What to do when you inherit a portfolio of shares and funds

If you inherit a portfolio of investments such as shares and funds it is important to undertake the right administrative steps, tax planning and asset allocation changes to maximise the value of your newly acquired assets. Not doing this appropriately could cost you some of your inheritance.

If you are the executor of the will you have to go through the probate process before the assets are distributed. This means valuing the full estate and working out if there is any inheritance tax (IHT) to pay, as this is paid by the estate rather than the beneficiaries. You have to send a copy of the death certificate to the companies where the deceased held their investments and get an estimate of the value. You also need to factor in whether the deceased made any gifts in the past seven years as they would fall back into the estate, and tax may be due on these.

You may need to sell investments to cover IHT, although losses can be used to mitigate IHT liability. Estates are valued at the point of death but if qualifying assets that have fallen in value since the date of death are sold they could benefit from share loss relief. These include securities listed on a recognised stock exchange at the date of the death, gilts (UK government bonds) and authorised unit trusts. Unquoted companies and Aim shares do not qualify.

“If the executor sells assets within 12 months of the date of death, they can apply for the IHT to be recalculated based on the lower value of the shares,” says Aaron McLoughlin, chartered financial planner at James Hambro & Partners. “That lower value is based on the cumulative amount of shares the executor has sold in that 12-month period. So the executor could only sell the shares that have lost value to create a cumulative loss and reapply to HM Revenue & Customs to reduce the IHT.”

If you are not the executor, it is a case of waiting for the probate process to complete. The executors can sell the investments and distribute the money or you could inherit the investments themselves. The latter option can make sense if the assets have built up a capital gains tax liability (CGT) liability. You do not inherit the deceased’s CGT liabilities because they are nullified when they die. But you could be liable on gains the inherited investments make from the date of the person’s death as from that time the assets can start again to build up a CGT liability. Because the probate process can take 12 to 18 months, the assets' value might grow between the time of the death and completion of the process so there may be CGT to pay if they are sold at that point. Sales of assets to pay IHT can also incur CGT.

The estate has its own annual CGT allowance for each of the three tax years after the previous holder’s death. “So between probate being finalised and before distributing the assets, the trustee of the estate may dispose of some of them to use the estate’s CGT allowance of £12,300 in the year of death and the following two tax years,” explains McLoughlin.

But it could also make sense to gift some of the assets to a spouse or other family members, or pass assets to them via a deed of variation (see box) to offset asset sales against their annual CGT allowances. “If you time this for the end of the financial year, and stagger the distribution and disposals across the tax year threshold you could, for example, get six lots of CGT allowances in the space of a few weeks if both the executor and two individuals used their CGT allowances amounting to £73,800,” says McLoughlin.

You can also offset losses on assets against gains to reduce CGT liability.

Using the money

Although you may wish to keep an inherited portfolio invested to capitalise on its potential, it could be better to use it to improve your personal financial position. For example, if you have debt you could use the assets to reduce or retire it, especially if the interest rate on it is high. If you don’t have many cash savings you could use it to build an emerging fund. Advisers generally suggest holding easily accessible cash worth about six months of your expenditure. Or you could top up your own pension if you have the capacity to do this.

If you plan to use inherited assets to finance something in the near future, such as buying a bigger house or school fees, Rosie Bullard, partner and portfolio manager at James Hambro & Partners, suggests earmarking the lowest risk assets for the more immediate calls on capital.

Merging your portfolios

If you intend to keep the inherited portfolio invested, and have an account with the same broker or platform as the person from whom you are inheriting it, the acquired investments can be added into your existing account. Hargreaves Lansdown, for example, sends executors a booklet with the forms they need to instruct on what to do with the assets. If you are the executor you need to complete these forms and send them to the platform. Or if someone else is the executor they will ask you to complete the forms to receive the assets.

If you do not have an account on the same platform you could open an account on that platform or transfer the assets you receive to another one. To transfer them away from Hargreaves Lansdown, for example, you would need to first transfer the assets into your own name on this platform and then request a transfer to a new provider. Hargreaves Lansdown does not charge to transfer to another provider or close an account.

If you inherit shares in certificated paper form – rather than held on an investment platform – you need to have them transferred into your name and ensure that there is nothing left in the probate account, for example, shares, scrip dividends (dividends paid as shares rather than cash) or cash dividends. "Consider moving your shares to electronic form on the register or using a nominee company for the ease of administration," says John Moore, senior investment manager at Brewin Dolphin. You could either move them to an electronic account with the existing registrars or transfer them to the investment platform which you use.

If the shares are held in a nominee account you will probably have to do some paperwork to transfer the account ownership to yourself. "Make yourself aware of how the account works, what happens with income, fees and corporate actions, and how you can instruct transactions and make payments in and undertake withdrawals," says Moore. And you need to consider if you want to remain in this account or transfer out.

It is very important to incorporate the assets you receive with the ones you already have tax efficiently. “Think about the value of your investments, and how these might be managed with within the context of CGT and dividend income tax allowances," says Moore.

Assets held within an individual savings account (Isa) do not incur CGT, income or dividend tax. If you inherit an Isa from a spouse or civil partner you can put the value they held in their Isa when they died into your own Isa in addition to your own annual Isa allowance, which is currently £20,000, in that tax year.

If you inherit assets from anyone else, you could sell assets each year up to a value of which the gains fall within your annual CGT allowance, after offsetting them against any losses, and repurchase them in an Isa. If the value of this exceeds the annual Isa allowance you could also put them into a pension, if you have enough of your pensions annual allowance left. This is usually either £40,000 or the value of your taxable earnings – whichever is less. But make sure that doing this does not mean that you breach or are more likely to breach the lifetime allowance which is £1,073,100 until the 2025/2026 tax year. Putting assets into a pension is also not a good option if you are under age 55 and likely to want to draw on the money in the near future.

Try to limit the income from any unwrapped investments within the dividend allowance of £2,000 a year. It can make sense to prioritise putting income generating investments into Isas so that you do not have to pay tax on it.

Think of what you have inherited and what you already own as one entity. “It’s all one portfolio now, so you need to make sure that you have the right overall balance of investments,” says Sarah Coles, senior personal finance analyst at Hargreaves Lansdown. “If you already have investments, you need to work out how the inherited ones fit into your portfolio. They could make it less diversified and skew the risk level.”

The assets you receive are likely to change your overall asset allocation and might not be suitable for your objectives. For example, if you inherit a pension which is allocated for a long-term investment horizon, it may not be suitable if you plan to draw from it in the near future. Or if you inherit income generating assets but want to grow them over decades for your own retirement, you may need to make some changes.

Your portfolio should also match your risk profile.

If you inherit lower-risk assets, for example, because they were part of a portfolio that was set up for wealth preservation or income, but you want growth you might not achieve the returns that you want. Or if you need to draw on your investments soon or cannot tolerate volatility, high-risk assets would not be suitable.

The addition of the assets you received and your newly enlarged wealth might mean that you could alter your objectives. “If you have inherited a significant amount, your needs may be now more easily met and you may want to dial down the risk of your portfolio,” says Bullard. This is because a larger overall portfolio does not need to make such high returns as a smaller one to generate a given sum of money.

“Think about what the optimum asset allocation is for your portfolio – the right mix of asset classes, and the right mix from a geographic and sector perspective,” says Bullard. “Look at your existing portfolio and then add the new one on a spreadsheet. Think about the asset allocation of your entire balance sheet, including your property or properties, artwork and classic cars. How much rebalancing do you have to do? Then you can begin to prioritise the changes. It’s complex and can take time.”

If the assets you have received now mean that you have a large number of different securities you should consider selling some. “You don't want to end up with an enormous list you can’t keep on top of,” says Bullard. Having many holdings, each of which only accounts for a small part of your overall portfolio, also means that each individual one cannot make much difference to its overall return but can still incur costs which detract from gains.

Conversely, if you inherit some of the same holdings or ones in the same sectors as existing holdings, ensure that your overall portfolio does not have overexposure to the same or similar assets, altering its allocation and risk profile in a way that you do not want.

“But if you need to sell assets and buy others, it makes sense to do this within an Isa, where possible, so there’s no CGT liability,” advises Coles.