT) is charged at 40% on the portion of an estate exceeding the nil-rate band threshold (currently £325,000). The residence nil-rate band adds an additional £175,000 for property passed to direct descendants.
Gifting to Family
You can gift up to £3,000 per year without incurring inheritance tax. Larger gifts may be subject to gift taper rules if the donor passes within 7 years. Many choose to gift portions of their inheritance to children or grandchildren.
Investing Your Inheritance
A lump sum inheritance can be a powerful catalyst for building long-term wealth if invested wisely.
ISA Contribution
You can contribute up to £20,000 to your ISA in the current tax year. This provides tax-free growth and can be an excellent first home for inherited funds.
Pension Contributions
Contributing to your pension attracts 20-45% tax relief depending on your income band. This can be highly efficient for larger inheritances.
Investment Portfolio
Consider a diversified, low-cost portfolio aligned with your goals and risk tolerance. Long-term investing harnesses compound growth.
Gifting to Family
One of the most rewarding aspects of receiving an inheritance is the ability to help future generations.
Annual Exemption
You can gift up to £3,000 per year without any inheritance tax implications. This can be carried forward if unused, allowing you to gift £6,000 in one year.
Gifts for Weddings
Parents can gift up to £5,000 to children for weddings, with grandparents able to gift £2,500. These are exempt from IHT.
Regular Gifts from Income
If you have regular surplus income, you can make gifts from this without them being counted as part of your estate for IHT purposes.
Ready to Make Smarter Financial Decisions?
Start Investing
Learn how to invest inherited money wisely with our beginner-friendly guide.
Gifting Strategies
Understand the best ways to gift money while managing inheritance tax.