Inheriting investments? Here are five tips to help you

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 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.

How easy is it to transfer inherited shares?

The answer to this question depends on how the shares are currently held and the types of shares involved.

• If you are a spouse or civil partner, you will be given an additional permitted subscription equal to the value of the ISA investments you are about to inherit. These can then be transferred into your personal account.
• In all other cases, the ISA has to be sold and the proceeds passed to the estate.
• Different rules apply to shares and other holdings in Invested Personal Pensions (SIPPs). If you are the beneficiary of a SIPP and the owner died before the age of 75, you can take the balance of the pension tax free within two years of the provider being notified of the death. Alternatively, you can choose to leave the funds invested so that the investments can continue to grow. You can then use some of the funds to you an income whenever you want. However, if the person who died had pension savings worth more than the lump sum and death benefit allowance (LSDBA) of £1,073,100, you'll need to pay income tax on any payments in excess of this amount. If the death occurs after 75 the same applies but all payments will be subject to income tax. .
• If the shares are in a general investment account and are listed on a major exchange (such as the FTSE, S&P500 etc) you might be able to transfer them. However, it relies on the discretion of the receiving investment manager or platform provider. They might instruct you to sell the shares and transfer the money.

Five tips to help when you’re inheriting investments

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.

But your emergency savings fund should still be working as hard as possible. Your bank might not be offering the best interest even with the recent increases in general interest rates. Smaller and “digital” banks and building societies compete for savers’ cash by offering better returns. An online savings platform can help you here. Depending on your near-term plans a mix of easy-access, fixed-term, and notice accounts can provide both flexibility and better returns.

See what rates are on offer with Charles Stanley Direct Cash Savings.

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.

If you’d like help reviewing the risk/return profile of your investments, speak to a member of the Investment Portfolio Review service team. A financial professional with run a series of diagnostics across your portfolio to identify whether they are right for your current situation and objectives.

4. Think about tax

One question we get asked at times is, ‘do you pay inheritance tax on shares?’ The short answer is yes, potentially, if they are passed onto someone other than a spouse or civil partner, and the value of all the deceased’s assets exceeds the inheritance tax ‘nil rate band’. Follow the link for more on how inheritance tax works.

When it comes to tax on inherited investments going forward, you should consider how they are currently held. In many circumstances it will be outside of an ISA or pension, in which case your shares, funds or other investments 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.

Inheriting a pension could also bring tax considerations. Notably, if the owner of a defined contribution scheme such as a pension dies after age 75 any withdrawals by the recipient of the fund are subject to income tax.

If you have children, consider opening a Junior ISA in their names and use some of the inheritance to give them a good start. In the tax year 2024/25 you can invest up to £9,000 a year and just like an adult ISA all capital growth and income are free from tax. If you have grandchildren, speak to their parents or guardians about opening an account so you can pay the money in. Once it is set up, paying in regular small sums out of your disposable income can provide a further boost to their financial futures and reduce your personal IHT liability at the same time.

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 in 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 regulated financial advice so to fully understand your options.