Tax on Inherited Savings UK (2026): Do You Pay Tax When You Inherit Money?

The simple answer is: NO — receiving an inheritance does not itself trigger any income tax or capital gains tax for the beneficiary. Here is why: (1) INHERITANCE IS NOT INCOME: in UK law, an inheritance is not 'income' for the beneficiary — it is a capital receipt. Income tax applies to income (earnings, interest, dividends, rental income etc.) — not to capital gifts. Inheriting money from an estate is a capital transfer, not income; (2) INHERITANCE TAX IS ALREADY PAID BY THE ESTATE: if IHT is due on the estate, it is calculated on the deceased's estate, paid by the personal representatives FROM the estate assets, before distribution. The beneficiary receives their inheritance NET of IHT — they have no personal IHT liability simply by virtue of receiving the inheritance (with limited exceptions — see below); (3) NO CGT ON RECEIPT OF INHERITANCE: receiving an inheritance does not trigger CGT for the beneficiary. CGT applies to gains on the disposal of an asset — receiving an asset is not a disposal; (4) THE CGT UPLIFT ON DEATH: when a person dies, all their assets are treated as disposed of and reacquired at market value at the date of death (TCGA 1992 s.62(1)). This 'uplift' resets the base cost of all assets to their probate value — wiping out the deceased's lifetime accumulated gains. The beneficiary inherits the asset at its probate value as their base cost. No CGT arises at the point of inheritance; (5) WHAT DOES HAPPEN: the only tax implications for a beneficiary typically arise AFTER they have inherited the money: (a) income tax: if the beneficiary puts inherited cash in a savings account and earns interest, that interest is income taxable in the normal way; (b) CGT: if the beneficiary later SELLS an inherited asset (property, shares) for more than the probate value, CGT applies to the gain above the probate value; (6) PRACTICAL EXAMPLES: (a) you inherit £50,000 cash from your parent's savings account — no tax on receipt; (b) you put that £50,000 in a savings account earning 4% interest (£2,000/year) — interest is income taxable under the personal savings allowance rules; (c) you inherit a rental property valued at £300,000 at the date of death — no immediate tax; rent received is income taxable; if you sell for £350,000, CGT on the £50,000 gain.

Between the date of death and the date the estate is distributed, income earned by the estate is taxed differently from income earned after the inheritance passes to the beneficiary: (1) DURING THE ADMINISTRATION PERIOD: the personal representative (PR) receives income generated by estate assets — bank interest; dividends from share portfolios; rental income from property. The PR is responsible for paying income tax on this income: (a) bank/savings interest: taxed at 20% basic rate; (b) dividends: taxed at 8.75% (the trust/estate rate); (c) rental income: taxed at 20% basic rate. No personal allowance is available to the estate (the personal allowance died with the deceased — estates have no personal allowance); (2) THE R185 CERTIFICATE: when the PR distributes income to the beneficiary (or pays income during administration), the PR must issue an R185 (estate income) certificate to the beneficiary. This shows: (a) the gross income; (b) the income tax already deducted; (c) the net income paid to the beneficiary; (3) WHAT THE BENEFICIARY DOES WITH THE R185: the beneficiary must declare the income shown on the R185 on their own self-assessment tax return. If the beneficiary is a basic rate taxpayer, the 20% already paid by the estate satisfies their liability — no additional tax. If the beneficiary is a higher rate taxpayer (40%) or additional rate taxpayer (45%), they must pay the additional tax. If the beneficiary's total income is below the personal allowance, they can reclaim some or all of the tax withheld by the estate; (4) NO R185 FOR CAPITAL: the R185 only covers income. When capital is distributed (the beneficiary's inheritance itself), no R185 is issued and no income tax arises. The distinction between income and capital distributions during administration can sometimes be subtle; (5) EXAMPLE: estate earns £3,000 rental income during administration. PR pays £600 (20%) income tax. Beneficiary receives £2,400 net. Beneficiary (higher rate taxpayer) owes additional 20% (£600) and declares it on their self-assessment return.

CGT only arises on inherited assets if the beneficiary sells them at a value ABOVE the probate value: (1) THE BASE COST RULE: when you inherit an asset, your base cost for CGT purposes is the probate value — the market value of the asset at the date of the deceased's death. Any future CGT is calculated from this base cost, not from the original purchase price by the deceased; (2) EXAMPLE — INHERITED SHARES: shares were worth £10,000 at date of death (probate value). You inherit them. You sell two years later for £15,000. Your CGT gain = £15,000 − £10,000 = £5,000. At 20% (higher rate for investments) = £1,000 CGT. Annual exempt amount (£3,000 in 2025/26) reduces this further — net CGT = (£5,000 − £3,000) × 20% = £400; (3) EXAMPLE — INHERITED PROPERTY (NOT YOUR HOME): property worth £250,000 at date of death (probate value). You inherit it and rent it out for 3 years, then sell for £290,000. CGT gain = £290,000 − £250,000 = £40,000. CGT on residential property: 18% (basic rate) or 24% (higher rate). Annual exempt amount deducted first: (£40,000 − £3,000) × 24% = £8,880; (4) PRINCIPAL PRIVATE RESIDENCE RELIEF: if you move into the inherited property and it becomes your main home, you can claim PPR relief on the period of your own occupation. The period from death to when you started living there does not qualify for PPR (unlike the deceased's period of occupation). But periods of your own occupation after inheritance do qualify; (5) 'LOSS ON SALE' — SELLING BELOW PROBATE VALUE: if you sell shares within 12 months of death for less than the probate value, you can elect to substitute the actual sale price for the probate value in the IHT calculation (IHTA 1984 ss.179-189 — loss on sale of shares relief). Similarly for property within 4 years (IHTA ss.191-198). These reliefs reduce the IHT already paid by the estate — not the beneficiary's CGT; (6) ANNUAL EXEMPT AMOUNT: each individual has a CGT annual exempt amount (£3,000 in 2025/26 — substantially reduced from £12,300 in 2022/23). This reduces the gain subject to CGT. If the gain on the inherited asset is within the annual exempt amount, no CGT is payable in that tax year.

Inheriting property comes with favourable treatment on several taxes: (1) SDLT — EXEMPT: there is no stamp duty land tax (SDLT) when you inherit a property via a will or the intestacy rules. FA 2003 Schedule 3, paragraph 3A — dispositions pursuant to a will or intestacy are exempt from SDLT. No SDLT return is required. No SDLT is payable; (2) COUNCIL TAX DURING ADMINISTRATION: while the property is unoccupied and part of the estate, it is generally exempt from council tax for up to 6 months after the grant of probate (under council tax regulations). After that exemption ends, the property is liable to council tax (usually charged to the executor or the estate); (3) INHERITANCE TAX — ALREADY PAID BY ESTATE: as discussed, IHT is paid by the estate before the property is transferred to you. If the estate paid IHT on the property, you receive the property net of that IHT. You have no personal IHT liability simply from receiving the property; (4) COUNCIL TAX PREMIUM FOR EMPTY HOMES: once the property is yours, if you leave it empty for more than 1 year, local authorities may charge a council tax premium (100% surcharge in many areas; up to 300% after 5 years). This is a post-inheritance issue rather than a tax on inheriting; (5) INCOME TAX ON RENTAL INCOME: if you rent out the inherited property, rental income is subject to income tax as property income in the normal way. Property income allowance of £1,000 per year is available against rental income. For amounts above the allowance, either actual expenses or HMRC's new rules on repairs and replacement costs apply; (6) 'ADDITIONAL STAMP DUTY' ON PURCHASING ANOTHER PROPERTY: if you inherit a property and then BUY another property (your main home or a buy-to-let), HMRC may treat you as owning more than one property — which can trigger the 3% additional rate SDLT surcharge on the purchase of the new property (unless you replace a main residence within the required period). This is not a tax on inheriting — it is a consequence of the ownership of inherited property on your main-residence SDLT position going forward.

Pensions and life insurance payouts on death are treated differently from other inherited assets: (1) PENSION DEATH BENEFITS — CURRENT RULES (BEFORE APRIL 2027): most defined contribution (DC) pension pots are held in trust and pass outside the estate. The pension trustees pay them to the beneficiaries direct, at their discretion (guided by the expression of wishes). Before April 2027: (a) if the deceased was under 75 when they died, the lump sum is INCOME TAX FREE for the beneficiary (provided paid within a 2-year window); (b) if the deceased was 75 or over, the lump sum is taxed as income for the beneficiary at their marginal rate of income tax. No IHT applies (IHTA 1984 s.151 exemption); (2) PENSION DEATH BENEFITS — AFTER APRIL 2027 (BUDGET 2024 CHANGE): from April 2027, unspent DC pension pots will be brought into the deceased's estate for IHT purposes. The pension trustees will still pay the death benefit directly to beneficiaries. But the IHT will be charged on the pension pot at the estate level. The income tax position on what the beneficiary receives may also change — the government is working on the mechanism. Note: the 'double tax' risk (IHT + income tax for over-75 beneficiaries) is one of the key issues under consultation; (3) LIFE INSURANCE PAYOUTS — WRITTEN UNDER TRUST: if the life insurance policy was written under trust, the payout goes directly to the trustees/beneficiaries and is not part of the deceased's estate. No IHT. No income tax (a life assurance lump sum is not income — it is a capital receipt). If the policy was not written under trust, it forms part of the estate and IHT may apply to it; (4) LIFE INSURANCE — NOT UNDER TRUST: if a life policy was not written under trust, the proceeds form part of the estate and are subject to IHT in the normal way. The beneficiary receives the post-IHT net amount. Still no income tax or CGT on receipt; (5) FINAL SALARY/DB PENSION: the spouse's pension from a defined benefit (DB) scheme continues to be paid to the surviving spouse. This is ordinary income and is subject to income tax at the spouse's marginal rate. It is not an 'inheritance' in the strict sense but is part of the income stream following bereavement.