What to Do With Inherited Money UK (2026): Tax, Benefits & Financial Planning

Most people who receive an inheritance do not personally pay any tax on it — but there are several taxes that may apply in specific circumstances: (1) Inheritance tax: IHT is paid by the estate, not by the beneficiary. The executor pays IHT to HMRC before distributing to beneficiaries. You receive your inheritance already net of IHT. However, if the estate's IHT return was incorrect or undervalued, HMRC can follow up with the estate for additional IHT — the executor bears that liability, not you personally. If you receive a gift within 7 years before death (a Potentially Exempt Transfer), the gift may be subject to IHT if the donor's estate exceeds the threshold and the gift is above the annual exemptions. In that case, you may receive a tax bill from HMRC as the recipient of the failed PET — this is rare but possible on very large gifts; (2) Income tax: the inheritance itself is not subject to income tax. But income generated by the inherited assets after you receive them (bank interest, dividends from shares, rental income from an inherited property) is subject to income tax in the usual way. Income generated by the estate during administration (before distribution to you) may also have been allocated to you as estate income — the executor's final estate accounts will show this, and you should check whether you need to include it on a self-assessment return; (3) Capital gains tax: receiving an inheritance does not trigger CGT. Your base cost for CGT purposes is the probate value of the asset (i.e. its open market value at the date of the deceased's death). When you sell an inherited asset, CGT applies to any gain from the probate value to the sale price. Example: you inherit shares valued at £20,000 on the date of death, and sell them 3 years later for £30,000 — CGT applies to the £10,000 gain above the probate value; (4) Stamp Duty Land Tax: you do not pay SDLT when you inherit property. SDLT only applies if you purchase property; (5) Council tax and other local taxes: not triggered by inheritance.

Yes — and the two-year window is an important planning tool that beneficiaries often overlook: (1) What a deed of variation does: a deed of variation (also called a deed of family arrangement or instrument of variation) is a document signed by the affected beneficiaries that redirects all or part of an inheritance to different people or charities. The key tax benefit: HMRC treats a valid deed of variation as if the deceased had made the change in their original will — so there are no PET clocks, no CGT on the redirect, and any IHT relief (charity exemption, business property relief) applies at the values at the date of death; (2) Time limit: you must execute the deed within 2 years of the date of death. There is no extension to this deadline; (3) Common uses: redirecting an inheritance to grandchildren (skip a generation to reduce IHT on the second death); adding a charitable gift to qualify the estate for the reduced 36% IHT rate; correcting intestacy that produced unfair results (e.g., redirecting some of the estate to a surviving cohabiting partner who received nothing under the intestacy rules); equalising shares between beneficiaries; correcting an outdated will that failed to anticipate changed circumstances; (4) Requirements: all beneficiaries whose share is reduced must sign. Minor beneficiaries cannot sign — Court of Protection approval is required if you want to reduce a minor's share; (5) The deed must include: a statement that it is made within the IHT time limit under IHTA 1984 s.142 (for the IHT write-back) and a statement under TCGA 1992 s.62(7) (for the CGT write-back). If either statement is missing, the tax benefits do not apply; (6) Cost: a solicitor typically charges £350–£1,250 + VAT for a straightforward deed of variation.

Yes — an inheritance can affect means-tested benefits, and the DWP is strict about reporting obligations: (1) Notify the DWP promptly: you must notify the DWP (and local council for Housing Benefit/Council Tax Support) within one month of receiving an inheritance. Failure to report is a benefit fraud offence; (2) Means-tested benefits affected: Universal Credit (capital above £6,000 reduces your payment; above £16,000 makes you ineligible); Housing Benefit (same capital limits as UC); Council Tax Support (varies by council, broadly similar); Pension Credit (above £10,000 reduces; above £16,000 = ineligible); income-related Employment & Support Allowance; income-based Jobseeker's Allowance; (3) Non-means-tested benefits not affected: Personal Independence Payment (PIP); Disability Living Allowance (DLA); Carer's Allowance; contribution-based JSA; new-style ESA; (4) Deprivation of assets rule: you cannot simply give the inheritance away or spend it down to preserve benefits — the DWP will treat deliberately reduced capital as if it still belongs to you. The deprivation rules apply from the moment you receive the inheritance; (5) Personal injury compensation exception: if you receive an inheritance via a personal injury trust, it is disregarded for means-test purposes under the Social Security (Personal Injury Payments) Regulations; (6) Pension credit and housing: if you receive Pension Credit, inheriting property or significant capital may end your entitlement. Check with the Pension Service (0800 731 7898) before taking the inheritance; (7) Universal Credit ISA strategy: if you invest the inheritance in an ISA, the capital inside the ISA is still counted as capital for Universal Credit purposes — ISAs do not shelter capital from the means test.

The optimal use of an inheritance depends on your existing financial situation, but the following priority order works for most people: (1) Establish an emergency fund: before doing anything else, ensure you have 3–6 months of essential spending in an easily accessible account (Instant Access Cash ISA or easy-access savings). This protects you from needing to liquidate investments at bad times; (2) Pay off expensive debt: credit cards (typically 20–30% APR), personal loans, and overdrafts cost far more in interest than almost any investment can reliably return. Clear these first; (3) Mortgage overpayment: if your mortgage has early repayment charges, check the free-payment allowance first (usually 10% of outstanding balance per year). Overpaying a 4–5% mortgage is a guaranteed, tax-free return; (4) Maximise pension contributions: pension contributions receive income tax relief at your marginal rate (20% basic, 40% higher, 45% additional). Each £1,000 invested at 40% tax relief becomes £1,667 gross in your pension. Annual pension allowance in 2026/27 is £60,000 (or 100% of relevant UK earnings, whichever is lower). For most people, pensions are the highest-returning use of a windfall; (5) Maximise ISA allowance: £20,000 per year tax-free growth and income. If you receive a large inheritance in one year, consider a Stocks and Shares ISA (or Innovative Finance ISA if higher risk appetite) to shelter long-term investment growth from CGT and income tax. Multiple family members can use their own allowances; (6) Invest for the long term: for amounts above pension and ISA allowances, a globally diversified low-cost index fund (e.g. FTSE All-World ETF) is a sensible default. Consider spreading investment over 6–12 months to reduce timing risk; (7) FSCS protection: the Financial Services Compensation Scheme covers £85,000 per institution (£170,000 for joint accounts) for authorised deposits. If you receive more than £85,000, spread across multiple authorised banks or use NS&I (government backed, no limit). Keep accounts at different banking groups, not just brands within the same group; (8) Large inheritances (over £250,000): professional independent financial advice is worth the cost. An IFA regulated by the FCA can model tax-efficient strategies, review your estate plan, and advise on philanthropy if appropriate.

As a beneficiary, you have rights to information about the estate and the legal right to scrutinise the accounts before you accept distribution: (1) Your right to accounts: under Administration of Estates Act 1925 s.25, you can demand estate accounts from the executor. The executor must provide a statement of assets and liabilities at the date of death, all income received by the estate, all expenses and debts paid, and a calculation of your share; (2) What to check: (a) Executors' remuneration: executors are not entitled to remuneration unless the will expressly permits it or all beneficiaries agree — be alert to large professional executor fees on a straightforward estate; (b) Valuation of assets: if you believe specific items (property, shares, jewellery) were undervalued, obtain your own RICS valuation. Undervaluation reduces your share; (c) Debts paid in wrong priority order: funeral expenses → secured debts (mortgage) → unsecured debts (credit cards) → beneficiaries. If debts were paid in the wrong order or paid unnecessarily, the executor may be personally liable; (d) Payment to wrong beneficiaries: check that distributions match the terms of the will or intestacy rules; (e) Tax reclaims: has the executor reclaimed all available IHT reliefs and CGT allowances? A significant overpayment of IHT or a missed relief is an estate loss that affects your share; (3) Disputes on accounts: if you cannot agree with the executor on the accounts, you can apply to court under CPR Part 64 for the court to approve the accounts and determine the amount due. This is expensive and should be a last resort; (4) Receipts: when you accept your distribution, you will usually be asked to sign a receipt. Do not sign until you are satisfied with the accounts — signing a receipt is effectively settling the claim against the estate; (5) Time limitation: your right to bring a claim for an executor's breach of trust is 6 years from the breach (Limitation Act 1980 s.21 — or 12 years for fraudulent breach).