Receiving an inheritance can be bitter-sweet. On the one hand, there's all the emotion that comes with a bereavement, but on the other, the money involved could potentially transform your life.

By the way, if you’re looking for information about leaving your family with an inheritance and want to know how to reduce their inheritance tax bill, see our article, How much money can I leave without leaving an Inheritance Tax bill?

Receiving a significant sum of money (whether it’s expected or not) can come with its own complications, and you’ll have the responsibility of managing the money well for you and your family’s future security.

The first thing to be aware of is that you won’t receive your inheritance immediately. For a straightforward estate with no property and a single bank account it could take as little as three months for beneficiaries to receive their inheritance. However, the majority of estates are more complex and will typically take around six to twelve months for probate to complete. Some particularly complex estates can take years to complete.

Inheritance tax is charged at 40%, but there are allowances in place

Will I need to pay Inheritance Tax (IHT)?

Depending on the estate’s value, you may receive an IHT bill. Inheritance tax is charged at 40%, but there are allowances in place. If the value of the entire estate (including property, savings, investments, and life insurance policies) is below £325,000, it’s under what’s called the ‘nil-rate band’, and you won’t need to pay any inheritance tax.

If your benefactor is a widower, their former spouse or civil partner’s nil-rate band may be combined with their own, meaning the joint overall IHT allowance for the estate is £650,000.

In addition, there’s a ‘residence nil-rate band’ (RNRB). If you’ve been left the home of a parent(s) or grandparent(s), you can make a claim to HMRC for £175,000 (or the value of the property if lower). Or a combined residence nil-rate band of £350,000 (£175,000 x 2) when they both pass. However, if the entire estate is worth over £2 million, the RNRB reduces by £1 for every £2 over the £2 million threshold.

It is complex, and if you know you’re about to receive a significant sum of money as an inheritance, we recommend you speak to an independent financial adviser to guide you through.

Inheriting from a spouse or or civil partner

When it comes to inheritance tax for married couples and civil partners, there’s usually no inheritance tax to pay when the estate is passed to the surviving partner, no matter how large the assets. This approach also preserves both of your IHT allowances, meaning that your estate benefits from a combined nil-rate band of £650,000 (£325,000 x 2) plus a combined residence nil-rate band of £350,000 (£175,000 x 2). This effectively gives you an IHT tax allowance of £1 million.

What to do with your inheritance?

What you do with your windfall depends on your age, whether or not you have dependents who rely on you, your current financial situation and your goals in life. But there are a few essentials you should take care of before you start making more elaborate plans.

- Pay off high-interest debt

First, get rid of any high-interest debt, such as credit cards and loans. Paying off these types of debts will help you save a significant amount of money on interest every year, as well as remove your debt burden.

- Create an emergency fund

Most financial experts will recommend you put aside an emergency fund that will get you by for three months or more if you have dependents who rely on your income. It could be a valuable financial lifeline if you lost your job or were unable to work due to an accident or illness.

- Get on the property ladder

If you’re renting, this could be your opportunity to put down a deposit on your first property. Although interest rates are high at the moment, if you can put down a larger deposit, you should be able to access a better deal. Remember, though, lenders have the right to repossess your property if you can’t keep up the repayments on your mortgage, so always speak to a mortgage expert before making any big decisions.

You can invest up to £20,000 into a Stocks & Shares ISA every tax year, and any capital gains you earn from your investment are free from tax

- Save more into your pension

You’ll receive tax relief on the money you save into your pension. This means if you pay 20% income tax, the government will top it up with 20% of whatever you put in. So, a net contribution of £1,000 grosses up to £1,250 in the pension (ie. 20% tax relief on the gross contribution). In this example, the net contribution will be the same for 40% taxpayers, and they can then claim the additional payment via their tax code/tax return.

In April 2023, the government increased the Annual Allowance for pension contributions from £40,000 to £60,000 per annum. You can also make retrospective payments for the previous three years at the old rate, although the ability to use carry forward is reduced by the amount of any pension contributions made in those three years. It’s also important to note that tax relief is restricted to contributions that are covered by your earnings in the tax year that the contribution is made.

Obviously, pension savings are a long-term investment, and you won’t be able to access your pot until you’re 55. This is set to increase to 57 years old from 6 April 2028.

- Tax-efficient investments

If you’re thinking about investing, make sure you take full advantage of all your tax-efficient allowances first. You can invest up to £20,000 into a Stocks & Shares ISA every tax year, and any capital gains you earn from your investment are free from tax. Please remember, though, your investment, and any income from it, can go down as well as up, and you may not get back what you invested.

- Investing in your children’s education

Whether you want to give your children a public school education or fund their university years, an inheritance may allow you to pay their school or university fees, helping to give them the best start in life. And, even if you don’t have children, you may want to put plans for your future family in place. An independent financial adviser can help you set up investments and trusts specifically designed to save and pay for school fees in a few years.

- Planning your estate

If you’re older, you may be in a more secure financial situation, so rather than spending the money on yourself, you might choose to pass it on to your children. When seeking estate planning advice it will typically involve writing a will, gifting during your lifetime, restructuring your assets for inheritance tax or setting up trusts for specific purposes. It’s important to seek the advice of an independent financial planner who can help you put in place a later-life plan that will leave your loved ones financially secure in your absence.

Amber River Financial Planning

Amber River has a network of friendly financial planners across the UK, ready to offer advice and help people at different life stages focus on their financial wellbeing and make the most of their money. We call it Life Landscaping® because each individual journey is unique.

Get in touch

To speak to us about your investment goals, or to arrange an appointment, call 0800 915 0000, or alternatively use our contact form here.