What to Do With Inherited Money: First Steps

Inheriting money almost always comes with the loss of someone who mattered. The practical questions, what to do with the money, whether it’s safe, whether you’ll owe tax, how to invest it- are important, but they don’t need answering immediately. If you are wondering what to do with inherited money right now, the honest answer is: it is normal, and genuinely advisable, to pause before making any significant financial decisions.

The first thing to do: give yourself time

Financial advisers almost universally recommend a pause period before making major decisions with inherited money, typically three to six months. Decisions made under the acute stress of bereavement are rarely the best ones, and choices like selling a property, investing a lump sum, or giving money away are better made with a clear head.

This does not mean doing nothing. There are sensible, lower-stakes steps you can take during this period that protect the money without locking it into anything permanent, covered below.

One thing worth knowing about immediately, if relevant, is a Deed of Variation: a legal mechanism allowing a beneficiary to redirect some or all of an inheritance to another person or charity within two years of death, treated as if the deceased had made that arrangement themselves. This can be useful for inheritance tax planning, requires a solicitor to draft properly, and has a firm time limit, so it is worth knowing it exists early on even if you don’t use it straight away.

Is your inherited money safe? The FSCS question

The Financial Services Compensation Scheme protects deposits up to £120,000 per person, per financial institution, under normal circumstances. That being said, following certain life events, which vitally includes receiving an inheritance, the FSCS provides temporary high balance protection of up to £1.4 million for six months, giving meaningful protection while you decide what to do next.

It’s key to remember that this protection applies per institution. Therefore, if the inheritance is large, it may be worthwhile spreading it across more than one bank. Some accounts may have an upper limit too, though NS&I, (National Savings and Investments), accounts are backed by the UK government with no upper limit, making them a useful holding option for very large sums during the decision period.

One detail worth flagging: the six-month temporary high balance window runs from the date the funds are actually received into your account, not from the date of death or probate.

Understand what you’ve actually inherited

Cash or savings are the simplest form, immediately accessible once probate is complete.

Inherited property raises the question of whether to sell, let, or live in it. Capital gains tax applies only if you sell above the probate value, since the base cost is stepped up to market value at the date of death, so there is no gain simply on receiving it, only on subsequent growth. Stamp duty may apply if you already own property. Where a property is inherited jointly by multiple beneficiaries, everyone needs to agree on next steps before anything can happen.

Inherited investments, such as shares or funds, are inherited at their market value on the date of death. As a result, no capital gains tax (CGT) is owed on receipt, only on any growth above that value if you later sell shares or funds you inherited. Don’t forget one detail that’s so often missed… shares held in an ISA lose their ISA wrapper on death and transfer to you as ordinary, taxable investments.

Inherited pensions are their own area. From April 2027, most unused pension pots and death benefits may become subject to inheritance tax. The rules around how an inherited pension must be accessed also depend on whether the deceased had reached age 75 and what type of pension it was, so it is worth taking specialist advice before making any decisions here rather than assuming the rules work like an ordinary savings account.

The practical first steps

Here are some steps you may want to consider when you inherit money or other assets. This is not a one-size fits all process, so seeking expert advice can be helpful to determine the best steps for your specific situation.

1. Protect the money while you decide. Place cash in FSCS-protected accounts or NS&I while the pause period runs, and avoid making permanent investment decisions under pressure.
2. Clear high-interest debt first. If you have credit card balances, personal loans or other high-interest debt, paying these off is almost always the right first use of inherited cash, since no investment reliably outperforms the interest cost of consumer debt.
3. Build or top up an emergency fund. A liquid reserve of three to six months’ essential expenditure in an accessible account is the foundation of any financial plan. If the inheritance takes you above this level, the rest can be considered for longer-term purposes.
4. Consider your pension. For those below the pension access age, contributing surplus cash to a pension is typically the most tax-efficient option available. Contributions attract income tax relief at your marginal rate so a higher-rate taxpayer making a £10,000 contribution effectively pays £6,000 of their own money. The annual allowance is £60,000 for 2026/27, subject to a cap of 100% of UK earnings.

For higher earners, the standard annual allowance can be reduced under the tapered annual allowance rules. This applies once both threshold income (broadly your taxable income after certain deductions, including personal pension contributions) exceeds £200,000, and adjusted income (your taxable income plus all pension contributions, including your employer’s) exceeds £260,000. Where both apply, the allowance drops by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000 once adjusted income reaches £360,000 or more.

Again, it’s worth noting: the pension IHT change from April 2027 means pensions will no longer sit outside the estate for IHT, which changes the relative appeal of pension top-ups for estate planning specifically.

1. Use your ISA allowance. ISAs shelter investment growth and income from tax permanently and allow flexible access, up to £20,000 per person for 2026/27. Unlike pensions, there is no earnings requirement, and you can hold cash, stocks and shares, or a mix of both. Inherited ISAs do not affect the personal annual allowance however, from 2027 those over 65 will only be able to invest £12,000 in cash ISAs out of the £20,000 allowance.
2. Invest the remainder in line with your goals. General investment accounts (GIAs) can hold anything above the ISA allowance. For many, this can often mean structuring investments as a diversified, low-cost portfolio crucially matched to a specific goal and time horizon. This step is genuinely where how to invest an inheritance becomes a planning question rather than a product question, and where advice tends to earn its keep.

How the inheritance affects your own financial position

A significant inheritance can change your own financial position in ways that go beyond the cash itself. If it brings your own estate above the nil-rate band of £325,000, plus up to £175,000 of residence nil-rate band for a qualifying home, your own beneficiaries may eventually face an inheritance tax bill of their own. Someone with an existing estate of £400,000 and a £500,000 property, for example, would see their own exposure change meaningfully after receiving a £200,000 inheritance.

If you don’t need all of it yourself and want to pass some on, the gifting exemptions, the annual allowance, normal expenditure out of income, and PETs under the seven-year rule, become relevant in their own right. If any of the inheritance goes into a pension, it may become subject to inheritance tax from April 2027 along with the rest of that pension fund. And for those approaching later life, a large inheritance can also affect means-tested care funding eligibility, so it is worth taking advice on care cost planning alongside the inheritance itself. Have you thought about how receiving this money changes your own estate, not just your bank balance?

What about tax on the inheritance itself?

As the recipient, you pay no income tax or capital gains tax simply on receiving an inheritance. Inheritance tax is paid by the estate before assets are distributed to you, not by you as the beneficiary.

If you:

• receive cash, there is no further tax on the cash itself. However, you’ll need to remember that any interest it subsequently earns in your own savings account is taxable income in the usual way.
• receive investments or property, no capital gains tax is owed on receipt, only if you later sell above the stepped-up value at the date of death.
• receive income-producing assets, such as a rental property or dividend-paying shares, the income they generate is taxable as your ordinary income from the date you inherited them.

When to speak to a financial planner

For smaller inheritances, broadly under £50,000, the steps above will usually be sufficient on their own: clear debt, top up the emergency fund, and use pension and ISA allowances. For larger or more complex inheritances, property, business interests, a pension, or overseas assets, professional advice tends to pay for itself many times over. In either situation, however, if you are unsure, seeking professional advice will often provide peace of mind.

The most common mistakes people make with a large inheritance are:

• investing too quickly before having a proper plan
• leaving cash doing nothing for far too long
• missing annual allowances
• not considering the impact on their own estate and tax position.

A financial planner brings a structured view of where the inheritance fits into your overall financial picture. They’ll consider tax-efficient sequencing across your pension, your ISA and investment accounts, a cashflow model showing how different choices play out over time and also conduct an ongoing review as your circumstances change.

Get in touch

This article covers the general position for the 2026/27 tax year and is for general information only, not personal financial or tax advice, since everyone’s circumstances are different. If you are working out what to do with an inheritance, or what to do with inheritance money, UK rules mean for your own situation, get in touch with our team. We would be glad to help you take the time you need and build a plan around it properly.

The Financial Conduct Authority does not regulate estate planning or tax planning.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.