For some people, receiving an inheritance can be a daunting time as they have never had to think of ways of dealing with an inheritance before. It may be a large sum of money, bigger than anything they have had to manage before.
As rapper the Notorious B.I.G. once said ‘“Mo money mo problems”.
This can be true, money can be a great source of stress however with the right planning you can spend less time worrying about money and more time enjoying your life.
Stuff to sort before dealing with an inheritance
If you were privy to the the deceased’s will and you know you are due for an inheritance make sure you follow the proper legal process after the person has died before you take and start spending the money.
You will need to speak with the Executors of the deceased’s estate. These are the people named in the will to carry out the administration of making sure everything is distributed according to the will. This process is called Probate. If you have been named as the Executor you will need to understand your responsibilities.
If the deceased died without a will then there are strict legal rules as to who can inherit what and how to deal with the estate. More detail can be found here.
Whether there is a will or not, you need to understand that even if you are entitled to an inheritance, it can be challenged by others who believe they should be entitled to something.
Another reason to make sure you do everything by the book.
Yes unfortunately for the deceased, you pay tax all through your life and then potentially pay some more when you die. The really annoying thing about Inheritance Tax is that you as a beneficiary needs to pay it before you can get your hands on your inheritance!
Whether the deceased owes Inheritance Tax or not will depend on how wealthy they were on death. You can use this calculator to find out what is owed. Inheritance Tax is dealt with as part of the Probate process.
Options for dealing with an inheritance
#1 – Deed of variation
- Are you comfortably well off and have all the money you need?
- Will receiving an inheritance just add to your own wealth and be subject to further Inheritance Tax on your death?
- Well there is a way you can re-direct your Inheritance on to someone else, perhaps your children.
- The process is called a deed of variation and can be arranged via a solicitor.
- This will mean the inheritance never touches your estate and you avoid any future Inheritance Tax.
#2 – Use a Trust
- If using a deed of variation, instead of redirecting the inheritance directly to your children you could redirect it to a Trust.
- This will allow you to maintain control over the money and only release funds to your children as an when you feel appropriate.
- Using a Trust also means you can keep the inheritance within your family bloodline by protecting it against potential future divorce, bankruptcies or long term care.
#3 – Purchase a new home
- If you do want/need the inheritance then you may wish to buy a new home.
- If you are thinking of buying a second home, perhaps an investment property, make sure you are aware of new tax rules on second homes.
- You now pay double the normal rate of Stamp Duty on second homes and any rent you earn from the second property is taxable.
#4 – Invest the money
- You could invest the inheritance for your financial future.
- You need to be clear on how long you want to invest for and what level of risk you want to take.
- If you don’t have any experience of investing, you may want to consider using a professional adviser.
- Investing in ways that don’t incur you more tax is crucial.
- A Pension, ISA and General Investment Account all have different tax treatment and rules and if used appropriately can provide you with an ‘income’ of £28,800 per year tax free!
#5 – Don’t forget to update your own will
- Now you have more money you may want to consider what would happen if you died.
- Does it mean you can now give more money to certain people?
- Or perhaps gift money to charity and save future Inheritance Tax.