Inheriting a large sum while in your 60s can be quite complicated, especially where the money could affect the value of your estate, and the amount of inheritance tax due. While we can’t give advice on what to do with your inheritance without knowing your specific circumstances, this article includes some ideas worth considering.

If you don’t have an up-to-date will in place, this should become a priority

Putting a later-life plan in place

If you don’t already have one, an inheritance might prompt you to put together your own later life plan. Designed in partnership with your financial planner, a later-life plan can help by asking some important questions, such as:

• How much money will I have for my retirement?
• Can I afford the lifestyle in retirement that I want?
• What happens if I become incapacitated or go into care?
• What inheritance or legacy can I leave behind for my children and grandchildren?

A later-life plan can help you find answers to those questions, take control over your financial future, and move forward with confidence.

Ensuring your will is up to date

If you don’t have an up-to-date will in place, this should become a priority after your inheritance. If you do have one, there’s nothing stopping you from updating your will after your circumstances change. Writing a will can help reduce the amount of inheritance tax that may otherwise be payable on your estate after your death – not to mention making things more straightforward for those left behind.

For more on setting up a will, read Why making a will matters to your family

Inheritance tax planning

It’s important to understand the potential implications of inheritance tax (IHT) on the value of your estate, and take steps to reduce the potential bill your loved ones will pay on whatever you leave behind. A financial planner can help by calculating the value of your estate (including any inheritance you’ve received), as well as determining the likely IHT bill due on the estate.

At present, only those with an estate valued at more than £325,000 (known as the ‘nil-rate band’) are required to pay inheritance tax. Anything over that amount can be taxed at up to the standard inheritance tax rate of 40%.

Those thresholds are expected to remain at current levels until at least the 2027-2028 tax year. When combined with the fact that rising house prices have led to a large number of people having estates valued above £325,000, this means that more people (or more specifically, their families) are likely to be left facing an IHT bill in the years to come.

For more on inheritance tax, see: 9 ways to reduce the inheritance tax bill for your family

If gifting money to your grandchildren is important to you, you might want to consider setting up trusts for them.

Making use of your gifting allowances

For people in their 60s, gifting money to family and friends is an extremely popular way to reduce a potential IHT bill. One of the added benefits is you’ll get to see your loved ones enjoying it, instead of them receiving it only after you’ve gone.

However, it’s important to know about the rules related to gifting, otherwise you could inadvertently trigger an IHT charge on the sums you’ve gifted.

For example, you can make use of an annual £3,000 gifting allowance (known as the annual exemption). In each tax year, gifts made up to that amount are not considered part of your estate, so there’s no IHT payable.

However, larger gifts valued above £3,000 are deemed by HMRC as ‘potentially exempt transfers’ (PETs). This means the gift will only become exempt from IHT if you live for a full seven years from when the gift was made. If you live for between three to seven years after making the gift, the amount of inheritance tax due will be calculated on a sliding scale. And if you die within three years of making the gift, the gift will be considered as part of your estate for IHT purposes.

It’s also worth knowing that you are able to make smaller gifts of up to £250 per person to whoever you wish, provided you haven’t given them a gift as part of your £3,000 annual exemption. If you didn’t use your annual exemption in the previous tax year, you can carry it over to the new year, meaning you can make a one-off gift up to £6,000 for that tax year only.

When it comes to making gifts, it pays to keep it in the family. Any gifts made between spouses or civil partners are completely free from IHT. You can also make IHT-free wedding gifts of up to £5,000 for your child, £2,500 for your grandchild or great-grandchild, and up to £1,000 for anyone else.

For more on gifting, see Gifting in your lifetime to reduce inheritance tax

Setting up trusts

If gifting money to your grandchildren is important to you, and the sums you want to share are too large to gift away, you might want to consider setting up trusts for them. These trusts can be used to pay for specific things like school and university fees. There are many types of trusts to consider, but the one most common used for grandchildren is the ‘discretionary trust’.

After seven years, any assets placed within a discretionary trust are considered outside of the estate for inheritance tax purposes. However, inheritance tax may be payable at three stages: when the trust is created, ten-year periods (known as ‘periodic’ charges) and when trust assets are paid out to beneficiaries.

For more on trusts, read Trust fund baby…the pros and cons of setting up a trust for your kids

A ‘deed of variation’ can be used by beneficiaries to redirect their inheritance from the estate to someone else

Put a Lasting Power of Attorney in place

While you’re making your later-life plan, you should give serious consideration to putting a Lasting Power of Attorney (LPA) in place. Known as an Enduring Power of Attorney in Northern Ireland, or Continuing Power of Attorney in Scotland, it’s a legal document that lets you appoint someone to take important decisions on your behalf, if one day you are no longer able to take them yourself.

There are two LPA types in England and Wales:

1. A Property & Affairs LPA gives someone you appoint the ability to make decisions about your property and finances.
2. A Health & Welfare LPA gives someone the ability to make decisions about your healthcare and any medical treatment you might need.

You can make similar arrangements in Scotland, although the labels and processes used are slightly different. In Northern Ireland, these arrangements can only be made to cover financial and property affairs, not health and welfare ones.

Arranging an LPA allows you to make your wishes known, and will make things less complicated, time-consuming and expensive should your loved ones need to act on your behalf in the future.

Using a deed of variation

There’s another important type of document to be aware of when considering what to do with an inheritance. A ‘deed of variation’ can be used by beneficiaries to redirect their inheritance from the estate to someone else. There are four commonplace situations when a deed of variation can be especially useful:

  • To make use of tax incentives and allowances. Deeds of variation are often used to reduce the amount of IHT that the beneficiary is likely to pay on their estate, perhaps by moving assets received from an inheritance directly into a trust.
  • When a person has died and left a potential beneficiary out of their will. A deed of variation can alter the inheritance received by beneficiaries, perhaps to include someone else or to ensure the inheritance is distributed more equally.
  • Giving to charity. A deed of variation can be used where a beneficiary wants some or all of their inheritance to go to charity.
    In divorce cases. The beneficiary may use a deed of variation to prevent their inheritance from becoming part of the financial settlement.

The deed of variation usually must be written within two years of the person’s death, and once written, cannot be revoked. So, while a deed of variation can provide you with greater control and tax benefits for your own the estate, it’s critical to get expert advice before making any decisions.

Spend some on yourself

Building a legacy for future generations might feel like the most important aspect of spending your inheritance lump sum, but don’t forget to enjoy yourself too.

If you are living comfortably and your estate is likely to be large enough to be subject to inheritance tax, it might be worth spending some of it on enjoying life while you can. Just remember that any ‘assets’ you buy will also form part of your taxable estate, meaning you can feel fully justified in booking that holiday experience you’ve always dreamt of!

Amber River financial planning for businesses

At Amber River, our independent financial planners help clients (and their families) secure their financial future, while making sure they enjoy the here and now too. We call this Life Landscaping®, because each individual journey is unique.

Amber River has a network of Chartered financial planners, right across the UK. If you want to set up an initial appointment, call 0800 915 0000, or alternatively use our contact form here.