Do You Pay Tax on an Inheritance? What Beneficiaries Actually Owe

In almost every case you do not pay tax on an inheritance you receive. Inheritance Tax is charged on the deceased person's estate and settled by the executors before anything is paid out, and the legacy that lands in your bank account is not taxable income — you do not declare it on a tax return.

What can create a bill in your own name is what happens next: interest on the cash, rent from an inherited property, dividends from inherited shares, and the gain if you later sell an asset for more than it was worth on the date of death.

Key points

• Inheritance Tax is 40% above the available nil-rate bands and is paid by the estate, not the beneficiary.
• An inheritance is capital, not income — it does not use up your Personal Allowance or push you into a higher tax band.
• Income the estate earns while being wound up is taxable on you when it is paid out, with credit for tax the estate already paid.
• If you sell an inherited asset, your Capital Gains Tax base cost is the probate value, not the price the deceased originally paid.
• From April 2027 most unused pension funds are expected to count towards the estate for Inheritance Tax.

The estate pays, not you

This is the confusion that trips up most people. The UK does not have an "inheritance received" tax on the recipient. Unlike Ireland or some US states, there is no charge that depends on who you are or how much you personally inherit. The tax is on the estate as a whole.

The executors or personal representatives value everything the deceased owned, deduct debts, apply the available allowances, calculate any Inheritance Tax and pay it to HMRC — usually before probate is granted. Only then are legacies distributed. So if you are told you will receive £50,000, that £50,000 is what you get; there is nothing further to pay and nothing to report.

How the estate's bill is worked out

The residence nil-rate band is reduced by £1 for every £2 by which the estate exceeds £2 million. Where at least 10% of the net estate is left to charity, the rate on the taxable amount falls to 36%.

Worked example. Margaret dies leaving an estate of £700,000, including her home, which passes to her son. Her nil-rate band of £325,000 plus a residence nil-rate band of £175,000 gives £500,000 tax-free. The taxable estate is £700,000 − £500,000 = £200,000, and 40% of that is £80,000 of Inheritance Tax. The executors pay it from the estate. Her son inherits £620,000 and owes nothing personally.

Had Margaret been widowed and inherited her husband's unused bands, the tax-free total could have reached £1 million and the estate would have paid nothing. You can test different estate values with our Inheritance Tax calculator.

The rare times a beneficiary is on the hook

There are narrow exceptions worth knowing:

• Gifts made in the seven years before death. These are added back into the estate. The estate normally pays any tax due, but if it cannot, HMRC can recover the tax from the person who received the gift. Taper relief reduces the tax on gifts made three to seven years before death.
• Trusts. If you receive assets through a trust, different rules apply and the trustees may hold back tax.
• Assets you already had the benefit of. Where someone gave away an asset but carried on using it, it is treated as still theirs, and the holder can be pursued for the tax.

Inheritance Tax rules are UK-wide, so the bands above apply the same in Scotland, Wales and Northern Ireland. Scotland's separate income tax rates matter only for the income side, covered below.

Is inheritance taxable income?

No. A cash legacy, a share of the residue, an inherited property or a portfolio of shares are all capital receipts. They do not go on a Self Assessment return, they do not affect your Personal Allowance of £12,570, they do not trigger the High Income Child Benefit Charge, and they do not reduce a tax credit or student loan calculation on their own.

What does need reporting is anything the inheritance then earns. That is a separate matter from the inheritance itself, and it is where most beneficiaries slip up.

Income from inherited assets

Income during the administration period

Estates often take months or years to wind up. While that happens, the assets keep producing income — bank interest, rent, dividends. The estate pays income tax on it at the basic rate of 20% for interest and rental profits, and at the dividend ordinary rate for dividends.

When the executors pass that income out to you, they should give you a form R185 (Estate Income) showing the amount and the tax already paid. You include the grossed-up figure on your tax return and claim credit for the tax the estate paid. The practical result:

• A basic-rate taxpayer usually has nothing more to pay.
• A higher or additional-rate taxpayer has a top-up to pay.
• A non-taxpayer may be able to reclaim some or all of the tax the estate paid.

Income after the assets are yours

Once assets are transferred into your name, the income is taxed like any other income you have:

A point that catches people out: an inherited ISA loses its tax-free status on death unless you are the deceased's spouse or civil partner, in which case you can claim an additional permitted subscription equal to its value. For everyone else, the money is simply cash or investments in your hands, and the interest or dividends become taxable.

Worked example. James inherits £180,000 and leaves it in a savings account paying 4%, earning £7,200 of interest in the year. He earns £45,000 in his job, so he is a basic-rate taxpayer with a £1,000 Personal Savings Allowance. Roughly £6,200 of the interest is taxable. Part of it pushes him over the higher-rate threshold of £50,270, so some is taxed at 20% and some at 40%. Nothing is due on the £180,000 itself. Our savings interest tax calculator works this through, and the rental income tax calculator does the same for an inherited let.

Selling what you inherit: Capital Gains Tax

There is no Capital Gains Tax on death. Instead, assets are rebased: your acquisition cost is the market value on the date of death, the figure used for probate. Only the increase in value after that date can be taxed, and only when you sell or give the asset away.

For 2026/27 the annual exempt amount is £3,000, with rates of 18% for gains falling within the basic-rate band and 24% above it. The basic-rate band is £37,700, and your other income uses it up first.

Worked example. Priya inherits her late father's flat, valued at £300,000 for probate. Two years later she sells it for £340,000 and pays £6,000 in estate agent and legal fees.

1. Proceeds £340,000 − probate value £300,000 = £40,000
2. Less selling costs £6,000 = £34,000 gain
3. Less annual exempt amount £3,000 = £31,000 taxable
4. Priya is a higher-rate taxpayer, so 24% × £31,000 = £7,440

Because this is residential property, she must report the disposal and pay within 60 days of completion using HMRC's report and pay Capital Gains Tax service, as well as including it on her tax return.

Two things reduce bills here. First, if you move into the inherited property as your only or main home, Private Residence Relief covers the period you live there. Second, if the property falls in value between death and sale, you have an allowable loss you can set against other gains. And if the executors sell the property before distributing the proceeds, the estate has its own annual exempt amount for the year of death and the following two tax years.

Inherited pensions and the 2027 change

Pensions have long sat outside the estate for Inheritance Tax, which is why they are usually the last pot to be touched. That is changing: from 6 April 2027, most unused pension funds and death benefits are expected to be brought into the value of the estate for Inheritance Tax, with scheme administrators and personal representatives sharing the reporting and payment.

Separately, income tax on an inherited pension depends on the age at death:

• Death before 75. Lump sums and drawdown income paid to a beneficiary are generally free of income tax, subject to an overall lump sum and death benefit allowance.
• Death at 75 or over. Whatever the beneficiary draws is taxed as their income at their marginal rate, so taking a large lump sum in one tax year can push it into the 40% or 45% band.

So from 2027 a pension could face Inheritance Tax in the estate and income tax in the beneficiary's hands, depending on age at death. That makes the timing of withdrawals the main lever a beneficiary controls.

Inheritances from overseas

Money inherited from abroad is still not taxable income in the UK, and UK Inheritance Tax follows the deceased's position rather than yours. But the country where the person died may tax the recipient directly — Ireland's Capital Acquisitions Tax and several US state inheritance taxes work that way. Once the funds are here, any interest or investment income they generate is taxable on you as normal. Keep the paperwork showing the source: banks and HMRC may ask where a large deposit came from.

What to do next

If you are dealing with an estate, start with the numbers: value the assets, apply the nil-rate band, the residence nil-rate band and any transferable bands from a late spouse, and see whether there is a bill at all. Our Inheritance Tax calculator does that in a couple of minutes.

If you are the beneficiary and the money has already arrived, the job is different. Work out what the inheritance will earn this year and whether that tips you over an allowance or into a higher band — the income tax calculator shows the effect of adding interest, dividends or rent to your existing income. Official guidance on the estate's obligations is at GOV.UK: Inheritance Tax.