This communication is for informational purposes only and is not intended to constitute, and should not be construed as investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change, and we are not responsible for any errors or omissions.
Receiving an inheritance lump sum can bring a lot of mixed emotions. It can be satisfying – even exhilarating – to suddenly get more money in your account. However, an inheritance can also be a painful reminder of the loved one you have lost.
It is not always easy to make rational decisions at a time of high emotions. Therefore, it helps to be ready with an inheritance “contingency plan” – where you decide, ahead of time, how you might use a lump sum if it ever arrives.
Below, our team at Scottsdale offers four ideas on how British expats (e.g. in Spain) can use an inheritance lump sum to help achieve their goals.
We hope this content is helpful. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
#1 Boosting an emergency fund
Typically, a UK financial adviser suggests building 3-6 months’ worth of living costs in an easy-access savings account. This helps to tide you over during an emergency (e.g. a family illness) or if you need to cover an unexpected large expense, such as a broken boiler.
For British expats, however, the potential list of “things that could go wrong” may be longer, and more complicated, than for British people living in the UK. For instance, a family emergency may involve getting multiple flights home and paying for accommodation during your stay(s).
As such, receiving an inheritance can be the perfect opportunity to boost your emergency fund if this is looking a bit low.
#2 Settling liabilities
If you have some costly debts hanging over you – e.g. from high-interest credit cards and/or personal loans – then an inheritance could help you reduce or even eliminate the bills. Going forward, this would free up much more of your monthly income, since you would be spending less on costly interest payments.
An inheritance could also help British expats with other liabilities such as helping to pay down the mortgage or a student loan. However, consider seeking financial advice when considering whether to pay down such loans.
Homeowners need to be wary of liquidity risk when making large overpayments (once you do it, the money is then tied up with your property). Also, your lender may impose penalties if you overpay too much on your mortgage.
Student loans can be a complex area. Generally speaking, a British person who was educated at a UK university will probably not benefit too much, financially speaking, from paying down their student loan. However, certain people on higher incomes may benefit.
#3 Preparing for retirement
Have you thought about how you will generate a sustainable, regular and comfortable income in retirement? An inheritance lump sum could be a great opportunity to boost your pension.
There are different options that you can explore here. For example, some people may benefit from making voluntary National Insurance (NI) contributions to “plug” missing “gaps” in their record, allowing them to claim a higher State Pension income in the future.
Another option could be to contribute to a pension “pot” (defined contribution pension) to boost its growth potential using compound interest. The funds could eventually be used for a range of income options, depending on your goals and needs (e.g. income drawdown and/or annuity).
Again, plan your inheritance and pension strategy carefully. Putting money into a UK pension means that you cannot access it until age 55 (or age 57 starting in 2028). Be mindful of the relevant tax rules, such as yearly limits on your tax-free contributions (“the annual allowance”).
#4 Invest in yourself
Have you ever wanted to engage in further study, such as a Masters, but have been put off by the fees? Maybe you fancied learning a new skill like how to use the Adobe Cloud software, but the costs were too prohibitive? An inheritance can release the funds to finally invest in yourself.
For those with an entrepreneurial spirit, maybe some of the money could be put towards starting a business or perhaps you could donate to charity. Another great option is to start investing – e.g. in equities, bonds and other asset classes – to start building personal net worth and open opportunities for greater financial freedom in the future.
Conclusion & invitation
Two final considerations are worth mentioning for UK expats receiving an inheritance. Firstly, what did your loved one want you to do with the money? Respecting their wishes is important and should be a factor in your decisions.
Secondly, consider getting financial advice to check that there is no tax liability on your inheritance. In the UK, inheritance tax (IHT) is paid by the estate owner out of their estate. In Spain, however, succession tax is payable by the beneficiary.
Be careful not to assume that you do not need to pay one or both. Check with a professional to ensure that you do not get a nasty surprise from tax authorities later (by which point, you may have spent/invested the funds)!
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407