How do you make the most of an inheritance?

Deciding what to do with an inheritance can feel overwhelming. Here's some helpful guidance on what to consider first.

An inheritance can be life-changing. But it may come at a difficult and emotional time. Knowing what to do with it can be bewildering if you are grieving. A period of reflection could help you avoid any rash financial decisions.

Laura Dove, co-founder and financial planner at Copper Coin Club, suggests taking a pause for thought. “It’s rare you get a chunk of money in life,” she says. “Whether it's £5,000 or £50,000, it's good to stop to think, ‘Would the person I inherited it from think this was wise and be happy? Will I be glad in five years’ time if I used the money like this?’”

Making the most of your gift

You can never know how you'll feel about a one-off gift like an inheritanceuntil it happens to you. Some people may be afraid to touch an inheritance until retirement, while others may start a period of emotional spending to soothe their grief. Emotional spending can be a way to avoid addressing difficult emotions. One strategy to balance any overspending is to put aside a set amount to treat yourself or your loved ones.

The next step is to consider moving the rest of the money outside your standard current account. Possibly put it somewhere tax efficient (such as an ISA), somewhere you won't see it often or somewhere that has withdrawal limitations.

“Possibly put it into a less accessible bank account if you don’t trust yourself,” says Victoria Ross, a chartered financial planner at the advice firm Progeny, “and take time to think about what’s important and what this money could do for you. The key is to give yourself time to find a balance between today’s needs and tomorrow's.”

She adds, “A financial adviser can use tools, such as producing a lifetime cashflow forecast, to model your future finances and the impact of major life events, and help you make the right choices for your future.”

But Dove advises comparing the fee structures of different advisers before engaging one – especially if the inheritance is less than £50,000. Make sure your inheritance gift isn’t swallowed up by administrative costs.

What debts should you prioritise if you receive an inheritance?

"Paying off debts with high interest rates should generally be a priority," says Dove, "to give yourself a clean bill of financial health."

If you plan to set money aside for retirement, be aware of the slow creep of inflation. You should usually factor in a minimum 2% rise in inflation every year, with occasional spikes like the ones we've been seeing (9.2% as of December 2022). To offset inflation, you could consider investing, but your capital is at risk and you may get back less than you invest.

Understanding inheritance tax

Inheritance tax may need to be considered too. If someone's estate is valued below £325,000, there's normally no inheritance tax to pay. However, any beneficiaries may have to pay other taxes, such as income tax on any rent received from an inherited property.

Even life insurance may be taxed if the payout pushes an estate above the £325,000 threshold.

If someone leaves you a gift such a house, cash or other assets, you may have to pay taxes on it if they die within seven years of making the gift.

There's more guidance on inheritance tax on the Gov website (Opens in new window)

Expert guidance can help

How you spend or invest an inheritance is a personal choice. But unbiased, professional guidance in navigating financial decisions could help you make the most of the sum you inherit.

Here are popular ways people invest or spend an inheritance:

• Pay off debts
• Put down a house deposit or make house repairs
• Take a once-in-a-lifetime holiday
• Create a nest egg for retirement or university fees
• Set aside an emergency fund for peace of mind

Disclaimer: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest.

Tax treatment depends on your individual circumstances and may be subject to change in the future. We do not offer any tax advice.

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