For a UK inheritance recipient in 2026/27: IHT is paid by the estate, not the recipient — you receive the post-IHT amount. £325,000 nil-rate band plus £175,000 residence nil-rate band (when main home passes to direct descendants) means estates up to £500,000 (or £1m for married couples) escape IHT. Inherited assets get a "step-up" in CGT base cost to the date-of-death value — so selling immediately usually generates little or no CGT. Pension inheritance is income-tax-free if death was before age 75, taxable to beneficiary if after.
Who pays inheritance tax
IHT is a tax on the deceased's estate, not on you as the recipient. The executor settles IHT with HMRC before distributing the estate. By the time you receive your inheritance, IHT has already been paid (or shown not to be due). Your inheritance is the post-IHT amount.
| 2026/27 IHT framework | Amount |
|---|---|
| Nil-rate band (everyone) | £325,000 |
| Residence nil-rate band (main home to direct descendants) | £175,000 |
| Combined single person allowance | £500,000 |
| Combined married couple allowance (transferable) | £1,000,000 |
| IHT rate above allowances | 40% |
| Reduced IHT rate (10% to charity) | 36% |
| Spouse / civil partner inheritance | 0% (unlimited) |
Inheritances above the threshold trigger IHT at 40% on the excess. A £700,000 estate with a £500k allowance pays 40% × £200,000 = £80,000 IHT — recipients receive £620,000 distributed per the will.
CGT base-cost step-up on inherited assets
When you inherit an asset (shares, property, art, anything subject to CGT), your "base cost" for future CGT becomes the date-of-death market value, not what the deceased originally paid. This is one of the most valuable features of UK inheritance — accumulated CGT liability is effectively wiped clean.
Parent bought BP shares for £10,000 in 1990. Worth £75,000 at parent's death in 2025.
You inherit at base cost £75,000.
You sell in 2026 for £78,000.
Gain: £3,000 (covered by AEA).
If you'd been gifted in life: gain would be £65,000 — £15,600 tax at 24%.
This means selling inherited assets soon after inheritance is usually CGT-efficient. The decision shifts from "tax" to "investment strategy" — should the inherited holdings stay in their original form or move into your own preferred portfolio?
Pension inheritance — the age 75 cliff
UK pensions are structurally outside the estate for IHT (with some exceptions for very wealthy estates from April 2027 onwards). Pension benefits passed to nominated beneficiaries are not part of the IHT calculation.
BUT — income tax on pension benefits the beneficiary draws depends on when the pension holder died:
| Pension holder died | Beneficiary tax on drawdown income |
|---|---|
| Before age 75 | 0% — fully tax-free |
| On or after age 75 | Income tax at beneficiary's marginal rate |
For pensions inherited from someone under 75, the strategy is often to keep them in beneficiary drawdown (tax-free) rather than crystallise. For pensions from someone over 75, beneficiaries should plan withdrawal years to spread the tax band.
The four decisions worth making with an inheritance
- Pay off high-interest debt first. Credit cards at 25%+, personal loans at 8-15%, store cards: paying these off is a guaranteed return matching the interest rate. Always beats investing the same money. Mortgage at 5-7% is more debatable.
- Max ISA and pension contributions for the year. £20,000 ISA + £60,000 pension = £80,000 tax-shelter every year. Across two spouses that's £160,000/year. A £200k inheritance can be moved into tax-shelters across 2-3 years.
- Don't rush. Park in best-buy savings. Cash a sudden windfall for 6-12 months in a top easy-access account (4.5-5%) while you think. Many windfall recipients make poor investment decisions in the first month — buying property, leveraged investments, or hot stocks. Patience is the highest-return decision.
- Plan for the recipient's spouse / children. Use the additional capital to make pension and ISA contributions for spouse and adult children too, where appropriate. Use the £3,000/year annual gifting allowance (PETs) for IHT planning. A £200k inheritance can become a multi-generation wealth transfer with planning.
Special situations
Inheriting a property
If the inherited property becomes your main home, no CGT on its later sale (PPR relief). If you let it out or keep it as a second home, full CGT applies on any growth from date of inheritance. Council tax may have a second-home premium (see second-home buyer guide).
Inheriting via a Deed of Variation
A Deed of Variation lets beneficiaries redirect their inheritance to someone else (e.g. skip a generation) within 2 years of death, with no IHT consequences. Useful when a child wants to pass inheritance to grandchildren who would benefit more.
Inheriting from outside the UK
UK residents are usually taxed on worldwide inheritance from a UK tax perspective. The estate may have paid foreign equivalent tax — double-taxation treaties usually relieve this. Get specialist advice for any non-UK estate.
Common windfall recipient mistakes
- Buying a property "because of the inheritance." Property is illiquid, generates ongoing costs, and concentrates wealth. Unless there's a clear use case (own residence, BTL with genuine yield), keeping the cash in liquid investments is usually better.
- Telling everyone. Windfalls attract requests from family, friends, and unsolicited financial advisers. Privacy is your friend.
- Spending more than you planned because the windfall "feels like extra." Behavioural research shows windfall money is often spent faster than earned money. Treat it as your money — same rules apply.
- Buying complex financial products with high commissions. "Adviser introduced" complex products (offshore bonds, structured products, EIS for non-suitable investors) often have hidden fees. Stick to simple ISAs, pensions, and global trackers.
- Not updating your will. A large inheritance changes your own estate planning. Update your will and consider pension nominations.
Sources and methodology
IHT framework from gov.uk Inheritance Tax. Residence nil-rate band from gov.uk RNRB guidance. CGT step-up from gov.uk CGT on inherited assets. Pension inheritance from gov.uk pension death benefits. Upcoming April 2027 pension/IHT change from Autumn Budget 2024.
UK Tax Drag is educational and not regulated financial advice — see the disclaimer for the full position.
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