“In this world nothing can be said to be certain, except death and taxes,” Benjamin Franklin once wrote in a letter to Jean-Baptiste Leroy in 1789.
More than 230 years later nothing much has changed in terms of that sentiment as they continue to remain the only two certainties in life.
Nowadays, when there is a death, money might be left behind to loved ones and a portion of that chunk still goes to the tax man.
But once those fees have been paid, what is the best way to make your inheritance work for you?
Splash out or save?
Being handed a lump sum of money can be exciting but before you splash out and start spending, you should ask yourself whether you actually need the cash.
If you earn a regular income and debt is at a minimum, chances are you could get by without the extra funds and it may be more beneficial to pass it to the next generation in a tax efficient way.
Placing the inheritance into a trust can sometimes be useful as it means technically the money no longer belongs to you. So, when you die the value would not normally be counted when your Inheritance Tax bill is worked out. Instead, the cash, investments or property belong to the trust and therefore will limit the amount of tax your loved ones would have to pay out.
The trust ensures the money is safe, allowing future generations to benefit from the money while also being hugely tax efficient.
Cash intention
Of course, the person who left you the inheritance may have had a specific intention for how the money was used. They might have wanted you to have enjoyed the cash, or to use it to form part of a memorable legacy.
Very often their requests will have been stipulated in some formal documentation. If not, consider what your loved one might have wanted for you. For instance, if you have racked up a lot of debt, perhaps the money was left for you to pay it all off and start off with a clean slate. Where possible, paying off expensive debt is always a good idea as interest on repayment adds up.
Financial freedom
Paying off the mortgage may also be a consideration as relieving yourself from those monthly payments will provide a huge amount of financial freedom. However, If the mortgage is affordable, or there is a penalty charge to pay it off in full, then there may be better uses of the inherited funds.
Instead, the cash could be used to bolster any capital expenditure you might have already planned. Investing the money into a larger home or a house extension could benefit the immediate family and the money would not be lost, instead it would be ploughed into bricks and mortar.
Splashing the cash on a holiday may seem like a great idea but means the money will be spent and there will no long-term financial return, just a collection of bankable memories.
Similarly, purchasing a new car might be tempting, but the depreciation of new vehicles makes buying anything like that a really poor investment idea.
Future planning
Instead of focusing on the short term, there are long-term investments which could contribute towards a brighter and more financially secure future.
Perhaps the inheritance could be used as a tax efficient pension contribution which might help early retirement become more of a reality, rather than a dream?
Or using the money to purchase a Buy to Let property would help generate an additional income which could be used to pay into an investment ISA, pay for educational costs, family holidays, house maintenance or new cars.
Help is at hand
When it comes to deciding what to do, try not to let the money burn a hole in your pocket and think more long-term.
Try to invest your newly received capital in an appreciating asset or at least something that will generate income and growth over the years.
Alternatively, pay off some expensive debt so you can release more disposable income.
Either way, there is impartial help out there for those who may find navigating the choppy waters of the financial world overwhelming.
For almost two decades, Chasebridge Wealth Management has been helping people to pinpoint where they are on their financial road map and guiding them to a secure and happy future which leaves them comfortable and contented.
We do this by offering by understanding the individual’s circumstances, provide potential options with an explanation on the pro’s and cons to ensure the best outcome possible. We also provide advice on tax and investment planning together with cash flow management.
