What do I need to know when I've got more to save than the ISA allowance?

[bigbadbernard]

We are about to receive a 6 figure inheritance from PIL and I want to do the right things with it. It's obviously more than ISAs can take so ... what happens? I put it in investment accounts like usual just not in an ISA wrapper?

What about tax - do we have to do self assessment on annual increase, or does HMRC sort it out automatically? Or is that what capital gains tax does?

I've always been PAYE and below ISA limits so a bit baffled (but very grateful!). I know IFA want really chunky amounts, is 300-400k worthwhile seeing an IFA? Mortgage paid off, DB pensions in place so an unexpected bonus I'm not sure how to nurture.

You need to think about risk and what you would like to do with the money. Spend it? Save it? Retire early? Have more treats day to day? Park the money for a bit while you think about it? Give some to your kids? An IFA can help with that but you can do it yourself.

In terms of tax efficiency, you say 'we' so can put 20K each in an ISA now, and again on 5 April. That is 80K. You can also (if you want) put 50K each into premium bonds. Prizes are tax free. (100K). If the rest is in a cash savings account, you pay tax on the interest on the savings which is collected automatically by HMRC. You get an annual interest free savings allowance depending on your current tax band (usually £500 per year for a higher rate tax payer or £1000 per year for a basic rate tax payer). Interest at 4% on 25K is £1000 per year for example. If you buy shares outside an ISA, you may pay capital gains tax if/when you sell but you may be able to transfer into an ISA without selling over time. You would also pay tax on dividend income. I think in this instance (investments outside an ISA) you would need to do a self assessment form. You may also be able to open a SIPP depending on how much of your annual allowance is used by your DB pension.

I don’t think tax on interest is automatically paid. It is reported to HMRC by the banks who will check it against your tax return or if you don’t need to do one will sometimes add it to your PAYE code but it’s not quite as simple as it’s collected automatically like it used to be (a long time ago).

If you are earning then a SIPP is a good idea as you can get tax relief on the amount you pay in. Do check the rules though as there are limits on how much you can pay in each year. I would look at doing this before end of this tax year as the limits reset on 6th April. If you continue to pay in next tax year be careful to follow the earnings limits and don’t pay in ahead of your actual earnings.

Go and look at Meaningful Money and Rebel Finance. Both on Facebook and have podcasts and YouTube. Both uk based. It ask depends on your age, dependants, mortgage amount, retirement goals etc

Low dividend gilts are a popular option in this situation. Gilts are backed by the UK government.
Buy discounted low dividend gilts on the secondary market. The dividend is taxed as income, but the capital gain on maturity is tax exempt. When buying you will know in advance the twice-yearly dividend and the exact return on the bond at maturity.

https://www.moneysavingexpert.com/savings/uk-gilts-lower-tax-savings/

My DH inherited a similar amount on top of his lump sum payment from his pension and redundancy payout (it was a turbulent year to say the least).

We maxed out ISAs, paid the max overpayment on the mortgage without incurring a penalty, topped up DD Junior ISA. We then did max premium bonds each. Next is to have your emergency fund covered. We have several top rate cash accounts, and a few fixed ones so savings interest is paid next not this year. Pensions….I sacrifice a lot more now as we can top up from cash each month, much more tax efficient. The rest is being moved into a balanced portfolio in T212. I’ll sell enough each year from this GIA to keep below capital gains limits and move this to the ISAs. If you do some reading, there is no reason you can’t manage this yourself.

My DH also treated himself to some big ticket items. Important to live a little and not go ‘full dragon’ as I call it, hoarding your gold.

I did read your pensions are sorted and mortgage paid off, so definitely more in the spend and invest camp than us. Good luck.

I would see an ifa, call about to find the right person who understands this is a lot of money to you.

as a starting point I’d max out both your isa limits and assuming you get it before the 5th of April, save £40k to max out next year too. Consider premium bonds as an interim too, prizes are tax free. Consider adding to sipps if you don’t have great pensions and don’t need the money but before any of that ensure you have paid off shorter term loans, consider paying off your mortgage (crunch the numbers on that) and get a buffer account so you never need short term loans, you can earn up to £1000 in interest a year tax free (at least could)

What about tax - do we have to do self assessment on annual increase, or does HMRC sort it out automatically? Or is that what capital gains tax does?

There is no tax on 'annual increase'.

If it's in an ISA or pension, no tax at all (income tax when you start drawing on your penions).

If it's in a GIA (general investment account, the name for any investments held outside a tax wrapper like an ISA) there are 3 types of tax to consider.

• Interest: payment intervals vary, reported and taxed annually. The platform.you have your account with will give you an annual tax statement telling you the amount.

• Dividends : usually paid quarterly, reported and taxed annually, also part of the annual tax statement.
• Capital gains: when you sell an investment you're taxed on the total increase since you bought it. This info will usually be on the platform somewhere but it isn’t always on the tax statement so it's best to keep your own record of purchase and sale price for each transaction.

Boring Money has a good comparison site and some intel. I've only just got to grips with finances (after embarassing years of negligence and missing out on investments) and have used Nicholas Lee of Making Sense of Money - he's an ex-IFA (I think he did 30+ years) o does NOT give finance advice as such but hand-holds whilst you self invest. Obvs he charges but I've got the money back by taking his advice (whacking into pensions, setting up Interactive Investor account etc). As he's not an IFA, he's not motivated to steer you in a particular direction

This is all really helpful, thank you. I wasn't aware of gilts (well, had heard the word but no more than that), thank you all for explaining clearly and adding links. Some research to be done!