Have you recently inherited a large sum of money? 2022 was a record-breaking year for inheritance tax. So, if you need inheritance money advice, then it’s more important than ever to talk to a professional financial planning firm. We share our guide to give you greater clarity on inheritance tax and some ways to secure and enjoy your inherited money.
£5.3bn – the amount of inheritance tax netted by the Treasury between April and December 2022 Gov.uk
According to official statistics, the above figure was £0.7bn higher than during the same period in 2021. This is because frozen tax thresholds have resulted in more estates having to pay inheritance tax (IHT). But this does not only apply to the wealthy; more middle earners are experiencing hefty IHT liabilities when a family member passes away.
If you have inherited a large sum of money, this figure will be added to your own estate value. So you will need to know how much your estate is worth today, along with any future inheritance tax (IHT) your family will likely pay. The standard rate of IHT is 40%. The current IHT threshold is £325,000 unless you leave your estate to “your spouse, civil partner, a charity or a community amateur sports club” (Gov.uk).
The complexities of inheritance tax
£37bn – the estimated amount of inheritance tax to be paid by families over the next five years Office for Budget Responsibility
The above amount is 36% more than in 2017 – 2021. But interestingly, inheritance tax (IHT) accounts for less than 1% of all tax revenues in the UK. So, what’s the big deal? IHT is always a controversial subject. Also called a “tax on death”, many people feel that inheritance tax is unfair, but it’s here to stay for the time being. There are different ways to reduce inheritance tax, which include putting money into trusts or gifting to family or charities.
Inheritance tax is reduced at a rate of 36% if you “leave 10% or more of the ‘net value’ to charity in your will” (Gov.uk). Also, if you gift your home to your children, which includes grandchildren, stepchildren, or adopted or fostered children, the threshold rises to £500,000.
The executor of the Will relating to the estate will be responsible for paying the inheritance tax. It’s unlikely that the Will beneficiaries will be expected to pay tax on inherited assets unless they generate an income, such as inherited rental property. So, what can you do to reduce your own IHT? First, carry out some estate planning well in advance. But your family’s IHT obligations will depend on what you choose to do with your inheritance money.
What should you do with your inheritance money?
Whether you decide to spend or save some or all of your money, there are different ways to use your lump sum:
Spend your money
This is, of course, your choice, and you might not need to fathom the complexities of inheritance tax as above. Asides from going on a spending spree or a luxury holiday, you might choose to pay off debts or buy a property. Using your money wisely today could put you in a more financially secure position in the future.
Individual Savings Accounts (ISAs)
An ISA is a tax-free way to save money. You have a £20,000 limit each financial year, so you can add this amount to your savings and build a nest egg for the future. Various ISAs have different rules, but these can be useful if saving towards a house deposit or another significant spend.
Fixed-rate and online savings accounts
Depending on the bank or building society, there are a variety of fixed-rate accounts with attractive interest rates. Some have penalties that prevent you from withdrawing within a specific time. As a rule of thumb, the easier you can access your cash, the lower the interest rates will be.
Investing is one way of making your money work harder for you. As with any form of investing, there is always a risk that you won’t get back what you put in. But your financial planner will discuss ways to diversify your portfolio, spreading your investments across different assets and asset classes. They will also explain the different levels of risk so that you can opt for a particular type of investment strategy.
Another tax-efficient way to secure your financial future is by setting up a pension or increasing your monthly contributions. You can also combine the investing element with a Self-Invested Pension (SIPP). This will give you more choice over how your pension is invested.
Professional financial planning advice will help you determine how to spend, save or invest your inheritance money and protect your estate. Our financial planners can help you work out the total value of your estate. In addition, we will calculate the amount of inheritance tax your family will likely owe in the future so you have complete clarity regarding your options.
Do you need a review of your estate or advice on how to use your inheritance money? Get in touch to speak to our financial planning team.