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What to do with inheritance in the UK: your guide to inheriting money

As sad as it may be, at some point in your life a loved one will pass away and leave money to you and the younger generations in your family.

This can be a difficult period as not only are you dealing with the emotional baggage of losing someone close to you, but you also have the burden of receiving a potentially large inheritance.

So, find out what to do with inheritance in my handy guide.

Also consider: Can you inherit an ISA?

Key takeaways

  • You have plenty of options for what to do with an inheritance, including investing in the stock market, holding it in a savings account, paying off outstanding debts, and building up a pot for emergencies.
  • The right options for you will depend on how much inheritance you receive, your personal circumstances, and your goals for the future.
  • Remember to factor Inheritance Tax (IHT) into your calculations, as you may end up receiving less inheritance than you might have thought you would.
  • Receiving an inheritance may be a reminder to consider methods to reduce your own IHT liability.
What to do with inheritance UK

Before you begin: remember to take your time

Before you start making decisions, remember to pause and take a breath. There’s no rush to instantly choose what to do with your money, especially if it’s a large sum.

Make choices in your own time, especially if you’re still dealing with the emotions of losing a family member. That way, you can make sensible financial decisions that will let you make the most of your money.

If you’re unsure what to do, you may want to seek financial advice from a financial advisor or planner.

A financial advisor can provide everything from investment advice to other queries about your wider financial health.

Meanwhile, a financial planner can design a financial plan and provide personal advice that takes you and your wider financial position into account. They’ll provide advice with your financial goals in mind, helping you to reach your targets for the future.

You can find a financial planner or advisor near you using the search tool on our website.

4 choices for managing your inheritance money

1. Investing your inheritance money

The first thing you may be considering is designing an investment portfolio or supplementing an existing one with your inheritance money.

Trying to grow your inherited money in the markets can be a good use for your lump sum. But, before you start, you’ll need to decide what type of assets to invest in and where you’re going to hold them.

Read more about these decisions below.

What assets can you invest in?

Whether you’re new to investing or a veteran investor, the number of options available when investing in the stock market can make it difficult to know where to start.

That’s why I’ve made a quick list below of some of the most popular kinds of assets that might be suitable for investing your inherited money.

Remember: always do some independent research before you buy any investment.

Stocks and shares

Perhaps the most common of investments, you could choose to buy stocks and shares in individual companies.

When you buy a share in a company, you essentially own a piece of it. The value of that share will typically then rise or fall in line with wider company performance and market conditions.

In general, stocks and shares are best held over the long term, with a minimum investment period of five years.

On the other hand, you can also “day trade” stocks and shares. This involves speculating on what the value of a stock or share will be from the start of the day to the finish.

Bear in mind that this tends to be a more time-consuming way to invest, and also tends to be higher risk, as share prices can fluctuate more in a single day than they might over longer periods.

Funds

Rather than selecting individual companies, you could invest in investment funds instead.

Funds are packages of investments which you can invest in all at once. You buy units in a fund, much like how you buy stocks and shares, and the value of these units will then rise or fall depending on how the investments within the fund perform.

You can generate a return from funds in two ways: either sell your units for more than you bought them for if they rise in value, or collect dividend payments from the fund when the investments within it pay them out.

Some funds are overseen by fund managers, who actively select the investments using their expert knowledge of the markets. While this can come with higher or additional fees, it means you can have the peace of mind that an investment professional has a handle on your money.

Meanwhile, there are also “index funds”, which track an underlying investment, such as a stock market index, a certain type of commodity, or even market volatility.

For example, you could buy a FTSE 100 tracker index fund, which invests in all the constituents of the FTSE 100 index.

Funds can be an appropriate option if you want to diversify your invested inheritance money instantly without having to individually select stocks and shares in companies.

Bonds

Bonds are small debts you can buy off an issuer, typically a corporate bond from a company, or a treasury bond (also known as a “gilt”) from a government.

When you buy a bond, you’re essentially loaning your money to the issuer. The issuer must then pay you a fixed rate of interest for the term of the bond, returning your initial investment when the bond matures.

Bonds can be a good use for your inheritance money as they provide a steady income over a fixed period.

You’re also free to sell your bond on a secondary market for a profit if you’d rather forgo the interest payments and receive a return instantly.

Corporate bonds tend to pay higher rates of interest, but also present greater risk, as a company could go bust and become unable to meet its debt obligations.

Meanwhile, treasury bonds tend to be more stable as it would require an entire government to collapse for you not to receive your money, which is not impossible but certainly unlikely. However, they tend to pay lower interest rates.

Where should you hold your investments?

The other decision you’ll need to make is which account to invest your money through.

If you need help choosing the right account for you, seek professional advice. A financial expert will help you to make sensible choices in your personal circumstances.

Stocks and Shares ISA

Investing through a Stocks and Shares ISA can be a useful option for your inheritance money. ISAs are considered tax-efficient as they shield your money from Income Tax, Capital Gains Tax (CGT), and Dividend Tax.

That means you won’t need to worry about these taxes on your investments.

Each tax year, you have an ISA allowance for tax-efficient saving and investing, which is £20,000 in the 2022/23 tax year. That means you can invest a fairly sizable chunk of your inheritance money tax-efficiently.

Self-invested personal pension

A self-invested personal pension (SIPP) is a type of pension in which you can choose your own investments, rather than your money being invested for you. This gives you greater control over how your retirement savings are invested.

A benefit of putting inheritance money in a SIPP is that you’ll receive tax relief on pension contributions at your marginal rate of Income Tax.

That means if you’re a basic-rate taxpayer, contributing £10,000 of your inheritance into a SIPP would actually see £12,500 go into your pot.

You’ll receive this tax relief on contributions up to the pension Annual Allowance, which is the lower of £40,000 or 100% of your earnings in the 2022/23 tax year.

You’re free to continue saving into your pension beyond this point, but your contributions will no longer receive tax relief.

Of course, this will only be appropriate for you if you won’t need your money until age 55 (rising to age 57 in 2028), typically the earliest point at which you can access your retirement savings.

You’ll also need to be confident in choosing your own investments, as making mistakes here could severely hamper your retirement plans.

2. Saving your inheritance money

Rather than investing your money, you could choose to hold it in a savings account instead.

Holding your money in a bank account with an interest rate can be a safer option for your inherited money, keeping it secure and away from the markets.

You’ll typically then receive interest in return for holding your money with whichever bank, building society, credit union, or other provider you choose.

You could even choose to hold your money in a fixed-term savings account. This essentially involves “locking” your money in the account for a fixed period in return for a higher rate of interest.

While you’ll need to be confident that you can afford to keep your money locked away like this, this can help you to generate a greater return on your money.

You can also choose to save your money in a Cash ISA if you have any of your remaining allowance (£20,000 in 2022/23).

This ensures that any interest your money generates is entirely free from Income Tax, which could be a concern if you’re saving an especially large sum that would generate interest above the Personal Savings Allowance (up to £1,000 in 2022/23, depending on your marginal rate of Income Tax).

When saving money, you should remember to maximise coverage from the Financial Services Compensation Scheme (FSCS).

The FSCS will pay compensation on up to £85,000 of your money if your savings provider fails. So, if you’ve inherited more than this amount, consider spreading it across institutions to ensure your entire inheritance is covered.

Make sure your provider is covered under the FSCS before you save.

3. Paying off debt

Before you start saving or investing, you may want to pay off debts if you have any outstanding personal loans to settle.

High-interest debts, such as on a credit card or a payday loan, can quickly stack up and start dragging you down.

According to MoneySavingExpert, taking out £3,000 on a credit card aged 21 and only making the minimum payment on your borrowing would see you not clear the debt entirely until you turned 50.

As a result, using your inheritance to make debt payments can be a sensible, long-term decision that ultimately saves you money and allows you to live debt-free.

Overpaying on your mortgage

Another option you have is to make overpayments on your mortgage if you used one to take your most recent step on the property ladder.

By overpaying on your mortgage, you could potentially clear some or all of the remaining debt, giving you the chance to own your home outright sooner than you thought you would.

Before you decide to do this, check with your mortgage provider whether your deal comes with early repayment charges (ERCs). ERCs can make it less viable to pay off part or all of your mortgage, as you’ll lose some of your money without making a dent in your borrowing.

4. Creating an emergency fund

You may also want to consider building an emergency fund using your inheritance.

You never know what’s going to happen in the future, from unexpected expenses such as your car breaking down to life-changing events such as losing your job.

So, keeping money aside in the event of an emergency can be a prudent choice, using your inheritance to prioritise your overall financial security.

Consider holding between three to six months’ expenses in your fund, and make sure it’s held in an easy-access savings account so you can dip into it instantly if need be.

What should I do with £5,000, £20,000, or £50,000 inheritance?

In reality, the question of what to do with inheritance money is simply a question of what to do with a lump sum windfall.

Whether you have £5,000, £20,000, or £50,000, a good starting point is to check that your emergency fund is sufficient and that you have no outstanding debts. This is often a good step in securing your wider financial health.

Next, it could be sensible to use any of your remaining ISA allowance. Whether you save or invest your money in ISAs, this ensures that your money is shielded from tax as far as possible.

Of course, if you’ve already used your ISA allowance in this tax year or your inherited sum is larger than the allowance, you could contribute it to a pension and receive tax relief on it instead.

Again, you’ll only receive tax relief if you have any remaining pension Annual Allowance. But, if you do, the combination of tax relief and potential investment returns on your pension could make a retirement account a good home for your inheritance.

If you still have money left over after this, you may want to simply consider saving it. You could always maximise your ISA and pension allowances this year, and then transfer leftover savings into those accounts next tax year, too.

Remember: this is not personal advice. These suggestions may not suit your individual circumstances or risk tolerance. Consult a professional advisor if you’re unsure what to do.

Receiving an inheritance and Inheritance Tax implications

One important thing to bear in mind is that, when the executors of your loved one’s estate come to calculate it, they may have to pay Inheritance Tax (IHT) on the total value.

As standard, IHT is charged at 40% of the value of the estate. This includes the value of money in savings, as well as non-cash assets such as investments, property, and more.

The executors of your loved one’s estate – which could of course be you – will calculate a tax bill if there is one and then settle it with HMRC within six months of the death before paying inheritance to the beneficiaries.

This may mean you receive less than you had initially thought you would. As a result, it’s vital to never solely rely on an inheritance to solve any financial issues you’re facing.

The Inheritance Tax nil-rate band

It’s worth noting that, before they owe tax, your loved one has a tax-free threshold called the nil-rate band (NRB) on their estate.

Standing at £325,000 in the 2022/23 tax year, this first portion of your loved one’s money is entirely free from IHT.

There’s also a separate residence nil-rate band (RNRB) if your loved one passes their main residence to their direct descendants – that is, their children or grandchildren. The RNRB currently stands at £175,000 in 2022/23.

In total, that means they can pass on up to £500,000 of their wealth without their executors having to settle an IHT bill on their death.

Additionally, if they’re married or in a civil partnership, their NRBs are combined with that of their spouse or civil partner. That means they may be able to pass on up to £1 million tax-free.

However, any value over these amounts may be subject to IHT.

Inheritance Tax planning

IHT is notoriously steep and can eat into the inheritance you receive. That’s why it can be sensible to consider strategies that reduce how much IHT is payable on an estate, ensuring that HMRC is not the biggest beneficiary of a death in your family.

There are many ways you can do this, including:

  • Gifting assets before death to reduce the size of a taxable estate
  • Making the most of tax allowances and reliefs, such as passing on pension assets or using Business Relief.
  • Holding money and assets in trust
  • Making charitable donations to reduce the IHT rate.

Of course, if you’ve already received your inheritance, it will be too late to do such planning.

Even so, it may be a good reminder for you to consider inheritance planning for your own estate so that your beneficiaries can receive your money without being subject to a large tax bill.

Tax rules can be complicated, so consider taking independent financial advice.

What to do with inheritance in the UK FAQs

Does an inheritance count as income?

No, an inheritance does not count as income, so it is not liable for Income Tax or Capital Gains Tax (CGT).

Do I need to inform HMRC if I inherit money?

Yes, you do need to let HMRC know that you have inherited money, regardless of whether Inheritance Tax (IHT) is due. The executors should calculate a potential IHT bill and pay it from the proceeds of the estate before you receive your inheritance.

What is the best thing to do when you inherit money?

The best thing to do when you inherit money will depend on your personal circumstances. You could invest it, save it, use it to pay off debts, build up an emergency fund, and more.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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