Inheriting investments from a loved one can be a daunting experience, especially for those not well versed in financial markets. It can present horrible dilemmas, and at the worst possible time when grief is still uppermost in the mind.
Yet it is a growing issue. Research we commissioned last year revealed that many significantly underestimate the funds they are likely to inherit with parents intending to pass on £124,000 - almost 60% more than UK adults said they expected to receive (£78,000). And with over 20 million people holding ISAs, and millions more holding shares or other investments, there is a good chance that heirs will receive investments as part of any windfall.
Ideally, when significant sums of money are involved, early planning among family members will be used to help build and maintain wealth through the generations, thereby reducing any inheritance tax liability too. However, if inheriting investments has come as more of a surprise, here are five tips on dealing with them.
1. Pay off expensive debt or build a cash reserve...
If you haven’t done so already, a sudden windfall of investments could be an opportunity to pay off expensive debt or build an emergency fund – perhaps three to six months of expenses – in case of a rainy day or a change in circumstances.
2. … but don’t hold too much cash.
Inherited investment may seem daunting, and people’s instinctive reaction to sell and move to cash but take time to think through your options and the various objectives you have for this money. You may well have some short-term plans to spend it, but if your goals are more than five years away you could be far better off keeping it invested and growing the money further.
3. Review the investments
If you have elected to keep some or all of the investments, you may need to change them. The former owner of the investments may have had specific objectives such as generating a regular income, which may not be applicable to you. If you want to maximise growth potential rather than income generation it requires a completely different approach and set of investments. The level of risk might need tweaking or possibly substantially altering – from low to high, or vice versa depending on circumstances. This could mean upping the weight to equities in favour of safer assets such as bonds – or the other way around as applicable.
4. Think about tax
You should consider how your investments you have inherited are currently held. In may circumstances it will be outside of an ISA or pension, in which case they will be subject to income or capital gains tax going forward. Taking action to shelter these investments in available tax wrappers could save you tax further down the line. This could take the form of a ‘Bed & ISA’ or Bed & SIPP’ – which serves to transfer the assets to a tax wrapper through selling and buying them, or in the case of a spouse inheriting ISA assets by using their one off ‘Additional Permitted Subscription’ ISA allowance, which is on top of the usual annual ISA allowance of £20,000. Inherit investments in a pension could bring another tax consideration – the pension lifetime allowance – into play, and this may require some financial planning to address.
5. Make things easier to manage
There may be a number of practical issues to address. For instance, if you have inherited physical share certificates these can be ‘dematerialised’ so that you can hold them electronically, which is likely to be more convenient and allows you to sell right away at a time of your choosing. Alternatively, you may have ended up with investments at a company you are not familiar with, but it a lot of cases you’ll be able to consolidate more of your investments in one place – just watch out for any exit fees or other penalties that might apply.
Finally, if in doubt, and especially if the sums involved are significant, it is best to take financial advice so to fully understand your options.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Five tips on dealing with inherited investments
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