How to manage a windfall, tax efficiently

Compile a detailed breakdown of your assets, liabilities, income sources, and ongoing expenses.

Define short-, medium-, and long-term objectives – whether that’s early retirement, property investment, philanthropy, or wealth preservation.

Assess whether your current portfolio is aligned with your new financial reality and risk tolerance.

Determine if paying down liabilities (such as mortgages or business loans) is a priority or if maintaining liquidity for future opportunities is more beneficial.

If the windfall is from an inheritance, consider strategies such as gifting, trusts, and other qualifying investments to reduce future IHT liabilities.

If assets (such as shares or property) are involved, a phased disposal strategy may help spread CGT liability over multiple tax years.

Large bonuses and unexpected income surges can push you into higher tax brackets. Structuring receipts over time, pension contributions, or investing in tax-efficient vehicles can mitigate this impact.

Leveraging ISAs, pensions, and other HMRC-approved schemes and investment wrappers, can provide significant tax relief while ensuring long-term wealth growth. Don’t forget, you could also provide some funds to your partner, and/or children, to utilise their respective pension and ISA allowances.

Avoid overexposure to any single asset class. A mix of equities, bonds, property, private equity, and alternative investments can mitigate risk.

Understand how your risk appetite has changed now that your wealth has increased. Stress-test different scenarios using cashflow modelling.

Balance active opportunities (e.g., private equity or thematic investing) with a long-term passive core.

Ensure you maintain an emergency fund while keeping a portion of your portfolio readily accessible for new opportunities.

Regular reviews with a financial adviser can help ensure your investments remain aligned with your changing needs and market conditions; for example, regularly evaluating rebalancing need.

Consider using your Annual Allowance (£60,000) and any available Carry Forward from the past three years to boost tax-efficient pension savings. One could theoretically contribute up to £200,000 at once, at a net cost from £110,000, subject to relevant earnings. Discover more about Pension Carry Forward.

While the Lifetime Allowance charge has been abolished, excess pension savings may still impact income tax rates in retirement. The Lump Sum Allowance (LSA) caps tax-free cash at £268,275, while the Lump Sum Death Benefit Allowance (LSDBA) has significant estate planning implications for individuals who die before age 75. Furthermore, from 2027, unspent pensions will be brought inside of estates for Inheritance Tax (IHT) purposes. Strategic withdrawals and planning remain crucial.

If you’re considering early retirement, ensure you have a sustainable drawdown plan that balances income needs with longevity risks.

Structuring withdrawals across ISAs, pensions, and taxable accounts efficiently can optimise your income tax position in retirement. Discover more about managing a high-value retirement portfolio, tax efficiently.

Discretionary and bare trusts can provide tax-efficient intergenerational wealth transfers while maintaining control. Discover more about Trusts.

The use of the £3,000 annual gift exemption, potentially exempt transfers (PETs), and regular gifts out of surplus income can mitigate inheritance tax. Discover more about Gifting.

For larger estates, FICs can provide an alternative to trusts while offering greater control and flexibility.

Please note FICs are not offered by St. James’s Place.

Ensure legal documents reflect your new financial circumstances and wishes for asset distribution.

If philanthropy is a priority, consider setting up a donor-advised fund (DAF) or a family charitable trust to structure donations effectively.