Inheriting money or assets can be life-changing. It can also be overwhelming — especially when it arrives during or after bereavement.
This guide covers the financial steps, tax implications, and decision-making framework for handling an inheritance wisely.
First: Do Not Act Hastily
The most important financial advice for any windfall — including inheritance — is to pause before making major decisions.
Why:
- Grief and major financial decisions are a dangerous combination
- Irreversible decisions (overpaying mortgage, expensive property purchase, transferring large sums) are hard to undo
- Better options often become clearer with time
Immediate action: Move inherited cash to a high-interest easy-access savings account or split across savings accounts (noting the £85,000 FSCS protection limit per bank). This protects it while you decide.
Understanding Inheritance Tax (What the Estate, Not You, Pays)
Who Pays IHT?
Inheritance Tax is paid by the deceased’s estate before you receive anything. If you’re a beneficiary, the estate’s executors handle this.
IHT basics:
- Charged at 40% on the estate value above the nil-rate band (£325,000 standard threshold in 2026/27)
- Residence Nil-Rate Band: Additional £175,000 when a main home is left to direct descendants
- Total threshold with both allowances: Up to £500,000 per person (£1 million for married couples)
- Estates left entirely to a spouse or civil partner are fully exempt
Some estates pay no IHT at all. If the estate is below the threshold — or if a good estate planner arranged things beforehand (use of the annual exemptions, gifts-from-income rules, trusts) — you may receive the full inheritance without any IHT deduction.
What You Receive
You receive what the will (or intestacy rules) directs after:
- Debts are paid
- IHT is settled
- Probate costs are met
The executor distributes what remains to beneficiaries.
Tax Implications for You as Beneficiary
Capital Gains Tax on Inherited Assets
If you inherit a property or investments (not cash), CGT may apply when you sell:
- HerYour base cost is the probate value (market value at date of death) — not the original purchase price
- CGT is charged on gains above the Annual Exempt Amount (£3,000 in 2026/27) at 18% (residential property for basic rate taxpayers) or 24% (higher rate)
- Selling quickly while value hasn’t changed minimises CGT exposure
Practical note: If you inherit a property and it falls in value before you sell, you may have a CGT loss — recordable but not immediately monetisable for most people.
Income Tax on Inherited Assets
Inheritance itself isn’t income. But once you receive it:
- Savings interest is taxable above the Personal Savings Allowance (£1,000 basic rate; £500 higher rate)
- Property rental income is taxable at your marginal rate
- Investment dividends are taxable above the Dividend Allowance (£500 in 2026/27)
Consider ISA sheltering — up to £20,000/year of cash or investments sheltered from income tax and CGT.
Inherited ISA Allowance
If you inherit from a spouse or civil partner, you receive an Additional Permitted Subscription (APS) equal to the value of their ISA holdings. This allows you to preserve the tax-free status of that money by transferring it into your own ISA — above the standard £20,000 annual allowance, as a one-time additional contribution.
What to Do With an Inheritance: Decision Framework
Step 1: Clear High-Cost Debt
Before investing, clear any debt costing more than you can reasonably earn on savings:
| Debt type | Interest rate typical | Action |
|---|---|---|
| Credit card | 20–30% | Pay off immediately |
| Personal loan | 8–15% | Pay off |
| Overdraft | 15–40% | Pay off |
| Car finance (PCP/HP) | 6–12% | Pay off or overpay |
| Mortgage | 4–6% | Consider — see below |
Mortgage decision: Paying off the mortgage is emotionally satisfying and mathematically often beneficial — but a pension contribution (with tax relief) may generate a better return. Run both scenarios with actual numbers.
Step 2: Maximise ISA Allowances
The standard annual ISA allowance is £20,000 per person. If the inheritance is larger than your remaining annual allowance, you’ll need to split contributions over multiple years.
Cash ISA: For money you may need within 5 years Stocks and Shares ISA: For money you can leave invested for 5+ years — historically higher returns, short-term volatility
Both are tax-free. The key decision is timeframe.
Step 3: Consider Pension Contributions
Pension contributions reduce your taxable income:
- Basic rate taxpayer: HMRC adds 20% relief — a £800 contribution becomes £1,000 in the pension
- Higher rate taxpayer: 40% relief — a £600 contribution becomes £1,000 in the pension
Annual limit: £60,000 per year (2026/27) across all pensions including employer contributions, subject to your earned income.
A large inheritance combined with unused carry-forward pension allowances from the previous 3 years can allow you to make a very substantial tax-efficient pension contribution.
Step 4: Invest the Rest
If you’ve cleared debt, maxed ISAs, and considered pension — a remaining lump sum can be invested:
| Option | Risk level | Time horizon | Notes |
|---|---|---|---|
| Easy-access savings | Very low | Any | Covered by FSCS; rates ~4–5% in 2026 |
| Premium Bonds | Very low | Any | Tax-free; prize draw instead of guaranteed interest |
| Global index funds (ISA) | Medium-high | 5+ years | Diversified; lower charges than active funds |
| Property (buy to let) | Medium-high | 10+ years | Income + capital growth but illiquid, stamp duty, management required |
| FTSE All-Share / World ETF | Medium-high | 5+ years | Low-cost diversified equity |
Seek independent financial advice if the inheritance is above ~£100,000 and you’re unsure. A one-off fee-only financial planner (not commission-based) is worth the cost.
Inheriting Property
If You Inherit a Property You Don’t Want to Live In
Options:
- Sell — CGT on gain above probate value (limited if you sell quickly)
- Rent out — rental income taxable; ongoing property management required; stamp duty may apply later if you buy another property
- Transfer to spouse/civil partner — CGT-free between spouses (lifetime and on death)
Selling option: If you and other beneficiaries decide to sell, the gain (if any) from probate value to sale price is subject to CGT on each beneficiary’s share. Quick sales after probate often generate minimal CGT.
If You Inherit a Property You Want to Keep
Check:
- Is there a mortgage on it? (If yes, it transfers on inheriting)
- What’s the stamp duty position if you own other property? (A second property surcharge applies — 5% extra SDLT in 2026/27 in England)
- Running costs: insurance, council tax, utilities, maintenance
Inheritance Checklist
| Task | Done? |
|---|---|
| Take time — don’t make big decisions immediately | ☐ |
| Understand what the estate is distributing (after tax/debts) | ☐ |
| Move inherited cash to FSCS-protected savings | ☐ |
| Check if ISA inheritance (APS) applies | ☐ |
| Clear high-cost debt first | ☐ |
| Maximise ISA allowance (£20,000/year) | ☐ |
| Consider pension contribution (with tax relief) | ☐ |
| Understand CGT position on any non-cash assets | ☐ |
| Decide on inherited property | ☐ |
| Get independent financial advice for large amounts | ☐ |
| Keep inheritance in sole account (divorce protection) | ☐ |
| Update your own will and pension nominations | ☐ |