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Joe Roxborough, one of our chartered independent financial advisers gives his top five inheritance tax planning tips.
1. Take a breath
Coming into a large amount of money can be quite a shock, and if this has come to you as an inheritance following the death of a loved one, you may not want to make any immediate decisions. Take a breather and remember that you should think thoroughly about all your options, and in order to make the right decisions you should not feel forced to act immediately.
Taking stock of your current situation and what you want to do with this money for the long term is important, so don’t get bogged down thinking about interest rates, investment options and so forth yet. Putting pen to paper and figuring out what to do as a long-term plan is your first port of call, something as simple as writing things down can make you realise your priorities and what is achievable with the money you now have.
2. Do your research
One thing we aren’t lacking these days is information and opinion, and you can find a compelling argument for and against almost every investment idea with some googling. At the same time, remember that there are no 'right' ideas for everyone and no one can see the future, so don’t stray down too many rabbit holes online or you may end up with decision-paralysis. In short, when considering an investment idea, fund, scheme or otherwise, try to find a contradictory opinion to the one you are considering, and approach this with an open mind to help weigh up both sides of the argument.
3. Seek counsel
Money is one of the most personal matters, so discussing what to do with a large inheritance is not as easy as asking for a restaurant recommendation. Speaking to family members or trusted close friends is the first port of call, and perhaps they are experienced themselves or able to recommend professionals who are able to guide you through the options. If you do feel you need professional advice, ensuring you seek independent advisers who are clear and transparent in their explanations to you is crucial. If they say they can’t explain their investment proposition to you in a way you fully understand, they probably don’t understand it themselves.
4. Consider tax implications
All investment types have pros and cons, and they also all have different tax consequences for income tax, capital gains tax, inheritance tax as well. The buy to let property market in particular has been hit hard by tax changes, so becoming a professional landlord should be considered carefully both from a logistical point of view and in terms of tax considerations. Similarly, remember that each individual has their own tax allowances, so depending on your circumstances the allocation of assets between yourself, your wife and your children can make a huge difference.
5. Look at all options and diversify
Now that you have your objectives, you want to consider where to invest your money specifically to meet those objectives. For instance, how long do you want to invest this, is it to generate income, are you going to gift it to your own children in part? This kind of decision making can help focus in on your investment options. Everyone has a new ‘flavour-of-the-month‘ investment idea; whether that be passive funds, property, gold or stock in a particular company. However, putting all your eggs in one basket is a sure fire method towards undue risk and sleepless nights. No matter how compelling an investment story can be, you should always diversify between multiple assets classes (i.e. property, equities, bonds and other more exotic areas) and don’t feel forced to put all your inheritance in a single area.