Do You Have to Pay Tax on Money You Inherit?
Receiving an inheritance can create a lot of financial questions.
You may inherit:
- Cash
- Property
- Investments
- Shares
- Savings
- Personal possessions
And one of the first questions is often:
“Do I need to pay tax on it?”
In many cases, you do not pay Income Tax simply because you receive an inheritance.
However, that does not mean inheritance is completely outside the tax system.
Inheritance Tax may have been payable by the estate before assets are distributed, while future income or gains generated by inherited assets can create separate tax liabilities.
Understanding the distinction can help you avoid unexpected tax issues later.
Do you pay Income Tax when you inherit money?
Generally, simply receiving inherited cash does not create an Income Tax bill for the beneficiary.
For example, if you inherit £30,000 from a relative’s estate, that £30,000 is not normally treated in the same way as:
- Salary
- Self-employed income
- Rental income
- Bank interest
- Dividends
The important distinction is between receiving the inheritance itself and what happens to that money afterwards.
Who pays Inheritance Tax?
Inheritance Tax is generally dealt with as part of administering the deceased person’s estate.
This means the estate may need to calculate and pay any Inheritance Tax due before the remaining assets are distributed to beneficiaries.
As a beneficiary, you would not normally receive an inheritance and then separately pay Income Tax simply because you inherited it.
However, more complicated estates can involve different rules, trusts or particular types of assets, so individual circumstances matter.
What happens if you inherit cash?
Cash is usually the simplest type of inheritance.
Suppose you inherit £50,000.
Receiving the £50,000 itself would not normally create an Income Tax charge.
But if you then put the money into a savings account and it generates interest, that interest may be taxable depending on your allowances and wider income.
For example:
- Inherited cash: £50,000
- Interest earned later: £2,000
The inheritance and the interest are treated differently.
The £50,000 is inherited capital.
The £2,000 is savings income.
You can read Merranti’s guide to tax on savings interest for more information about how savings income is treated.
What if you inherit a property?
Property can create more complicated tax consequences.
Receiving the property itself does not necessarily mean you immediately have tax to pay personally.
However, what you do with it afterwards matters.
You might:
- Live in it
- Sell it
- Rent it out
- Keep it as a second property
- Transfer it later
Each can produce a different tax position.
What if you rent out an inherited property?
If you inherit a property and begin renting it out, the rental income may be taxable.
You will generally need to consider:
- Rental income received
- Allowable expenses
- Finance costs where relevant
- Your other taxable income
- Whether a tax return is required
The fact that the property was inherited does not make future rental income tax-free.
The inheritance and the income generated afterwards are separate events.
What happens if you sell an inherited property?
Selling an inherited property can potentially create a Capital Gains Tax calculation.
A key point is that the relevant starting value is generally connected to the property’s value when it was inherited rather than simply what the deceased originally paid for it.
For example:
- Property value when inherited: £300,000
- Later sale price: £350,000
The potential gain may broadly relate to the increase after inheritance, subject to allowable costs, reliefs and the wider Capital Gains Tax rules.
This is why probate valuations and property documentation should be retained.
What if you inherit shares?
Shares work in a similar way.
Receiving shares does not normally mean the full value becomes taxable income.
But if you later sell them for more than the relevant inherited value, a Capital Gains Tax calculation may arise.
For example:
- Shares inherited at value: £20,000
- Later sold for: £28,000
There may potentially be an £8,000 gain before considering costs, losses and available exemptions.
Merranti’s guide to tax when selling shares can help explain how share disposals and Capital Gains Tax interact.
What happens to dividends from inherited shares?
If the inherited investments continue paying dividends, those dividends can become part of your taxable income.
Again, the inheritance itself and the income it generates afterwards need to be separated.
You could therefore inherit a portfolio without paying Income Tax on its value but later have tax considerations involving:
- Dividends
- Interest
- Capital gains
What if the estate earns income before you receive the inheritance?
Estates can continue receiving income while they are being administered.
For example, an estate may receive:
- Bank interest
- Rental income
- Dividends
The tax treatment during the administration period can differ from the tax treatment after assets have been distributed.
Beneficiaries receiving estate income may therefore need appropriate documentation from the executors.
Larger or more complicated estates can benefit from professional advice because several types of tax can interact.
What if you inherit money from overseas?
Foreign inheritances can be more complicated.
You may need to consider:
- Where the deceased lived
- Where the assets were located
- Your UK residence status
- Whether foreign tax was paid
- Whether overseas income continues after inheritance
- Currency conversion
- Reporting requirements
Different countries have different inheritance and estate tax systems.
If substantial overseas assets are involved, obtain advice before assuming the UK treatment is the only tax issue.
What if someone gives you money before they die?
A lifetime gift is different from receiving money under an estate.
Large gifts made before death can remain relevant for Inheritance Tax, particularly where the donor dies within a certain period after making the gift.
There are also various exemptions for certain gifts.
These may include:
- Annual exemptions
- Small gifts
- Certain wedding gifts
- Regular gifts from surplus income
The rules around lifetime gifts can become important where families begin transferring significant amounts before death.
Do you pay tax on inherited jewellery or possessions?
Items such as:
- Jewellery
- Watches
- Artwork
- Antiques
- Vehicles
- Collectables
can also be inherited.
Receiving them does not normally create an Income Tax charge.
However, if you later sell a valuable inherited asset, Capital Gains Tax may potentially need to be considered depending on the type and value of the asset.
Keep any estate valuation provided.
It may become important years later.
Should you keep inheritance paperwork?
Yes.
Do not dispose of the paperwork as soon as the estate has been settled.
Useful documents can include:
- Probate valuations
- Estate accounts
- Letters from executors
- Property valuations
- Share valuations
- Investment statements
- Tax certificates
- Evidence of inherited cash
- Details of assets transferred
These documents can become particularly important if inherited assets are sold several years later.
Do you need to tell HMRC about an inheritance?
Receiving an ordinary inheritance does not automatically mean you need to report the inherited capital as taxable income.
However, you may need to report subsequent taxable income or gains.
Examples include:
- Rental income from inherited property
- Interest from inherited savings
- Dividends from inherited investments
- Capital gains when inherited assets are sold
Your reporting obligations therefore depend on what happens after the inheritance.
What if you inherit a business?
An inherited business or company shareholding can be significantly more complicated.
The estate may need to consider:
- Business valuation
- Company shares
- Inheritance Tax reliefs
- Ownership changes
- Future dividends
- Capital Gains Tax
- Succession planning
For family businesses, tax planning should often begin well before succession occurs.
The commercial implications can be just as important as the tax consequences.
Do debts come with an inheritance?
People sometimes worry that inheriting from someone means they personally inherit all of the deceased’s debts.
Generally, debts are dealt with through the estate before beneficiaries receive the remaining assets.
However, there may be complications involving:
- Joint debts
- Secured borrowing
- Jointly owned property
- Guarantees
The executors should establish the estate’s liabilities before making distributions.
Be careful before spending a large inheritance
Receiving a significant amount of money can change your financial position quickly.
Before making major decisions, consider:
- Clearing expensive debt
- Building an emergency reserve
- Pension planning
- Mortgage repayment
- Savings
- Investments
- Property
- Tax-efficient accounts
- Long-term financial goals
There is rarely a need to make every decision immediately.
Keeping the money somewhere secure while you understand your options can prevent rushed decisions.
Frequently Asked Questions
Do I pay Income Tax when I inherit money?
Normally, simply receiving an inheritance is not treated as taxable income.
Does the beneficiary pay Inheritance Tax?
Inheritance Tax is usually dealt with by the estate before assets are distributed, although individual circumstances can vary.
Do I pay tax if I put inherited money into savings?
The inherited capital itself is generally not Income Taxable, but interest earned afterwards may be taxable.
What happens if I sell an inherited house?
A later sale can potentially create Capital Gains Tax if the property has increased in value since inheritance.
Is rental income from an inherited property taxable?
Potentially, yes. Rental income is considered separately from the inheritance itself.
Should I keep probate valuations?
Yes. They may be required later when calculating gains on property, shares or other inherited assets.
Final thoughts
Receiving an inheritance does not usually mean you immediately receive a personal Income Tax bill.
But that is only the beginning of the tax picture.
After inheriting assets, you may need to consider:
- Savings interest
- Dividends
- Rental income
- Capital Gains Tax
- Property
- Investments
- Overseas assets
Keeping accurate records from the estate can make these calculations significantly easier later.
At Merranti Accounting, we help individuals understand personal taxation, Capital Gains Tax, investment income and the tax consequences of significant financial events.
Contact Merranti Accounting if you need help understanding the tax position following an inheritance.
Written by Jenny Seaford ACPA
Senior Accountant, Merranti Accounting
Jenny is a Senior Accountant at Merranti Accounting, supporting individuals and businesses with accounts, taxation and financial reporting. She works with clients to help them understand their financial position and ensure their records support accurate tax reporting.
Author image: Use Jenny’s existing Merranti headshot.
