How to Handle Financial Advice on Inheritance: A Comprehensive Guide

Inheriting wealth, or planning to pass it on to your loved ones, can be both a blessing and a challenge. The financial decisions you make in these situations can have a lasting impact on your future and your family’s financial well-being.

Whether you are receiving an inheritance, or wealth transfer planning for the next generation, navigating the legal, tax, and investment aspects can be complex.

This is where independent financial advice becomes so important. Expert guidance can help ensure your assets are managed wisely, tax implications are minimised, and your financial goals are met.

In this comprehensive guide, we will explore the key considerations for handling inheritance, from financial and tax issues to smart strategies for investing inherited assets. We will also cover essential estate tax strategies and planning techniques to help you protect your wealth, and pass it on to your loved ones as efficiently as possible.

Received an inheritance? What to do next.

Inheriting assets can be both emotionally and financially overwhelming. While it may feel like a welcome windfall, it is important to approach the situation carefully to make the most of the opportunity.

Here are the key steps to consider when you receive an inheritance:

1. Understand the legal and tax implications

Depending on the size and nature of your inheritance, you may be liable for Inheritance Tax (IHT) or other taxes.

It is vital that you know what these liabilities are, and how they will impact your overall financial situation. Consulting with a specialist financial planner is the safest way to navigate these complexities. Investing in professional financial advice on inheritance will make sure you avoid any pitfalls, as well as helping you achieve your ultimate goals.

2. Evaluate your inherited assets

Inheritances can come in many forms, from cash and investments to property and personal belongings. Each type of asset may require different handling.

For example, inherited property may need to be sold, rented out, or transferred into your name. Investments may need to be reviewed and aligned with your financial goals.

Taking time to assess what you have inherited and how it fits into your overall financial picture and life story is essential. A financial planner will help you take stock of everything, and work out what you need to do in practical terms.

3. Decide your next steps

Once you have a clear understanding of what you have inherited and any related tax implications, it is time to decide how best to use or invest it. This is where taking financial advice on inheritance becomes critical.

Whether you want to pay off debts, invest for the future, or set aside funds for a specific goal, it is important to make decisions that align with your long-term objectives.

A financial planner will help you create a strategy that maximises the value of your inheritance, whilst ensuring it supports your financial goals.

Planning your own wealth transfer: minimising Inheritance Tax

As you think about passing on your wealth to the next generation, it is essential to consider how to do so in a way that minimises Inheritance Tax.

With careful planning, you can ensure as much of your estate as possible goes to your loved ones, rather than being lost to taxes. Here are some key strategies to help you achieve this goal:

1. Get to grips with the basics of Inheritance Tax

Inheritance Tax is levied on the estate of someone who has passed away. It can reduce the value of what you leave behind.

In the UK, the current standard IHT rate is 40% on estates above the tax-free threshold. However, there are several allowances, exemptions, and estate tax strategies that can help reduce the amount of tax your beneficiaries must pay.

A financial planner specialising in estate planning can help you understand how IHT applies to your estate, and identify ways to mitigate it.

2. Gifting assets during your lifetime

You may be able to reduce the value of your estate for tax purposes by gifting assets during your lifetime. This can be one of the most popular strategies for wealth transfer planning.

It is important to be aware, however, that giving assets away may carry tax implications, and that there are various rules involved.

Lifetime gifts will generally either be exempt transfers, potentially exempt transfers (PETs), or chargeable lifetime transfers (CLTs).

Exempt transfers are gifts you can make any time without incurring IHT. This means:

• Gifts of any value between spouses or civil partners
• Annual gifts of up to £3,000 per tax year
• Regular payments out of your income that leave enough to fund your normal lifestyle
• Wedding or civil partnership ceremony gifts up to a certain amount
• Small gifts up to £250 per person per year
• Gifts to charities, political parties or national organisations

Potentially exempt transfers are gifts to individuals and specific types of trusts which exceed exempt transfers. Whilst there is no immediate tax liability, IHT must be paid if you die within seven years and the value of the PET takes your estate above the tax-free threshold. Gifts made less than three years before death incur the full 40% IHT, whereas gifts made three to seven years before death are taxed on a sliding scale known as taper relief.

Chargeable lifetime transfers are non-outright gifts, for example a gift into certain types of trusts. There is no IHT to pay on a CLT, as long as the total amount of CLTs made in the previous seven years is lower than the tax-free threshold. CLTs will normally fall outside the estate for IHT purposes if you outlive them for at least seven years.

3. Using trusts to protect your wealth

Trusts are another popular option when looking at estate tax strategies. They allow you to set aside assets for the benefit of your loved ones, whilst in some cases keeping them out of your estate for tax purposes.

Trusts can be particularly useful for protecting assets for future generations, or for providing for beneficiaries who may not be ready to manage a large inheritance. There are different types of trusts, each with its own tax implications, so it is important to work with a financial planner to choose the right one for your needs.

4. Making and reviewing a will

Making a will is one of the most straightforward wealth transfer planning strategies.

A will allows you to choose how your assets will be distributed when you die, allowing you to plan for and potentially reduce your beneficiaries’ IHT liability.

Without a will, your estate will be distributed in line with the intestacy rules. This is unlikely to be the most tax-efficient way of bequeathing your estate. If you are not married, or you have particular individuals, charities or organisations you wish to benefit from your estate, then a will is the only way of doing so.

You can use a will to make gifts up that use up your IHT allowance, as using it to set up trusts and ensure all available IHT exemptions are used at the most appropriate time.

If you already have a will, but your circumstances have changed since you wrote it, then you should review it to bring it up to date.

4. Changing your will via a deed of variation

It is possible to change a will after someone dies. This is known as a deed of variation, and is one of the most effective estate tax strategies if you do not require the assets that have been left to you.

For example, if you have inherited assets from a parent, but you are financially secure, then you could use a deed of variation to divert the inheritance to your children, placing it in trust if necessary until they are of a certain age. This would remove the IHT liability, because your children would not have anything to pay.

Again, specialist wealth transfer planning advice from a financial planner is vital, because a deed of variation can be a complex arrangement.

Receiving or leaving an inheritance: Why financial advice is crucial in both cases

Whether you are receiving an inheritance, or embarking on your own wealth transfer planning journey, the decisions you make are likely to be far reaching.

Having a trusted financial planner supporting you will ensure you can navigate these situations with confidence and clarity, and with everyone’s best interests in mind. Not just yours, but your family’s too.

In summary, tailored financial advice on inheritance matters will allow you to:

1. Manage inherited wealth with confidence

Receiving an inheritance can be both a blessing and a responsibility. It is essential to make informed decisions about how to use, invest, or save these funds.

A financial planner can help you evaluate your options, taking into account your financial goals, tax implications, and long-term needs. They can also provide guidance on how to integrate your inheritance into your broader financial plan, ensuring that it works towards your overall objectives.

2. Effectively plan around tax and wealth protection

When it comes to minimising Inheritance Tax and protecting your wealth for future generations, professional financial advice on inheritance is invaluable.

Financial planners have the expertise to navigate the complexities of tax laws, helping you make the most of available allowances, reliefs, and strategies. They can also help you structure your estate in a way that aligns with your wishes, while maximising the financial benefits for your loved ones.

3. Avoid costly mistakes

Both receiving and planning an inheritance involve numerous decisions that can have long-lasting consequences.

Without expert guidance, it is easy to overlook important details, or make choices that could lead to unnecessary taxes or financial strain.

A financial planner can help you avoid these pitfalls by providing personalised advice tailored to your unique circumstances.

4. Take advantage of ongoing, tailored support

Financial planning is not a one-time service. As your life and financial situation evolve, your plans may need to be adjusted.

You should choose a financial planner who offers ongoing support and who will ensure your strategies remain relevant and effective over time. Such a partnership will help you stay on track towards your financial goals, whether you are managing an inheritance, or wealth transfer planning for your own estate.

Inherited assets or wealth transfer planning: For the tailored guidance you need, talk to Finli.

Your story is so often linked to your loved ones’ stories. Whether we are guiding you on an inheritance you have received, or helping you ensure those you care about are looked after when the time comes for them to inherit your estate, we appreciate there will always be interlinked threads.

At Finli, we will always include your loved ones in your financial planning, ensuring peace of mind for everyone involved.

For tailored advice, continuous support and expert financial advice on inheritance, we welcome you to get in touch.