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Coming into an inheritance

Knowing what to do with a lump sum of money, at what is often an emotional time, can be quite difficult. Such a bittersweet situation; the loss of a loved one is never pleasant, but the gift they have left you in the form of inheritance can be a blessing.

Deciding how to best use this money can be quite overwhelming. Pay off the mortgage, take a holiday or purchase a new car… they’re all great ideas. But before you come to a decision, read through the below considerations.

  • Don’t act rashly – Sit back and take a deep breath. You could certainly set aside a specific amount to treat yourself to a new car or holiday. But if you spend too much now, you could be struggling to achieve your long-term retirement goals.
  • Take stock of your finances – Spend some time to work out your most pressing financial goals. First, you may need funds for more short-term goals, such as paying off debt and university fees. Then you can look at your long-term goals, such as saving for a comfortable retirement.
  • Manage your risk – A typical mistake many people make when they come into large sums of money is to chase big returns. Generally, the bigger the return, the riskier the investment. And if it looks too good to be true, it probably is. You are usually better off developing a portfolio that delivers a regular and sustainable income.
  • Talk to an expert – An experienced financial planner can help you avoid the tax pitfalls and develop a strategy to help you achieve your long-term investment goals.


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Some ways to use the windfall

  • Pay off the home loan – Paying off debt is usually a smart move, but don’t assume that paying off the mortgage is necessarily the way to go. You may be better off keeping the home loan and investing in an asset that generates a higher return.
  • Boost your super – Super is a tax-effective way to save for retirement. Earnings are only taxed at 15%, compared with your usual marginal rate, and your money will be available tax-free once you reach retirement. Of course, you should be aware of the contribution caps that apply, so you don’t pay additional tax.
  • Split income – If you have a spouse on a lower income, you could invest some of the funds in their name to take advantage of the lower marginal tax rate. And you could also boost their super by making spouse contributions.
  • Save for school and university fees – If you have children, talk to us about the most tax-effective way to pay for their education.


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Remember the two-year window!

If on the other hand, you inherited the family home, the good news is there is no inheritance tax in Australia. But the bad news is there is Capital Gains Tax (CGT). You have to watch out for CGT if you are acquiring an asset as a result of a will. The most common assets are property and shares.

There are ways to avoid CGT. If for example, your mother was living in the family home up until her death and the home wasn’t used to produce an income, then you don’t have to pay CGT if you:

  • sell the property within two years of her death, or
  • live in the property as your main place of residence until you sell it.

If you hold on to the property for more than two years, rent it out, and then sell it at a later date, CGT will apply to the difference between the purchase value and the sale price. So, if it was worth say $150,000 back in 1987 and you sell it for $500,000, then you will be liable for capital gains on 50% of the $350,000 nominal capital gain.

We can help you to understand these options in more detail and make the most of your inheritance, contact us today to find out more.

What you need to know

The information in this article is based on a hypothetical case study. Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning Pty Ltd and other companies within the AMP group will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.Some of the information in this article is based on our interpretation of the law. It is a summary of the subject matter covered and is not intended to be comprehensive tax or financial advice. No reader should act on the basis of this article without obtaining specific professional advice.