Do You Pay Tax on Inherited Money? What Beneficiaries Need to Know

Receiving an inheritance can prompt real anxiety about tax — stories of unexpected bills put many beneficiaries on edge. In reality, the UK tax rules for beneficiaries are generally straightforward and benign, but there are specific situations where tax does arise. This guide covers each of those scenarios clearly, so you can understand your position and plan accordingly.

The Capital You Receive Is Not Taxable Income

When you receive a cash legacy of, say, £50,000 or a residuary share of an estate, that amount is not treated as income for income tax purposes. You do not report it on your self-assessment tax return, you do not pay income tax on it, and it does not affect your tax band or personal allowance.

This is because inheritance tax (IHT) is charged at the estate level — on the estate before distribution — rather than at the beneficiary level. If the estate was liable for IHT, the executor pays that tax from estate funds before passing anything to you. You receive the net amount after IHT has been settled.

If the estate was below the IHT threshold (which most UK estates are — fewer than 5% of estates pay IHT), no IHT is due at all, and you receive the full amount the deceased wished you to have.

The same principle applies whether you receive cash, personal belongings, jewellery, or a specific asset like a car. The act of inheriting is not a taxable event for the beneficiary.

Estate Income: When Tax Can Apply to Beneficiaries

The situation is different when you receive a share of income that the estate earned during the administration period, rather than just capital. If the estate included, for example, a rental property or a portfolio of dividend-paying shares, the estate will have received income between the date of death and distribution to you.

As a residuary beneficiary (someone who receives whatever is left after specific legacies and costs have been met), you are entitled to a proportionate share of that estate income. When you receive it, the executor must provide you with an R185 Estate Income certificate showing:

• The gross amount of your share of estate income by category (interest, dividends, rental)
• The income tax already deducted at source or paid by the estate
• The net amount you received

You must then include this on your own self-assessment tax return if you are required to file one. The tax treatment depends on your own tax position: if you are a non-taxpayer, you may be able to reclaim the tax the estate paid on your behalf. If you are a higher or additional rate taxpayer, you may owe additional tax.

It is worth noting that beneficiaries receiving specific legacies (fixed amounts, rather than residuary shares) do not share in estate income in this way. Income tax on estate income only affects residuary beneficiaries.

Capital Gains Tax on Inherited Assets You Later Sell

If you inherit an asset — such as a house, a portfolio of shares, or a valuable item — rather than cash, there is no tax when you inherit it. However, if you later sell that asset at a profit, capital gains tax (CGT) may apply to the gain you have made since you inherited it.

The key principle is that you inherit assets at their probate value — the value recorded for inheritance tax purposes at the date of death. This becomes your CGT base cost. You only pay CGT on growth above that figure, not on any growth that occurred during the deceased’s lifetime.

For example: If you inherit a property valued at £300,000 for probate purposes and sell it three years later for £340,000, your gain is £40,000 (less any allowable selling costs). You would then apply the CGT annual exemption (£3,000 for 2025/26) and pay CGT on the remaining gain at the applicable rate — 18% or 24% on residential property depending on your income.

CGT on residential property must be reported and paid within 60 days of completion. CGT on other assets (shares, for example) is reported via self-assessment and paid by 31 January following the tax year.

Gifting Inherited Money: The 7-Year Rule

A common question is whether the 7-year gifting rule applies if you pass on money you have inherited. The answer is yes — from the date you give the gift, not from when you inherited the money.

If you inherit £100,000 in 2025 and give £30,000 to your adult child in 2026, the 7-year clock starts from the date of your gift in 2026. If you were to die within 7 years of that gift, the £30,000 could be pulled back into your estate for IHT purposes (subject to taper relief if you survive more than 3 years).

This is the same rule that applies to any other gift — it does not matter that the money originally came from an inheritance. This is an important consideration for anyone thinking about passing on inherited wealth to the next generation.

The annual gifting exemption of £3,000 per tax year, and the small gifts exemption of £250 per recipient, can help reduce the amount of gifted money that falls within the 7-year rule.

Pension Death Benefits: The Major Change Coming in 2027

Until April 2027, pension pots (defined contribution pensions that have not been fully drawn down) typically pass outside of the deceased’s estate for inheritance tax purposes, making them a highly tax-efficient vehicle for passing on wealth. Under current rules, a pension pot can often be passed to a nominated beneficiary free of IHT, and in some cases free of income tax too.

However, the government announced in October 2024 that this will change significantly from April 2027. From that date, unused pension funds will be brought within the inheritance tax estate and taxed accordingly. The precise mechanics are still being consulted on, but the direction of travel is clear: pension pots will no longer be a simple IHT-free route for passing on wealth.

If you are a potential beneficiary expecting to inherit a pension, or if you are a pension holder thinking about estate planning, it is advisable to take financial advice before April 2027. The changes may affect decisions about drawdown timing, nomination, and how other assets are structured.