Over the next few decades, the older silent generation and aging baby boomers are expected to transfer record amounts of wealth to their children.
Figures published by Vanguard have revealed that a projected $18.3 trillion of wealth will be passed to the next generation globally by 2030, as part of the Great Wealth Transfer.
While a large inheritance may provide a welcome financial boost, experiencing a bereavement could also be an emotionally challenging time. As such, it’s worth taking your time to decide how you might put your newfound wealth to good use.
Keep reading to discover five valuable tips for making the most of your inheritance.
1. Avoid making any rushed decisions
Any unexpected change in your financial situation – even if it’s for the better – could feel overwhelming. This may be especially true if you’re also grieving the loss of a loved one.
Making rushed, emotion-based decisions could lead to poor choices and regrets. So, it’s worth taking a beat and carefully thinking through your options.
In fact, months or even years might pass before you receive your inheritance. According to Co-op Legal Services, it typically takes between 6 and 12 months for beneficiaries to start receiving their inheritance. However, the wait may be longer for more complex estates or if someone contests the will.
As such, you’re likely to have plenty of time to explore your options and review your long-term goals. While this delay may feel frustrating, it could help you make decisions based on logic and data, rather than your emotions.
2. Understand the tax implications of inheriting
Before you make plans for spending your inherited wealth, it’s important that you understand if any Inheritance Tax (IHT) is due, and if so, how much.
Failing to do so could lead to disappointment and abandoned plans if you receive less than you thought you would.
There’s normally no IHT to pay on estates valued below the nil-rate band, which stands at £325,000 in 2024/25 and the government has frozen until April 2030. Additionally, if you’ve been named as the beneficiary of your parents’ or grandparents’ main home, you may be able to inherit up to an additional £175,000 of their estate without incurring IHT.
However, IHT might be payable on any amount of a person’s estate that exceeds these thresholds, and the standard IHT rate is 40% (2024/25).
Also, if someone gifts you a portion of your inheritance during their lifetime, you may face an IHT bill if they die within seven years of doing so.
As you can see, the rules around IHT can be complex, so you might benefit from speaking to a financial planner who can help you understand your liability.
3. Pay off your debts
Once you’ve received your inheritance and paid any IHT due, paying off some or all of your debts could help you gain more financial stability.
Indeed, the ongoing cost of living crisis might have led you to take on higher levels of debt in recent years. According to data published by the UK Parliament, in October 2024, 20% of adults in Great Britain said they had to borrow more money or use more credit than usual in the last month, compared to the previous year.
Unfortunately, over time, your debt could grow due to “compounding” – paying interest on both the principal amount you borrowed and previous interest charges. This might mean that you end up owing a lot more than you originally borrowed.
So, while clearing debt may not seem like the most exciting way to spend your inheritance, it could enhance your long-term financial security.
If you can’t clear all of your debts – or you choose not to – consider paying off high-interest loans and credit cards as a priority.
4. Make your inheritance work harder for you by investing
Keeping some of your money in cash could be a sensible way to pay for short-term expenses and ensure that you have something to fall back on in the event of an emergency.
However, when it comes to your long-term goals, investing some of your inherited wealth could potentially help you to achieve higher returns than cash savings.
Indeed, over time, inflation may diminish the real-term value of cash savings and reduce its purchasing power.
So, if you want to make your inheritance work harder for you, there are a few investment options you might like to consider.
Stocks and Shares ISAs
In the 2024/25 tax year, you can add up to £20,000 across all your ISA accounts – or a single ISA – tax-efficiently. You won’t pay Dividend Tax or Capital Gains Tax (CGT) on any income or profits you make from your investments, so you could build up a tax-efficient pot over time.
What’s more, you can choose from a variety of funds and shares, allowing you to align your investments with your goals, values, and time horizon.
Junior ISAs
If you have children under the age of 18, putting some of your inherited wealth into a Junior ISA (JISA) could be a tax-efficient way to save for their future.
You can contribute up to ÂŁ9,000 each tax year (2024/25), into a single JISA or split between a Junior Stocks and Shares ISA and a Junior Cash ISA. This allowance is separate to your individual ISA annual allowance.
As with adult Stocks and Shares ISAs, you won’t pay tax on any interest or returns you generate from a JISA.
Your child can take control of the account when they turn 16, but they can’t make withdrawals until they’re 18. Calculations by Morningstar suggest that if you invest £9,000 a year from the year your child is born, with 6% annual returns you could grow your child’s JISA to £300,000 by the time they are 18.
So, using some of your wealth in a JISA could be a useful way to invest in your child’s future.
Property
Investing in property could potentially provide a valuable source of rental income in the short- and medium-term.
Over the long-term, your property may also increase in value. Indeed, data published by Statista shows that despite some short-term dips, the average house price in the UK rose more than 63% from ÂŁ176,758 in January 2007 to ÂŁ288,533 in July 2024.
Additionally, as real estate typically has a relatively low correlation with the stock market, investing in property could help you to diversify your portfolio and balance risk.
5. Boost your retirement fund by topping up your pension
If your retirement is a long way off, paying into your pension might not be at the forefront of your mind when you receive an inheritance.
However, saving into a pension is one of the most tax-efficient ways to prepare for later life.
This is because you receive tax relief on any contributions you make within your Annual Allowance, which is £60,000 or 100% of your annual earnings, whichever is lower. However, this allowance may be reduced if your income exceeds certain thresholds or if you’ve already accessed your pension flexibly.
Additionally, if you have a workplace pension, you’ll usually benefit from employer contributions. Under auto-enrolment, employers must contribute at least 3% of qualifying earnings, and many will match your contributions up to certain limits.
So, paying more into your pension could be a sensible way to make the most of a portion of your inherited wealth.
Get in touch
If you’d like help understanding your IHT liability and planning how to put your newfound wealth to good use, please get in touch.
Email info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can assist you.
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.
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 Financial Conduct Authority does not regulate estate planning, tax planning, trusts, 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 performance.
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.
The value of your investments (and any income from them) 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.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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