If you’ve inherited money, property or any other valuable possessions, it can feel slightly overwhelming when it comes to deciding what to do with it. After all, there are so many options. Should you pay off your debts or all/part of your mortgage? Should you invest it or save it? Before you make any decisions, it’s a good idea to take a step back and carefully consider the options. Here we take a look at the issues surrounding inheritance.
Inheritance tax
This is a tax on the estate of someone who’s died, and can also apply to gifts or money they give in the seven years prior to their death. The standard rate is 40%, which is paid on anything over the £325,000 threshold, but it doesn’t apply to anything left to the deceased’s spouse or civil partner. Inheritance Tax is paid from the estate of the deceased, so the amount you inherit will already have had this deducted.
Inheritance Tax is a complicated matter, so if you’re looking at your own finances, you should consider getting advice from a financial adviser on how best to pass on your wealth to minimise your tax.
Paying off debts
Paying off some of the mortgage is a tempting option, which will probably leave you with a significant amount of extra money every month, but if you have a lot of other debt, on a loan or credit card, for example, it might not be the most shrewd move. Loans and credit cards have higher interest rates than mortgages, so it would be better to pay these off first. Many mortgage plans also come with an early repayment charge of around 1-5% of the outstanding mortgage debt − a big amount to just throw away.
Pensions vs saving
Interest rates are currently so low that it’s hard to get any sort of meaningful return on your savings. However, the new ISA allowance is a whopping £20,000, so it makes sense to take advantage of this; shop around the latest ISA products to find the best rates. And obviously, if you’re going to want to use the money in the near future, on a house or for university, for example, you won’t want to tie your money up for a long time.
If you’re thinking longer term, however, you could consider starting or topping up your pension. Unlike savings accounts (ISAs excepted), money put into pensions benefits from tax relief.
Investing
Investing your money in stocks and shares offers much higher returns than sticking it in savings, but it is up you to decide how much risk you want to take. The general rule is the higher the potential return, the higher the risk. An alternative to stocks and shares would be to invest your money into something that will generate an income – a buy-to-let property, for example. But make sure to factor in the increased Stamp Duty charges on investment properties.
Seek the help of a financial adviser
With such a lot to consider, you may find it helpful to take on the services of a financial adviser, especially if you’ve inherited a large amount. Look for an independent financial adviser - this means that they’re not tied to recommending only certain products or providers. Fees for financial advisers vary, so ask around friends and family for recommendations and get fees in writing before you enter into any kind of arrangement.
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