People frequently receive unexpected inheritances, often in less than optimal circumstances, such as when a family member passes away unexpectedly. While you’ll likely have other things on your mind, it’s important to consider what you want to do with your inheritance for a number of reasons, especially for the tax implications it could have.
Here, we explore both what you should do if you want to keep the inheritance, and what you should do in the case that you don’t want to keep it.
If you do want to keep the inheritance
There are an incredibly wide variety of options available if you do want to keep your inheritance. These include the following:
- Paying off debts: if you have debts with substantial interest rates, it might be a good idea to pay those off outright.
- Investing: there are a wide variety of different investment opportunities; in general, the higher the purported reward, the higher the risk. Seek advice from a financial advisor on how best to spread your portfolio for an optimal balance of security vs return on investment (ROI).
- Trust fund: you may decide that you want to place the inheritance in a trust fund – this can put controls on the assets for other beneficiaries, and can come with substantial tax benefits.
If you don’t want to keep the inheritance
There are certain situations where you may decide that you don’t want to keep the inheritance. There are circumstances where the beneficiary may not want to keep the inheritance due to both practical and emotional reasons. There are two main choices that you can take if this is the case:
Gift the inheritance
One option is to gift the inheritance to another person or trust as soon as it’s received. This is reasonably straightforward, however, it can have negative tax consequences, if it’s subject to either Inheritance Tax or Capital Gains tax.
Depending on if the gift is given to a trust or not, it can either be treated as a potentially exempt transfer (PET) or as a chargeable lifetime transfer.
Deed of variation
By executing a Deed of Variation, you can redirect the inheritance, in total or in part, to another entity such as an individual, charity, or trust. Using a Deed of Variation will frequently have significant tax benefits compared to receiving and then gifting the inheritance, allowing the end recipient to receive much more of the original amount.
Take your time
No matter what you decide, take your time. It will likely be an emotional moment, and there’s no hurry to decide what you want to do (unless you want to redirect it). Take a second, seek appropriate advice on your different options, and then pick the one that seems best for your circumstances.