How to spend an inheritance

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

If you’ve inherited a large sum of money, what’s the best way to manage it? This is one of the first questions many people ask when they’ve been gifted an inheritance.

While there could be an immediate temptation to spend this money, you could put it away to grow your wealth over time. This often brings a set of additional questions, and it can be quite stressful for those who don’t consider themselves financially savvy.

Do you put the money towards a deposit on your first home? Or should you place it in your pension so you can reap the rewards when you stop working?

These answers will depend on a variety of factors, including your financial goals, age and appetite for risk. Below, we’ve listed four different ways to manage a large inheritance. 

If you’re comfortably living from your own income, you could be thinking about saving this money for the future.

While there’s more than one way to build your wealth, one strategy could be to invest your money in the stock market.

Investing does come with its own caveats, however, such as the risk of losing your capital altogether. But it does offer the potential to protect your money from the rising cost of living, especially at a time where there isn’t one savings deal on the market that beats the current rate of inflation.

According to calculations by the Bank of England, what costs £100,000 today would only have cost £59,053 twenty years ago. With inflation currently over 10%, consider how this could impact the purchasing power of your inheritance in another 20 years’ time.

On the other hand, investing part of your inheritance in a diverse portfolio of assets that meets your appetite for risk could improve its long-term spending power.

Another way to invest your inheritance would be to expand your property portfolio. Perhaps you’ve always wanted a bolthole by the sea or wish to support your income with a buy-to-let business.

Whatever your reason for investing further in property, this move could keep your inherited wealth locked into a valuable asset for many years to come.

While there’s risk associated with any investment – the property market could crash, or the home could cost you more in maintenance and bills than you had anticipated – overall, your property value is likely to appreciate over time.

The table below from the Office for National Statistics (ONS) exemplifies the gradual overall rise in UK house prices between January 2005 and December 2022.

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So, while past performance is not a reliable indicator of future performance, investing your inheritance in property could provide you with a valuable asset to rely on in future years.

If you’ve inherited money that you feel your children would benefit from, there are ways to bypass your own inheritance and pass it straight to the next generation.

Your adult children may be looking to start their own families, get married, buy their first home or climb the career ladder from the bottom rung up – all of which could be helped by this injection of capital.

Some options for passing on your inherited wealth include:

• Writing the funds into trust. This can usually protect the wealth you pass down from Inheritance Tax (IHT), and can give the trustee full control over how the money is used.
• Investing the money on your child’s behalf. For instance, if your child is looking to buy their first home, providing a sizeable deposit from the inheritance you receive can help them build a nest egg of their own.
• Writing a Deed of Variation into your will. This is a legal document that allows beneficiaries named in a will to make changes to the distribution of an estate. So, if you already have wealth of your own, and are due to receive an inheritance that could perhaps lead to IHT issues, a Deed of Variation allows you to redirect part or all of an inheritance to another person (such as an adult child). This can help to reduce the amount of IHT payable on this portion of an estate.
• Giving the funds. You can pass up to £3,000 a year tax-efficiently to anyone you like. If you give more than £3,000 to your loved ones in a single tax year, they may pay IHT on the sum if you pass away within seven years.

If you do choose this route, it could be wise to consult your Kellands financial planner before immediately passing on the funds. Without professional advice, you or your children could pay an increased tax bill as a result, depleting your inherited wealth unnecessarily.

Finally, if you’re approaching retirement, you could boost your later-life income by paying your inheritance into your pension.

If you’re still a little way away from retiring, contributing a larger sum each year between now and when you draw your funds could improve your financial stability in retirement – especially as you’ll likely benefit from tax relief on your contributions.

If you plan to reroute your inheritance into your pension, speak to your Kellands financial planner before you proceed.

We can review your current circumstances, advise on the tax implications of your decision, and help form a tax-efficient contribution plan.

For advice on incorporating your inheritance into a bespoke financial plan, speak to us today. Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Buy-to-let (pure) and commercial mortgages are not regulated by the FCA. Think carefully before securing other debts against your home.

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

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.