Inheriting money can be life changing. Whether it comes in the form of cash, investments, property or pension assets, an inheritance often arrives during an emotionally difficult period and can bring a range of financial decisions.
While there may be pressure to act quickly, taking the time to understand what you have inherited and how it fits into your wider financial circumstances can help you avoid costly mistakes.
This article outlines the key considerations when inheriting money, from tax and pensions to property, investing and longer-term financial planning.
A financial Adviser can help you assess your options and make the most of your inheritance while avoiding costly mistakes.
Guidance
Guidance
All information here is general guidance, rather than personal advice and offers a light touch overview, rather than an exhaustive guide for decision making.
How should you hold cash safely while you decide?
You may find yourself holding a substantial sum for several months while considering your longer-term plans. Deciding how to hold those funds safely and efficiently during this period is a decision in itself.
The Financial Services Compensation Scheme limit is £120,000 per person, per UK banking institution (be aware that this is specifically per institution, not per account). There is increased protection for holding a temporary high balance due to inheritance, but this is for up to 6 months, so should not be relied upon.
What are the tax implications of inheriting money?
Inheritance Tax: paid by the estate, not the beneficiary
In the UK, Inheritance Tax (IHT) is a tax on the estate of the person who has died, not on the beneficiary receiving the assets, so by the time you receive the assets, the IHT should have been settled.
The Nil Rate Band allows the deceased to pass on £325,000 free of IHT, though lifetime gifts prior to death may reduce the available band. The Residence Nil Rate Band is an additional £175,000 potentially available where a main residence is passed to a direct descendant, though it tapers away for estates over £2million. Unused nil rate bands can be inherited by a spouse or civil partner.
Capital Gains Tax on inherited assets
There is a capital gains tax (CGT) uplift on death, meaning inherited assets are revalued to their market value at the date of death. If you later sell CGT-liable assets, tax will be due on any gain between this uplifted value and the eventual sale price, less any allowable costs.
Income Tax on inherited assets
Once assets have been transferred to you, any income they generate will be taxable at your marginal rate. Income arising within the estate during the administration period (between death and final distribution) may be taxed within the estate before being passed to you. You may be able to reclaim tax paid at higher rates or may have additional tax liabilities to settle.
Inheriting a pension: the rules are changing
Pensions have historically been a popular vehicle for passing on wealth; however, from April 2027, pension death benefits will be included within the deceased’s estate for inheritance tax purposes.
Pension death benefits can also be subject to income tax. The rules differ depending on whether the deceased was under or over 75, and whether they were in a defined contribution or defined benefit scheme. Decisions around how and when to access an inherited pension can have significant tax implications, and there are also deadlines for some options, therefore specialist advice is recommended.
Tax rules apply
Tax rules apply
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
What is a deed of variation and when might it be used?
You may already be in a strong financial position when you receive an inheritance. If you conclude that you don’t require the funds for your own needs, you may wish to pass some or all of the inheritance to other beneficiaries, either through outright gifts or by varying the distribution of the estate. Executing a deed of variation (typically with the help of a solicitor) will remove the value of the inheritance from your own estate and avoid it being taxed again on your own death.
A deed of variation can be used to redirect assets under a will or the intestacy rules, but it must be agreed by all affected beneficiaries and completed within two years of the date of death. Given this time limit, it is worth considering the option as early as possible.
Inheriting property: what are your options
Property is often the most emotionally and financially complex element of an inheritance. It cannot be divided easily, it generates costs from day one, and decisions may carry family weight.
Sell: Selling is often the cleanest option, particularly where there are multiple beneficiaries. Keep in mind that there may be a time delay and capital gains tax (CGT) applies on any gain between the date of death valuation and the sale price, though selling costs can be deducted. Where there are multiple owners, all must agree to sell.
Move in: If you choose to move in, the property will become your main home for Principal Private Residence (PPR) relief, which will eliminate CGT on any future sale. Retaining multiple properties will impact the rate of stamp duty land tax payable on future property purchases.
Let out: Letting will generate an income, but it also brings ongoing responsibilities, including maintenance, landlord compliance, and tax reporting. After costs, the net yield may be lower than alternative investment options.
Gift: If you gift the property to another family member, this is a disposal for CGT purposes, even if no money changes hands. There may be IHT consequences if you do not survive 7 years following the gift.
How should you invest an inheritance?
First consider what the money is intended to be used for, as this will help determine an appropriate investment strategy. For goals with a time horizon of less than five years, equity investments may not be suitable due to their volatility.
Portfolios should be diverse across stocks, sectors and industries. A balanced approach combines higher growth, higher volatility investments (such as equities) with lower risk, lower volatility investments (such as fixed income bonds).
You should consider the impact of tax on investment returns and make use of tax-efficient wrappers, such as ISAs and pensions, where appropriate.
Capital at Risk
Capital at Risk
Please do remember that as with all investments, your capital is at risk. Tax treatment depends on individual circumstances and may be subject to change.
Common mistakes to avoid with a sudden inheritance
Acting too quickly: Hasty decisions may be driven by guilt, excitement or desire to simplify matters, but are often a major source of regret for beneficiaries. There may also be pressure to share the proceeds, but impulsive gifts made before your own financial position is secure can be difficult to reverse.
Overlooking the tax consequences: Selling assets, making gifts, drawing income, or reinvesting in certain structures all carry tax consequences that vary considerably depending on timing and approach. While tax should not be the sole driver of decisions, it is important to understand the potential impact before taking action.
Confusing an inheritance with an income: A lump sum feels like wealth, but it is not an income stream, unless invested thoughtfully. Treating it as such leads people to increase their spending before the money has been put to work, often leaving them financially worse off within a few years. Understanding the difference between capital and sustainable income is fundamental.
Failing to review your own arrangements: Financial protection (life cover and other insurances) should be reviewed in light of your new circumstances. You may also wish to update your will or commence lifetime estate planning.
How financial advice can help when dealing with a sudden inheritance
Most people approach an inheritance thinking about the money in isolation. A financial adviser will help put this windfall into the context of your financial circumstances and the goals you wish to achieve. They can help you decide the priorities for different actions and decisions, as well as avoiding costly or permanent mistakes.
Financial advisers can also act as a coordinating professional and identify when you need help from other specialists, such as solicitors and accountants.
FAQs
How much can I inherit before paying tax in the UK?
Inheritance Tax is usually paid by the estate of the person who has died before assets are passed on. The standard nil-rate band is currently £325,000, although additional allowances and exemptions may apply depending on the estate and who inherits.
Is it better to receive an inheritance or a gift during someone’s lifetime?
This depends on your personal circumstances, as both inheritance and lifetime gifting can have tax and financial planning implications. Working with an Adviser can help you understand your options and build a plan that is right for you and your family.
What happens to an inherited pension from April 2027?
From 6th April 2027, most unused pension funds and death benefits will be included within an individual’s estate for Inheritance Tax purposes. Pension death benefits may also be subject to Income Tax, depending on the circumstances.
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