Now might be an advantageous time to utilise lifetime gifting to reduce Inheritance Tax liabilities, but there is also a broader tax picture to take account of too.
Here, wealth management and financial planning experts from the findaWEALTHMANAGER.com panel explain key considerations as those inheriting the family home decide their next steps.
The property boom means that more and more people are inheriting a family home worth several hundreds of thousands of pounds at around the time they are retiring and their children are flying the nest. This is a situation that often comes up in our conversations with clients: currently, 27% of findaWEALTHMANAGER.com’s users describe themselves as receiving a lump sum and just over a fifth are retired.
Inheriting a property – which may or may not be sold – can make a massive difference to your wealth situation in retirement, but only if the windfall is deployed strategically as part of an overall financial plan. The following provides a framework to help you formulate one.
Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, says:
We often speak to users in their fifties and sixties who have inherited a property and are seeking advice on what they should do with sums of around £250,000 and up – maybe not enough to retire on, but certainly a large chunk of money which could mean a big boost to their lifestyle long term.
There are a number of important questions those inheriting a property need to think about to make sure their additional assets work as hard as possible for them, but that risk is still kept at sensible levels.
Diversification should always be front of mind, but often people are far too exposed to property in all its guises, with multiple residential properties and possibly commercial holdings alongside property-orientated stocks and funds in their portfolios. We British do love property, but there can be too much of a good thing – particularly given recent warnings on a growing UK bubble.
Your first decision is clearly whether to keep the property to generate an additional income stream or sell it to generate cash and reinvest the proceeds to help with meeting your longer-term financial objectives.
If your primary objective is additional income and the yield on the property is good, then keeping it could be a sound option. However, you need to bear in mind that there will likely be void periods where you don’t receive any income and also a requirement to spend time and money on an annual basis to make sure the property is maintained.
Alternatively, if you require access to the capital or don’t want the hassle of letting, you would be better off selling the property and re-investing the proceeds into an investment portfolio aligned to your objectives, time horizons and importantly attitude to investment risk. When investing it is important to ensure that you have a balanced portfolio with a cohesive investment strategy.
A couple at this stage in their lives will likely be considering retirement in the not too distant future, so establishing what their objectives are, prior to any investment, is essential.
Is there a need for the lump sum to generate income over the short to medium term, or is the goal purely to achieve growth for the future? This will have an impact on the make-up of any investment portfolio, as well as lead to further conversations around what realistic level of return that can be expected for the amount of risk that the couple are willing to take. Once a tolerance level has been established, it will offer greater clarity around what vehicle may be suitable.
The adage of ‘eggs in baskets’ is still relevant, so broad diversification is key. An effective method of achieving this is within a collective investment fund. Seeking professional advice, to navigate what can be an intimidating universe is recommended here. This will also ensure that investments are structured in the most tax-efficient manner, making use of all allowances available.
Andrew Gibbs, Investment Manager at Henderson Rowe, says:A sizeable inheritance can make a substantial difference to a couple’s retirement, if carefully invested with a clearly defined long-term investment plan. Investment discipline is key.
Financial history provides ample evidence that over the long term equities provide the highest returns relative to bonds and cash, but with higher short-term risk of loss.
Market timing is incredibly difficult and to benefit from longer-term equity growth, investors need to stay invested in down periods. Easy to say, but harder to do when presented with a sea of red, especially as a novice investor. The greatest service that the experienced wealth manager can provide here is to counsel investors to focus on long-term objectives, rather than letting market noise pull them into investment after rallies and out after falls – the reverse of sensible long-term investing.
If you already have an investment portfolio then this would be a good time to have a review as it would provide the opportunity to introduce some new stocks. It may be a chance to grow the investments rather than look for a higher income.
ISAs are now an important part of financial planning and as a couple you can invest £30,000 between you. Windfalls are a great opportunity to add an ISA to your existing portfolio if you have not already done so this tax year.
Pensions remain a minefield, particularly with the new legislation, but don’t ignore them. A windfall means that a review can take place, as to how much can be put in this tax year. Finally, you should also consider keeping some cash; although interest rates may be low it is always useful to have funds – but not too much as there are better ways of growing your wealth.
These tips are, of course, merely a starting point. To continue this discussion to find out more on what considerations and decisions you need to make now, try our smart online tool and discover who will be able to advise you on this specialised area.