How to Avoid Paying Taxes on Inherited Money
In England and Wales, you do not personally pay inheritance tax on money you receive. The estate pays any IHT bill before assets reach you. Your role as a beneficiary is limited, but the deceased's earlier planning (or lack of it) determines how much of the estate HMRC takes at 40% above the £325,000 threshold.
As a beneficiary in England and Wales, you generally do not pay tax on money you inherit. IHT is paid by the estate before it reaches you. The executors settle any tax bill with HMRC before distributing assets.
If the estate is worth less than £325,000 (the nil-rate band), no IHT is due. If the deceased owned a qualifying home and left it to children or grandchildren, the threshold rises to £500,000. A surviving spouse or civil partner inherits everything tax-free with no upper limit, and any unused nil-rate band transfers to the survivor's estate.
If you want to redirect your inheritance, say to your own children, you can use a deed of variation within two years of the death. This treats the gift as though it came directly from the deceased, which can save IHT at the next generation.
One thing to watch: once you receive the inheritance, any income it generates (rent, dividends) is subject to income tax in the normal way. Selling an inherited asset at a profit may trigger capital gains tax. But the inheritance itself is not taxed again in your hands.
If the estate is worth less than £325,000 (the nil-rate band), no IHT is due. If the deceased owned a qualifying home and left it to children or grandchildren, the threshold rises to £500,000. A surviving spouse or civil partner inherits everything tax-free with no upper limit, and any unused nil-rate band transfers to the survivor's estate.
If you want to redirect your inheritance, say to your own children, you can use a deed of variation within two years of the death. This treats the gift as though it came directly from the deceased, which can save IHT at the next generation.
One thing to watch: once you receive the inheritance, any income it generates (rent, dividends) is subject to income tax in the normal way. Selling an inherited asset at a profit may trigger capital gains tax. But the inheritance itself is not taxed again in your hands.
What the Estate Actually Pays Before You Receive Anything
The executor or personal representative files an IHT return (form IHT400) with HMRC and pays any tax due before distributing assets. For the 2026/27 tax year, the standard rate is 40% on everything above the nil-rate band. HMRC collected £8.2 billion in IHT receipts in the year to March 2025, a 10% increase on the prior year (HMRC monthly tax receipts data, March 2025).
The residence nil-rate band (RNRB) adds £175,000 per person when a qualifying home passes to direct descendants, bringing the individual threshold to £500,000. For married couples and civil partners, both allowances can combine. If the first spouse used none of their nil-rate band, the survivor's estate can claim up to £1 million before any IHT is due.
Both thresholds are frozen until at least April 2031 under the current HMRC guidance. With property values rising, the Office for Budget Responsibility estimates nearly 10% of estates will pay IHT by 2030, up from around 5% currently.
The residence nil-rate band (RNRB) adds £175,000 per person when a qualifying home passes to direct descendants, bringing the individual threshold to £500,000. For married couples and civil partners, both allowances can combine. If the first spouse used none of their nil-rate band, the survivor's estate can claim up to £1 million before any IHT is due.
Both thresholds are frozen until at least April 2031 under the current HMRC guidance. With property values rising, the Office for Budget Responsibility estimates nearly 10% of estates will pay IHT by 2030, up from around 5% currently.
Steps to Reduce the Bill Before It's Due
If you are planning ahead for your own beneficiaries, several HMRC-approved steps can reduce your inheritance tax liability during your lifetime.
Gifts from surplus income. Regular gifts made from after-tax income (not capital) are immediately exempt from IHT with no seven-year waiting period. The gift must form part of a normal pattern, and the donor must maintain their usual standard of living after making it. There is no cap on the amount. HMRC assesses this via form IHT403, so keeping clear records of income, outgoings, and gifts is essential.
Annual exemptions. Each person can give away £3,000 per tax year free of IHT. Small gifts of up to £250 per recipient per year are also exempt, and wedding gifts up to £5,000 (from a parent) qualify separately.
Life insurance in trust. A life insurance policy written in trust pays out directly to beneficiaries without forming part of the taxable estate. This does not reduce the estate's value, but it provides cash to cover the IHT bill so that property or investments do not need to be sold quickly.
Charitable legacies. Leaving at least 10% of the net estate to a UK-registered charity reduces the IHT rate from 40% to 36% on the remainder. For a £1 million estate above the threshold, this drops the bill from £400,000 to £360,000, while £100,000 goes to the chosen charity.
Gifts from surplus income. Regular gifts made from after-tax income (not capital) are immediately exempt from IHT with no seven-year waiting period. The gift must form part of a normal pattern, and the donor must maintain their usual standard of living after making it. There is no cap on the amount. HMRC assesses this via form IHT403, so keeping clear records of income, outgoings, and gifts is essential.
Annual exemptions. Each person can give away £3,000 per tax year free of IHT. Small gifts of up to £250 per recipient per year are also exempt, and wedding gifts up to £5,000 (from a parent) qualify separately.
Life insurance in trust. A life insurance policy written in trust pays out directly to beneficiaries without forming part of the taxable estate. This does not reduce the estate's value, but it provides cash to cover the IHT bill so that property or investments do not need to be sold quickly.
Charitable legacies. Leaving at least 10% of the net estate to a UK-registered charity reduces the IHT rate from 40% to 36% on the remainder. For a £1 million estate above the threshold, this drops the bill from £400,000 to £360,000, while £100,000 goes to the chosen charity.
Capital Gains Tax and Income Tax After You Inherit
The inheritance itself is not taxed in your hands, but what you do with the assets afterwards may trigger other liabilities.
Capital gains tax (CGT). Your base cost for CGT is the probate value (market value at the date of death), not what the deceased originally paid. If you sell an inherited property for more than its probate value, the gain is taxable. The CGT annual exempt amount for 2026/27 is £3,000 per person. For residential property, you must report and pay within 60 days of completion.
Income tax. Rent from an inherited buy-to-let, dividends from inherited shares, or interest from inherited savings accounts are all subject to income tax at your marginal rate from the date of death onwards.
If you want to pass your inheritance on to the next generation, a structured plan for leaving inheritance to children can protect those assets from a second round of IHT when your own estate is assessed.
Capital gains tax (CGT). Your base cost for CGT is the probate value (market value at the date of death), not what the deceased originally paid. If you sell an inherited property for more than its probate value, the gain is taxable. The CGT annual exempt amount for 2026/27 is £3,000 per person. For residential property, you must report and pay within 60 days of completion.
Income tax. Rent from an inherited buy-to-let, dividends from inherited shares, or interest from inherited savings accounts are all subject to income tax at your marginal rate from the date of death onwards.
If you want to pass your inheritance on to the next generation, a structured plan for leaving inheritance to children can protect those assets from a second round of IHT when your own estate is assessed.