When creating your financial plan, you might consider how much of your estate you can leave to your loved ones. But have you thought about the inheritance you could receive from your parents and other loved ones?
If not, you may need to start planning for the “Great Wealth Transfer” that is expected to happen in the coming years. In August 2024, FTAdviser reported that an estimated £7 trillion would pass between generations in the UK in the next 30 years.
This wealth could help you reach your own financial goals and depending on the sum you receive and how you manage it, you might even pass a portion of it to your own beneficiaries. However, figures reported by FTAdviser suggest this could be difficult as 70% of affluent families lose their wealth by the second generation and 90% lose it by the third generation.
Fortunately, if you and your family plan for this wealth transfer now, you can ensure you make the most of your inheritance.
Read on to learn three ways to prepare for a large windfall.
1. Have a conversation about estate planning with your family
In the UK, estate planning is often a taboo subject that we avoid talking about. Indeed, according to Canada Life, 37% of those surveyed believe that older generations were closed off to the idea of discussing inheritance plans.
Failing to have estate planning conversations with your family means that you don’t necessarily know how much you’re likely to inherit. As such, you can’t make clear plans about what you will do with that wealth when the time comes, or how you will mitigate tax (more on this later).
Additionally, without clear expectations about who will inherit what from the estate, certain family members might be upset if they don’t receive as much as they first thought. As a result, a lack of open conversations about inheritance could increase the chances of disputes in the future.
If you haven’t already, you may want to encourage your family to talk about their estate plan now.
2. Consider the potential tax implications of an inheritance
Once you know how much you’re likely to inherit, you can begin thinking about the tax implications of a large windfall.
For instance, there may be Inheritance Tax (IHT) to pay on the estate before you receive the funds. You may want to discuss this with your parents now, so they can put measures in place to potentially mitigate IHT, such as gifting wealth while they’re alive, or placing certain assets in a trust. We can support your family with this.
You’ll also need to consider how you hold the wealth when you receive the inheritance, and what the tax implications could be.
For example, if you hold funds in a non-ISA cash savings account, you could pay tax at your marginal rate of Income Tax on any interest that exceeds your “Personal Savings Allowance” (PSA).
In 2024/25, this is:
- £1,000 if you’re a basic-rate taxpayer
- £500 if you’re a higher-rate taxpayer
- £0 if you’re an additional-rate taxpayer.
So, if you inherited £100,000 and put it in a savings account with an interest rate of 5% – the highest rate on an easy-access savings account on 23 January 2025, according to Moneyfacts – you would earn £5,000 interest in a year.
As a higher-rate taxpayer with a PSA of £500, you’d normally pay Income Tax at your marginal rate on the remaining £4,500. This would leave you with a bill of £1,800. An additional-rate taxpayer with no PSA would pay £2,250.
Similarly, you might use a cash inheritance to invest in the stock market or inherit dividend-paying stocks. Dividends are a portion of the company’s profits paid to shareholders, and this income may be subject to Dividend Tax if you hold the investments outside an ISA.
In 2024/25, you have a Dividend Allowance of £500 and any dividend income that exceeds this threshold may be taxed at:
- 8.75% if you’re a basic-rate taxpayer
- 33.75% if you’re a higher-rate taxpayer
- 39.35% if you’re an additional-rate taxpayer.
It’s important to consider these tax implications and how you hold your wealth while you decide on the most sensible way to use your inheritance.
We can help you explore various tax wrappers including ISAs or pensions, to mitigate a large tax bill.
3. List your financial priorities
Receiving a large inheritance could be an opportunity to reach important goals. However, if you rush into a decision, you might find it more difficult to utilise the wealth in ways that support your financial plan.
That’s why it’s important that you take some time to consider what your financial priorities are and how best to use your inheritance. This could include:
- Paying off debts, including your mortgage
- Helping adult children get on the property ladder
- Planning a once-in-a-lifetime holiday
- Purchasing a second home
- Contributing to your retirement savings and possibly bringing your retirement date forward
- Passing wealth to your loved ones.
Deciding what is most important to you will help you determine the most suitable ways to spend your inheritance. Alternatively, you might consider the best ways to hold wealth and eventually pass it to your beneficiaries.
Get in touch
If you need support managing a large inheritance in the future, we are here to help.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Approved by the Openwork Partnership on 27/01/2024
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