If the government abolishes inheritance tax, I’d invest the extra windfall money in stocks and shares. Or I’d choose funds backed by such equities.
Over the recent weekend of 15 and 16 July 2023, the newswires ran a story about the UK government’s discussions on the possibility of abolishing inheritance tax.
I offer no political opinion about that suggestion. But I will say that inheritance tax has always struck me as being among the most unfair of taxes.
Potential for more financial independence
Taxing inheritance capital seems to target funds that people have saved from the leftovers after already paying multiple taxes in the first place.
So, if the tax is abolished, there’s a possibility that more folks will see wealth cascading down from the efforts of prior generations.
And that situation could help people to become financially independent and in a better position to pay other taxes. However, I’m mindful that my view is simplistic and I may not fully appreciate the complexities involved. After all, I’m not a political animal.
But what should people do with any windfall caused by the abolishment of inheritance tax? Invest it and make it work hard, I’d say. And here’s how I’d go about it:
Am I experienced (as Jimi Hendrix might have said)?
To begin with, I’d gauge my own investing experience. And if I had none, would aim to put the money into low-cost index tracker funds. And maybe a few select managed funds and investment trusts.
However, caution is required. I’ve been kicking the tyres of many stocks funds and trusts recently. And my research made it clear to me that many are what we could describe as ‘closet’ trackers.
In other words, they have perhaps too many stock positions. And any conviction the managers had about the potential for the underlying businesses has been diluted away with excessive diversification.
I’m talking about multiple positions, and the very largest being as little as around 2% of the invested funds. And the multi-year track records of these funds makes it clear that many simply track their benchmark indices, at best.
But when we consider the higher fees levied by managed funds and trusts, it adds up to being an expensive way to track the stock market. I had to look long and hard to find any funds with meaningful conviction represented in their holdings.
So for me, one option would be to consider a range of low-cost mechanical index tracker funds. And personally, I’m tracking the US and UK markets. But I also have in my portfolio, a small selection of the better trusts and funds uncovered in my research.
Shooting for outperformance
However, many investors will almost certainly wish to put inherited money into the shares of individual companies too.
The aim would be to try to beat the general performance of the wider market. However, it’s worth bearing in mind all businesses can face challenges from time to time. And positive investment outcomes are not guaranteed.
Nevertheless, with a well-thought-out and polished strategy, I wouldn’t hold back from trying. And that’s because I think there’s more positive potential in the stock market now than there has been for a decade.
