Inheriting investments: what you need to know
Elderly households are now wealthier than households of a decade ago, according to a report in January 2017 by the Institute of Fiscal Studies. Younger generations are therefore more likely to expect to receive an inheritance than their predecessors were.
While property remains the largest source of inherited wealth transfer, there is an increasing trend towards the transfer of investments.
Dealing with inheritance can often be fraught with complications, and dealing with non-tangible assets such as investments can be particularly confusing. Of course, when people are left an investment portfolio in someone’s will, there are a few hoops to jump through.
Inheriting a stocks and shares ISA
If the assets are in a stocks and shares ISA, the investments can be sold and could then be used to open a new ISA in the inheritor’s name. Alternatively, the investments can be transferred directly without being sold. This is known as an “in-specie” transfer.
As of April 2015, ISA assets can be passed on to spouses or civil partners while retaining their tax-friendly status. Inheriting an ISA from a spouse or civil partner means you are entitled to an additional allowance that will cover the value of your partner’s savings as well as your own.
ISA rules state that you are only allowed to open one cash ISA and one stocks and shares ISA each tax year, however you won’t be breaching these rules if you open up another ISA for the sole purpose of transferring savings you have inherited.
Stocks and shares ISAs are treated in exactly the same way as cash ISAs, and there are two ways a surviving partner can use their inherited allowance. The investments can be sold and you can open up a cash ISA to deposit the cash into, or the investments can be transferred directly without being sold.
Inheriting stocks outside of an ISA
If stocks are held outside an ISA there are more options to transfer. In order to release assets from a Nominee Account (e.g. transfer or sell stock), typically nothing can happen until the broker is notified with a certified copy of the registered death certificate. Usually a letter will be sent to the registered address requesting the Grant of Probate, or if this is not being obtained, the Small Estate Declaration.
Grant of Probate / Letters of Administration (or Certificate of Confirmation for investors who were resident in Scotland) is the legal document obtained from the courts, appointing someone to administer with the whole Estate when someone passes away.
Once the Small Estate Declaration or Probate has been received, one of the following can happen:
- Portfolio liquidation: shares will be sold less charges and cash sent once trades have settled. Charges tend to be standard dealing fees and any transfer costs levied by the broker or investment platform, which can vary.
- Transfer: assets are transferred usually with no charge if the beneficiary is transferring the assets within the same broker (or investment platform). The beneficiary will need to open an account with the same broker to allow the transfer to take place. This request must be submitted in writing by the executor/s and include the account number, name of stock and amount of shares. From here, holdings can then be transferred out to a new broker if required and typically charges will apply.
Inheriting illiquid assets or fixed-term bonds
For those who want to liquidate their inheritance and keep the cash, inheriting illiquid assets such as open-ended property funds and bonds that haven’t yet matured can be a little more difficult.
Open-ended property funds, at certain times, may impose a delay on selling the units back to the fund manager and thus liquidating the assets. However, these tend to be in exceptional circumstances and otherwise are no different to most other open-ended funds.
Bonds can be of varying types and as such the treatment on death may vary across both the type of bond and the issuer. Many fixed-term cash deposit style bonds offer an early redemption option on death but there may be a penalty such as loss of interest.
Large amounts of cash: a warning
If you are looking to convert investments into cash you should be aware of the extent to which your cash will be protected once liquidated. Under the Financial Services Compensation Scheme (FSCS), savings held within bank accounts are protected up to £85,000 per person. This means that if your bank were to collapse your savings would be safe, up to £85,000.
If the value of the investments you inherit exceed £85,000 in value then be aware that it will not be completely protected should you liquidate it and the bank you deposit with fails.
While people have the option to liquidate their inherited investment portfolio and keep the cash, rising inflation and record low interest rates mean that cash is not an attractive vehicle in which to hold large amounts of wealth.
Being passed on an investment portfolio can be a trigger for people to take a greater interest in investing and to begin to invest themselves. It makes sense to keep some cash for necessities or as a buffer in case of emergencies, but investing any non-essential money is a great option to grow a nest egg.
Mark Taylor is CEO of investment platform Selftrade