Financial strategy

What Should You Do with an Inheritance?

An inheritance usually comes with mixed feelings. While the money can be enormously helpful, grief and guilt can sometimes factor into the decisions that follow. You may want to honour the wishes of the person who passed on, whether that involves saving prudently for the future, or spending the money on a once in a lifetime experience. 

You should also consider your own financial plans. An unexpected windfall can bring you closer to your goals, whether that is early retirement or a step on the property ladder.

The amount is also relevant, particularly relative to your financial situation. If you are already financially comfortable, a few thousand pounds could go towards a family holiday. If you are struggling, even a modest amount can be life changing. 

Below are some potential options for your inheritance.

Save It

Cash interest is pitifully low at the moment, even with the recent interest rate increase.

But there are still good reasons for holding cash. An unforeseen bill, urgent repair, illness, or period of unemployment could mean that you need to access a sum of money at short notice. If you don’t have the cash to hand, you could end up in debt.

It’s worth keeping an emergency fund of around 6 months’ expenditure to deal with the unexpected. If you don’t already have some reserves in place, it’s worth keeping some of your inheritance in a savings account for this purpose.

Spend It

If you are on track to meet your financial goals, you might feel that spending the money is a better use of your inheritance. Some options include:

  • Extending your home or upsizing to a bigger one
  • Buying a new car
  • A dream holiday for the family
  • Investing in a motorhome for many years of adventures

You should always shop around for the best deal and think carefully about any purchases.

Invest It

Another option is to invest the money for long term growth.

The first step is to make use of your ISA allowance. This allows you to invest £20,000 per year for tax-free returns. 

You can invest in shares, bonds, funds, investment trusts, ETFs, and many other asset types. It’s always worth checking the costs and the risk profile of your chosen investment to ensure it’s suitable for your requirements. 

You should aim to invest in a wide range of assets, and avoid anything you don’t understand or looks too good to be true. 

A diversified, multi-asset tracker fund is a good option for beginner investors as it allows you to invest in a wide section of the market at a low cost.

Top Up Your Pension

A good way to invest for the long term is to contribute to a pension. You might already have one through your employer, or you can set one up yourself.

Anyone can contribute up to £2,880 per year to a pension. This receives tax relief of 20%, resulting in a gross contribution of £3,600. Higher and additional rate taxpayers receive further relief through their tax returns. If you are working or running your own business, you will probably be able to contribute much more than this. 

Pensions grow free of tax, and when you retire, you can withdraw 25% of your pot as a lump sum. If you are unlikely to need the money for many years, a lump sum pension contribution could be a good use of your inheritance.

Buy Property

Buying property is a key goal for many people, but saving a deposit can be an obstacle. Using your inheritance for this purpose could be an excellent use of the money as it achieves a short term goal, while contributing to your financial security.

You might also be considering buying a second property to let out. Investing in property is still a popular choice, and worth considering if you know what you are doing. However, there are a number of disadvantages to investing in property rather than other assets, for example:

  • A surcharge of 3% (4% in Scotland and Wales) payable in addition to the normal rate of stamp duty.
  • Higher rates of capital gains tax when you sell.
  • You can only claim basic rate tax relief against your mortgage interest, which is bad news if you are a higher or additional rate taxpayer.
  • Property is not particularly liquid and it can take time to sell and recoup your investment. Additionally, dealing with tenants and letting agents can take up a lot of time. 

If you are keen to invest in property, you should weigh it up with other investment options and avoid rushing into anything.

Pay off Debt

A high priority should be to clear expensive debt such as loans or credit cards.

A mortgage can be a trickier decision, as interest rates are generally low and you might find you are better off over the long term if you keep the mortgage and invest the money. Of course, this can go wrong, as the investment could fall in value. 

This decision will depend on your overall financial position and how you feel about risk. 

Give it Away

If you are in a financially secure position, you may not require the money for your own needs. It could even increase the value of your estate and result in an unwelcome inheritance tax bill.

If you give the money away, it will remain in your estate for seven years.

Giving the money to charity is one option. Charitable gifts are immediately outside your estate. However, this may not align with the wishes of the person who left you the money, as their intention was to probably to keep it in the family.

Alternatively, could enact a deed of variation within two years of death. This effectively changes the person’s Will so that the money can be redirected to someone else (for example, your children) or a trust. This can be complex, particularly if there are several beneficiaries, who may not all be in agreement.

Receiving an inheritance can give you a lot to think about, especially if it is for a large sum. If you are unsure, it’s worth taking some time before making the decision, seeking advice where necessary, particularly if the person who died was a close relative. 

Photo of author

Joe Jackson

Helping people achieve their financial goals is an extremely rewarding experience. No two clients are the same, which means no two days are the same. It’s a really fast-paced industry, full of characters and personal interaction, and I absolutely love it.