Inheriting wealth can be daunting, particularly if you’re not used to having money or do not have any experience in the inherited asset type. Should you keep such a portfolio intact, cash it in or use it to rebalance what investments you own already?
Here we explore what to consider if you inherit a portfolio of shares or investment funds.
Will I have to pay Inheritance Tax?
When you inherit shares or investments, you shouldn’t have any immediate concerns about Inheritance Tax (IHT).
The Legal Personal Representatives (LPR’s) will already have paid inheritance tax and completed the administrative tasks of organising the estate. An LPR is the collective term for a person who has responsibility for administering an estate, either as executor or administrator.
This will typically take up to 18 months before the assets are distributed to the beneficiaries.
Registering as the new owner
Following this, the LPR’s should work with you to register the investments into your name, assuming you are not going to gift them with a deed of variation, which we will come onto later.
Re-registering shares and investment funds into a new name can take weeks or even months and typically involves the LPR’s sending the death certificate, legal documentation and completing forms with your personal information as the new owner of the assets.
Once the assets are in your name, you need to decide what you would like to do with them; keep them, transfer them, gift them or cash them.
A few of the key things to consider are what you want to achieve with the money, when you might need access to it and how the taxation of the inherited asset interacts with your current tax position.
Be sure to factor in your wider financial plans
It may be that you’d like to retain the investments and let them remain invested for growth potential until such time that you need the cash from them. It is important to ensure that retaining the investments is suitable for you. The deceased may have had different objectives such as generating an income or a different risk appetite. At this stage, it would be helpful to engage your financial planner to assess how the investments fit in with your own goals and objectives and whether the investments fit with your own personal risk appetite.
If you have your own investment portfolio, there may be the opportunity to transfer the inherited investments to your existing account to be managed in unison with your current holdings. This can usually be done either by transferring the assets in cash, in which case a professional tax analysis should be undertaken prior to moving anything or by re-registering the holdings from the deceased’s provider to yours.
You may have your own financial objectives that need funding. For example, repaying debt, a large purchase or building your retirement fund.
If the value of the inherited portfolio is going to help you achieve these goals, then cashing them in is an attractive option and some good financial planning will help minimise the value lost to tax.
Deeds of variation
The inherited assets can also be passed on to someone else. Perhaps you don’t need the money, or you are trying to reduce your own inheritance tax liability. This is usually done via a Deed of Variation. This is a deed drawn up by a solicitor bypassing you as the beneficiary of the asset and passing it straight onto an individual or individuals of your choosing. A Deed of Variation must be done within two years of the deceased passing and once in effect, it cannot be revoked.
Potential tax implications?
Capital Gains Tax (CGT) accrued during the deceased’s lifetime is written off by HMRC at the date of death. Whilst the estate is being administered, the estate is responsible for the CGT from gains accrued after the date of death which then becomes your responsibility once the assets are in your name. If the LPR’s realise a capital gain whilst in administration, they can use the annual CGT allowance of £3,000 in the year of death and the following two tax years, after which no further exemptions are given.
Once the assets are transferred to you, you will also be able to use your annual CGT allowance for disposal, even if this is in the same tax year as the estate has used theirs. This can be a helpful planning tool if you want to sell the assets either for cash or for moving them into more tax efficient products like an ISA or pension. Any disinvestment realising gains above the annual CGT allowance will be taxed at 20% if sold by the estate or 10% if sold by you.
Inherited ISA?
If the assets are already in an ISA, the estate can continue to benefit from the ISAs tax advantaged status for a period with some conditions. The date of death must be after 6th April 2018 and no further monies can be paid in post death.
The ISA retains its income and capital tax exemptions until one of three things happens; the ISA is closed, the administration of the estate is finalised or three years after death, whichever is the sooner.
Additional Permitted Subscription
If you are a spouse or civil partner inheriting the ISA, you will receive an Additional Permitted Subscription (APS). Assuming death occurs after 6 April 2018, this effectively increases your own ISA allowance by the value of the deceased ISA as at the date of death or the date the LPR’s distribute the assets. You must have held an ISA at the time of the deceased’s death.
If you fund the APS with cash, the APS must be used by the later of three years following the death or 180 days of the estate administration finalising. If the APS is used by transfer of the shares and investment funds directly into your ISA this must be done within 180 days of the assets being distributed by the LPRs.
Speak to a professional
Navigating an inheritance can be complicated to do efficiently without professional expertise. To protect yourself and the legacy left to you, you should engage a financial planner to guide you through the process.
Please get in touch to discuss how we can help you.
Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.
