Sammie Ellard-King
I’m Sammie, a money expert and business owner passionate about helping you take control of your wallet. My mission with Up the Gains is to create a safe space to help improve your finances, cut your costs and make you feel good while doing it.
An inheritance is one of the best gifts you can ever receive upon losing a loved one.Â
When wondering ‘what should I do with my inheritance’ it’s essential to know where you stand from tax and other factors.
An inheritance, like any large and unexpected sum of money, is a unique gift that can change your fortunes and set you up for financial stability.Â
However, inheritances aren’t all that common as less than one-in-three people benefit from inheritance gifts in the UK.
People from wealthy and higher-income families are more likely to be inheritance recipients than their compatriots in the low-income bracket.Â
Most inheritances are left behind to be passed along to the next generations.Â
That’s why planning for one is essential and ensuring any money you receive significantly impacts your life and the entire household.Â
Table of Contents
What is an inheritance?
Inheritance is simply the passing of financial or physical assets from one person to another after someone dies. It may come in different forms, such as a house, cash, investments, antiques, real estate, and other valuable items.
An inheritance can be called small or large, depending on its overall value and where you live. In the UK, a large inheritance is an inheritance that’s big enough to impact your life substantially.
This is usually an amount or a property worth more than £100,000.
To enjoy an inheritance, you must be an undisputed heir or named in a will. The UK government subjects every inheritance to the Inheritance tax.
This tax applies to the deceased’s estate (the property, money, and possessions) before being passed on to the genuine inheritor.
The UK government currently administers a standard inheritance tax rate of 40%, and this only applies to the part of the estate above the £325,000 threshold.
The government always conducts a valuation of an estate for Inheritance Tax to ascertain its eligibility for taxation.
You can only be exempted from paying tax if either:
- The value of the estate is below the £325,000 threshold
- Everything above the £325,000 threshold is left to the spouse, civil partner, a charity, or a community amateur sports club.
Listen to this podcast episode 💯
Join us with Conor from Foundered to discuss how he sold his business for millions in his 40s but is just getting started!
There are lessons to learn here if you’re wondering what to do with a sizeable bit of money like an inheritance.
Hit the play button just below or for the full episode with links to your favourite podcast platforms click Conor’s name just above.
How to maximise your inheritance?
An inheritance, like any other financial windfall, can be both a blessing and a burden. It can be a blessing because the money may come in handy at some point and change your financial status for good.Â
An inheritance can also be a burden because it imposes a responsibility to utilise it wisely.
So, what should I do with my inheritance?
It would help if you asked yourself this question as soon as you find that you are the beneficiary of an inheritance.Â
A mismanaged estate could mean your financial situation remains unaltered, which is not what we want!
It can also cause financial harm if it tempts you into more debt. Remember that even the most financially savvy individuals might become overwhelmed by their newfound financial windfall, making them vulnerable to poor financial decisions.
Prioritising your inheritance for significant usage is the best thing to do. Whatever you do with the money make sure you set aside an emergency fund to ensure you have a safety net.
Below are some of the most effective ways to use your inheritance to change your financial situation.
Find a financial planner
The best decision you can ever make after inheriting property is to look for proper guidance.
You might want to seek financial advice depending on the inheritance and your level of making sound financial decisions.
A financial planner can help make objective decisions about using your inheritance. They are best suited to advise you in the short term and devise a long-term financial plan that considers your newfound riches and obligations.
We believe using a professional has its pros and cons but is especially critical if you have limited knowledge of managing a large sum of cash.
Hiring a financial advisor should not only be limited to helping you out with planning the money. A financial advisor also comes in handy when planning for inherited non-cash assets.
For instance, you need advice on inheritances such as stocks or shares to decide whether you should sell them and buy something else.
You’d be better off if a financial planner already managed the estate you inherited. Consider retaining them since they have all the insider’s knowledge about your inheritance and a proven track record of effectively managing such wealth.
Pay off high interest debt
Sometimes we apply for bank loans and seek credit financing for various reasons.Â
A well-utilised loan can make a difference, depending on where you invest the money. However, loans are better off paid as early as possible to avoid the accumulation of interest and probably ruining your credit rating.
One worthy use for inheritance is to pay down such high-interest debts. Evaluate your financial situation, including student loans and credit card payments, and pay them off as soon as possible.Â
Even if your inheritance is in the form of a property such as land or a home, the best thing to do is sell part of it and use the money to clear debts.
This will provide you reprieve from heavy interest payments and enhance your credit worthiness. Remember, it makes more sense to pay off a high-interest debt rather than save or invest the money.Â
For instance, credit card bills are usually more expensive and attract a much higher interest rate in the long run.
You can go slow on lower-interest debt, such as a home mortgage. But if you’re capable and feel more secure paying off the mortgage, use the inheritance for that purpose.
It’s also reasonable if you’d rather invest the inheritance money for a higher return than your mortgage is costing you.
Invest your money wisely
Investment in stock market is often overlook and viewed as a high power done only by bankers in pinstripe suits.
That however has changed! Retail investors (everyday investors) have become more active in the markets due to the rise in technology and app-based stock brokers.
Dedicating the assets and inheritance money to a new profit-achieving venture is the next logical decision you can make after offsetting your debts.
It is strongly recommended that you invest for the long term and not jump into some crypto coin or new blockchain technology company that your mates told you about down the pub.
If you invest well it should put you in a position to receive consistent dividends or payments from your profits. Building a portfolio requires research and so make sure you’re comfortable investing before putting your capital to work.
You should look at diversifying your investments across several securities or businesses to lower your risk. There are medium term plays like Stocks and Shares ISAs and then longer term plays like a SIPP or retirement account.Â
Here are some of the most popular investments you can make with a stock broker:
StocksÂ
Companies issue stock shares to raise capital investment and to fuel growth. You can buy these shares for the opportunity to earn a return on the investment via a vehicle called the stock market.Â
Stocks are highly volatile investments with tremendous potential for both gain and loss so it’s important to understand what you are buying.Â
That being said if you’re investing for the long term (10 years or more) if you buy shares in stable, growing companies then you’re very likely to earn a decent profit.
Invest a portion in some individual stocks and set aside a certain percentage of your allocation to low-risk investments like mutual funds. This creates what’s called a balanced portfolio.
Index Funds, Mutual Funds & ETFs
Investment in mutual funds, index funds and ETFs will help you diversify your portfolio by allowing you to invest in multiple sectors, countries or continents.Â
It’s one of the best low-risk investments where you have professionals manage your money and invest in different industries.
Personally learning how to invest in index funds should be paramount to any investing strategy as it currently makes up over 90% of my own portfolio.
Bonds and REITs
Bonds provide a safe and predictable way to invest your money. They have a smaller but consistent return, making them one of the best ways to balance your investment portfolio.
REITs (Real Estate Investment Trusts) allow you to invest in commercial real estate companies for a portion of the earnings without managing the properties yourself.Â
Remember to talk to an investment expert before inventing any of your inheritance money in the above basic investment options. They can help you identify the best assets and investment opportunities with better returns.Â
Buy some property
The UK’s property investment market has numerous opportunities for investors. Low-interest rates and a fast-growing rebounding economy have provided investors an excellent opportunity in the property market.
It could be that you don’t own a home so can enjoy being a homeowner without a big mortgage. Often this is how first time buyers without a deposit can finally enter the market.Â
If you’re already a home owner you could look into buy-to-let options that could earn you passive income. Another option could be to buy commercial property and look to rent it out to a business with a revenue share.
The UK commercial real estate market is the biggest in Europe, after Germany. It’s valued at over £1.3 trillion and focuses on securing financial returns from renting.
Some of the best real estate property investments in the UK range from office spaces to retail, hotel, and privately rented residential homes.
Owning a property altogether provides financial security and lower monthly expenses. Besides, property ownership is known for expanding capital, plus the property value could go up over time.Â
The one downside here is that proper means expensive so it’s important you understand exactly what it takes to buy you first home.
Buy an Online Business
As an entrepreneur, inheriting money or a large estate provides enough capital to start a business.
For most online entrepreneurs, starting from scratch and building an online business from the ground up offers fulfilment.Â
It can be as simple as figuring out a niche, building a site, creating an email list, creating content, and marketing the business. This can be attractive for people as it’s often low-cost to start.Â
It does however, if going at it alone require 100s of hours of work before you see any benefit.The time it takes before the business can start making money can put people off but the reward can be huge.
The average blogger or ecommerce website earns around £2084 a month after 18 months. Some bloggers are earning £50,000+ a month so it is possible!
You can avoid this if you have enough resources to buy an already established business.Â
There are now endless opportunities and places where you can buy an online business and save yourself the trouble of working from the ground up.
Using your inheritance, you can now own an established online business, become an acquisition entrepreneur, and invest in digital real estate.
By doing so, you’re not just buying a website but an entire business with products and customers.Â
It’s also a business with proven marketing methods to generate leads and allow you to earn from investment almost instantly.
The best part about buying a business is that you can let it run as it was before or force some changes to increase profits.Â
This is especially essential if you notice something new that you can leverage to boost sales.Â
Steps for buying an online business should be:
- Examine the track record of sales and profits— always check out the business’s financials over a given period.
- Don’t go with the seller’s word. Rather, find someone who understands how online businesses work and gain their perspective on what the seller tells you.Â
- Invest in an online business because of passion. Please don’t buy an online business because it is a big moneymaker, and you can afford it. It’ll get neglected and not serve the purpose of creating some freedom.
Go on a holiday
There’s always a high chance you’ll receive an inheritance after losing a loved one. You’re likely getting the windfall while you’re unfortunately grieving and confused about making any sound decision.
However, it could also be the perfect time to head out and cool off your head.Â
Sometimes you may need something nice for yourself to deal with the loss of the loved one and prepare your mind on how to spend the inheritance. A holiday break makes sense, and it doesn’t have to be extravagant.
The aim is to have a little moment of self-indulgence that’ll help you move on from your loss and probably because its been quite a stressful time.Â
That being said, don’t make rash decisions, try to allocate a certain amount of money that you can use to splurge on whatever will bring you joy without breaking the bank.
But first, ensure you’ve paid all the taxes as required, offset some debts and set aside some cash into an emergency fund. This is also a good way to limit your holiday budget. Remember, the goal is to have some fun while using the money wisely.
You don’t want to splurge all your money on holiday without caring for the most pressing needs.
FAQs
What is the smartest thing to do with an inheritance?
Be sure to seek independent financial advice and take your time before making any rash decisions. A substantial inheritance can change the course of your life so the last thing you want to do is waste it.
A good place to start would be looking into investing the money either in business, property or the stock market. This could allow your money to grow and therefore create income streams.
What should you not do when you inherit money?
Do not spend it all at once on lavish things that will provide you with a short term dopamine hit. It’s important to assess your options and make smart financial decisions.Â
If you’ve received any kind of money from a family remember that they have worked for that money so you could have it.
Do I have to inform HMRC when I inherit money?
Yes, you will need to declare your inheritance. This is normally done by the person exciting the deceased’s will.
From there you will need to pay inheritance tax and directly to HMRC. How much you pay will depend on the size of the estate you inherit.
If you’re unsure seek financial advice to understand your options.
What is the average inheritance in the UK?
The average inheritance in the UK is £290,000. This is based on 80% of population that plan to leave an inheritance to their children or a significant other.
Conclusion
An inheritance can completely transform your financial situation if you manage it wisely. When considering what should I do with my inheritance, allow yourself enough time to think about your options before jumping in headfirst.
Also, remember to be open to expert advice and be aware of any tax obligations.
Not only will it help you secure your financial future but your loved ones would have wanted you to do something amazing with it!
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Disclaimer: Content on this page is for informational purposes and does not constitute financial advice. Always do your own research before making a financially related decision.
