It’s an emotional and potentially life-changing moment. But without a clear plan, the risks of not optimising your inheritance is significant.
Receiving a lump sum inheritance can be life-changing, but it often comes during a time of profound emotional upheaval following the loss of a loved one. It’s not uncommon to feel overwhelmed and uncertain during this period, especially when faced with major financial decisions that could impact your family’s future for generations. With an increasing number of UK estates subject to Inheritance Tax (IHT), protecting family wealth has never been more important. Here’s how you should approach it.
Pause before you act
The first step is to give yourself time to grieve and process events before making any major financial choices. Acting too quickly without a strategy can lead to decisions you may later regret. To avoid hasty spending or your money losing its purchasing power to inflation (see table below), consider placing the funds in a secure, high-interest account whilst you assess your options. This allows you to zoom out and think long-term about what you want the inheritance to achieve for you and your family. Gathering trusted and expert advice at this stage will guide your next steps with confidence.
Understand tax implications
Have you inherited cash? Property? Investments? And are there any implications attached? The reality is some inheritances can be a minefield to navigate. In the UK, IHT is typically charged at 40% on estates above the nil-rate band of £325,000 per person, so large portions of family wealth can be lost without planning. Additionally, each estate may benefit from a residence nil-rate band of £175,000 when passing property to direct descendants. However, this can be reduced if the
estate exceeds £2 million. It’s crucial to minimise these liabilities and protect more of your inheritance, as you will not receive a penny until the IHT has been paid and probate granted.
Turn goals into plans
Once you have clarity on what you’ve inherited and its tax position, think about your own financial goals and whether they’re short, medium, or long-term. Do you want to clear debts, build savings, invest for future growth, or increase your pension contributions? These are critical questions and working with an independent financial adviser can help you create a balanced plan that aligns with your goals, time horizon and risk tolerance. A careful plan ensures your choices reflect your current needs and future goals.
Give or spend thoughtfully
It’s only natural to want to share your inheritance, but gifting or spending without a plan can lead to problems later on. If you’d like to gift money to family, consider using HMRC’s £3,000 annual exemption or making regular gifts from surplus income to avoid the burden of IHT. Remember, larger gifts may be taxed if you die within seven years.
Tip: Be mindful of sudden lifestyle inflation as spending increases can quickly erode your inheritance and could be better placed in an investment or pension fund to support your long-term wealth and retirement goals.
Manage cash-flow
At Lumin Wealth, we incorporate cashflow modelling into our clients’ financial plans to ensure their goals and aspirations remain achievable, providing clarity and confidence for the years ahead. This also helps identify any potential shortfalls and plan proactively to address them. Doing so, we limit any future financial hiccups for our clients.
Have you received a lump sum and don’t know where to start with your financial plan? Call 03300 564 446 for more details on how to proceed.
