Life Event · Inheritance
Inheriting Money in the UK
UK inheritance is generally tax-free for the beneficiary — IHT (if any) is paid by the estate before you receive your share. This guide covers what to expect, how to handle a lump sum, and key tax considerations including the ISA APS and pension inheritance.
Do I Pay Tax on Inheritance?
Generally no — beneficiaries do NOT pay income tax on inherited money or assets. The estate pays Inheritance Tax (if any) before distribution. You only pay tax going forward on any INCOME generated by the inheritance (interest, dividends, rent, capital gains on sale).
UK Inheritance Tax Recap (2025/26)
- NRB: £325,000 per person (frozen to April 2030)
- RNRB: extra £175,000 if main residence to direct descendants
- Spouse transfers: unlimited tax-free + unused NRB/RNRB passes
- Combined for couple: up to £1m IHT-free
- Rate above thresholds: 40% (or 36% if 10%+ to charity)
- RNRB tapers above £2m net estate (£1 lost per £2 over)
Full guide: Inheritance Tax UK.
The 7-Year Rule and Taper Relief on PETs
Lifetime gifts to individuals are Potentially Exempt Transfers (PETs). If the donor survives a full seven years from the date of the gift, the gift falls outside the estate entirely. If the donor dies within seven years, the gift is brought back into the IHT calculation.
Taper relief reduces the tax payable (not the value of the gift) on a sliding scale: 0-3 years 100% of full rate (40% IHT); 3-4 years 80% (32%); 4-5 years 60% (24%); 5-6 years 40% (16%); 6-7 years 20% (8%); 7+ years exempt. Critically, taper relief only helps if cumulative PETs exceed the donor's available NRB — for small gifts entirely within the NRB, taper relief has no benefit because there is no IHT to taper.
For beneficiaries: if you received a PET and the donor dies within seven years, you may be liable for the IHT on that gift (unless the will directs otherwise). Keep records of any large gifts received with dates — executors will need them.
Inheriting Property: CGT Base Cost Reset to Probate Value
When you inherit property, the Capital Gains Tax cost basis is reset to the open-market value at the date of death — the probate value. Any capital gain that accrued during the deceased's lifetime escapes CGT entirely (it may have featured in IHT). If you later sell, your gain is calculated as sale price minus probate value, not minus the original purchase price.
Practical consequences: get a formal RICS Red Book probate valuation rather than a quick Zoopla estimate — that figure becomes your CGT base cost forever. If you intend to keep the property as a buy-to-let, the reset reduces future CGT meaningfully. If you intend to sell within the executor's administration period, the executor may sell free of CGT using the estate's annual exempt amount (£3,000 in 2025/26 for executors in the year of death and two following years).
If you sell within 9 months at materially below probate value, you can claim a loss against the estate's IHT under s.191 IHTA — useful in falling markets but a one-shot relief.
ISA Additional Permitted Subscription (APS)
If your spouse or civil partner died and held ISAs, you inherit an Additional Permitted Subscription equal to their ISA balance — on top of your £20,000 annual limit. This APS preserves the tax-free ISA wrapper for the inherited money. Available for three years from death or 180 days after probate (whichever is later).
The APS is one of the most overlooked elements of inheritance in the UK — providers do not advertise it, and the surviving spouse often does not learn of it until reading a guide like this. Both ISA managers (the deceased's and the survivor's) operate the APS process via form HMRC ISA APS — ask both providers in writing. APS is per spouse only; children and siblings do not receive it.
Inheriting Pension Pots: April 2027 Sea Change
- Currently (until 5 April 2027): pension death benefits sit OUTSIDE the estate for IHT — major shelter for wealthier estates.
- Died before 75: beneficiary receives the pension tax-free on withdrawal (no income tax).
- Died after 75: beneficiary pays income tax at their marginal rate on withdrawals (drawdown, lump sum or annuity income).
- Spouse: can usually take over the pension drawdown or inherit lump sum, with the above tax treatment.
- From 6 April 2027: the Government plans to bring unused pensions WITHIN the estate for IHT (announced in 2024 Budget). The income tax position on withdrawals is unchanged, but the estate may pay up to 40% IHT first — meaning effective combined tax above 60% for higher-rate beneficiaries inheriting from post-75 deaths.
Pre-2027 deaths receive the old treatment regardless of when the beneficiary draws the money. Post-2027 deaths face the new rules. This is one of the largest IHT reforms in two decades and may trigger many wealthier individuals to draw down pensions earlier and gift surplus capital using PETs.
Probate Timeline: What to Expect
Typical UK probate runs six to twelve months from death to distribution, longer for complex estates. The path:
- Register the death within five days, obtain certified death certificates (~£11 each).
- Locate the will and identify executors; if no will, statutory intestacy rules determine administrators.
- Value the estate — banks, investments, pensions, property, possessions, debts. 1-2 months typical.
- File IHT400 (or IHT205 for excepted estates) where required, and pay any IHT due within 6 months of death (interest accrues thereafter at 7.75% in 2025).
- Apply for a Grant of Probate online or by post. HMCTS turnaround in 2025 is 8-16 weeks on average for straightforward applications.
- Executor collects assets, pays creditors, files final tax returns and distributes residue to beneficiaries.
Beneficiaries rarely receive funds before the Grant of Probate is issued. Some estates issue partial interim distributions for liquid assets after debts are clearly covered.
What to Do with a Lump Sum
- Park it safely first — savings account or Premium Bonds for 3-12 months. No rushed decisions. Grief affects judgment.
- Maximise FSCS protection — £85k per bank, £1m for temporary high balance (from inheritance) for 6 months.
- Clear high-interest debt — credit cards, personal loans, overdrafts.
- Use your ISA allowance — £20,000 this year, plus APS if from spouse.
- Top up pension — up to £60,000 annual allowance + carry forward 3 years (potential £200,000+ single contribution).
- Consider mortgage overpayment — risk-free return equal to your mortgage rate, attractive at 5-6%.
- Do not be talked into complex investments by financial advisers calling unsolicited or pressuring quick decisions.
- Update your own will — your circumstances and the share of estate to your own beneficiaries have just changed.
Scam Warning: Estate-Related Fraud
Estate-related scams spike around death because probate records are publicly searchable and bereavement reduces normal scepticism. Be wary of: cold-calling financial advisers; inheritance unlocking schemes; fraudulent calls or emails about estate fees; fake solicitor emails changing payment details at the last moment (a £30,000+ fraud target in 2024); pressure to invest in storage pods, overseas property, crypto or other unregulated products. Always verify caller identity via independent phone numbers. The Solicitors Regulation Authority (sra.org.uk) and FCA Register (fca.org.uk) confirm whether a firm is regulated.
Common Mistakes to Avoid
- Investing the lump sum in a panic. Cash ISA at 4-5% for six months while you take advice costs nothing and saves disasters.
- Skipping the ISA APS. A spouse inheriting £100k+ of ISAs without APS loses tax-free wrapper status forever. Providers do not promote it — you must ask.
- Using a Zoopla estimate as probate value. Get a formal RICS valuation — it becomes your CGT base cost for any future sale.
- Falling for changed-bank-account scams. Always phone the solicitor on a number you obtained independently (gov.uk solicitor finder) before transferring funds.
- Ignoring the April 2027 pension change. If you expect to inherit a sizeable pension from a parent likely to die soon, post-2027 IHT exposure changes the planning equation materially.