What to do with inheritance money: at a glance
What do I need to know? Receiving an inheritance can have different financial implications depending on the amount you inherit and the types of assets involved.
What does it mean for me? When considering where to save large cash deposits, it can be helpful to balance protection, growth, and access, so you can take advantage of financial opportunities as they arise.
Why does it matter? Keeping some of your inheritance in cash can keep funds available for tax bills and other costs as they fall due.
Coming into an inheritance can be a life-changing event. But it often comes at an emotionally distressing time. And deciding whether to spend, save, or invest an inheritance is rarely straightforward.
During this period, it’s important to be aware of the risks of leaving a large lump sum sitting idle in a current account for longer than necessary.
In this guide, you’ll learn how you can safeguard some of the value of your inheritance, the potential tax implications, and how to structure your savings and investments around your financial goals.
What can you do after receiving an inheritance?
For many savers, the first step after receiving an inheritance is usually to contact a financial adviser. This is because they can provide qualified guidance based on your personal circumstances. A financial adviser can also make you aware of upcoming costs you may need to consider in the near future, such as Inheritance Tax.
The pressure to make important financial decisions after losing a loved one can feel overwhelming. This is why, when coming into an inheritance, it’s common to wait at least three months before making any long-term financial commitments.
Whether you’re planning to establish generational wealth, hold the money in cash to earn an income from interest, or invest it, understanding your options can help you to make informed choices when you’re ready.
How is your inheritance money taxed?
The wealth you inherit comes with different tax implications depending on the asset types you receive and what you choose to do with them. Timing can also be a significant factor in how much you owe to HMRC in tax.
The impact of IHT on your inheritance
At which point do you pay Inheritance Tax?
IHT must be paid no later than six months after the passing of your loved one. The person required to pay IHT is usually the 'executor', or the person nominated to administer the estate.
This means that if you're only receiving wealth, you won't need to pay IHT for the estate. Instead, you may have to pay other taxes that are related to the wealth you receive and what you choose to do with it.
How many estates pay Inheritance tax?
HMRC charges Inheritance Tax (IHT) on fewer than one in 20 estates every year, which has been the case since the 2007/08 tax year. But for those paying the tax, it can represent a significant cost.
How much Inheritance Tax will you pay?
The amount of IHT HMRC charges depends on the total value of the estate after allowances have been considered.
The current UK Inheritance Tax nil-rate band (NRB) is £325,000, meaning an estate can pass on assets up to this amount without paying IHT.
The allowance can be combined with the residence nil-rate band (RNRB) of up to £175,000, which applies to properties in specific circumstances. For example, when a home is left to direct descendants, including children or grandchildren. The RNRB tapers down by £1 for every £2 that the value of the estate exceeds £2m.
This means an estate can theoretically pass on up to £500,000 without paying IHT, or even up to £1m when it combines a spouse or civil partner’s unused NRB and RNRB. HMRC generally charges IHT at 40% on wealth that exceeds these allowances.
Capital Gains Tax and your inheritance
You generally won’t have to pay Capital Gains Tax (CGT) when you first receive an inheritance.
But CGT can apply if you sell an inherited asset later, such as a property or shares, for more than its market value on the date your loved one passed away.
The annual Capital Gains Tax allowance (known as the Annual Exempt Amount) is £3,000 for individuals and £1,500 for most trusts. HMRC charges CGT on the gains you make above these allowances.
Assessing your assets for Income Tax
In general, there are two assets that can significantly affect your Income Tax with a large inheritance: cash and pensions.
Cash
Cash is usually the quickest asset for an executor to distribute, and you can move this money into savings accounts once you receive it.
If you receive a large lump sum in cash, you can choose to fund competitive savings accounts to receive income by earning interest. If your earnings exceed your Personal Savings Allowance (PSA), you'll pay Income Tax on the amount you receive above the limit.
Pensions
Inherited pensions are slightly more complex to assess than cash, as the tax rules depend on the age of the person who passed away. These rules are also set to change from 06 April 2027, when most unused pension funds and benefits will be included in a person’s estate for IHT purposes.
This means you may no longer be able to inherit an unused pension pot outside of IHT if you're a child of the person that passed away.
If you inherit a pension, you can either take the entire amount as a lump sum or buy an annuity, which disburses the pension gradually as income.
Consider speaking with a financial adviser if you're unsure which approach is right for your personal circumstances.
Saving your inheritance securely: Cash ISAs and savings accounts
If you decide to generate an income through earning interest, you can use a mix of Cash ISAs and high-yield savings accounts to protect your wealth. Savings accounts are generally considered a low-risk way to grow a deposit through earning interest, especially if your accounts are protected by the Financial Services Compensation Scheme (FSCS).
The FSCS protects your eligible deposits up to a value of £120,000 per person, per financial institution.
The risk of cash in current accounts
FSCS protection can also apply to current accounts, but the purchasing power of your deposit can decline if it doesn't earn enough interest. This is because the interest rates for current accounts are often below the rate of inflation.
Spreading the wealth: the value of multiple accounts
The range of accounts that will suit you best will depend on your priorities. But dividing your inheritance across multiple savings accounts can help you to build a diversified financial portfolio, balancing access for new opportunities and planned spending with longer-term growth.
Tax-efficient accounts
Cash ISAs let you build tax-free earnings within annual limits. The current total annual ISA limit is £20,000. From 06 April 2027, annual Cash ISA deposits will be limited to £12,000, for savers under 65. The previous limit of £20,000 will remain unchanged for those aged 65 and over.
This ISA allowance can shield a portion of your lump sum from tax, even if it doesn't cover the entire amount. So, you could treat ISAs as one tax-efficient component of a financial portfolio. The allowance resets every year, which means you could gradually build up tax-free interest earnings over several years if you wish.
Splitting savings
Instant access accounts keep your funds available for unexpected costs or investment opportunities, while fixed rate accounts offer higher interest in exchange for locking your cash away for a set term.
Applying for and managing several savings accounts and Cash ISAs can be time-consuming. Savings platforms like Flagstone let you open multiple high-interest accounts with one application and manage them in one place, with one login.
Expanding FSCS protection
The FSCS only protects eligible deposits up to £120,000 per individual, per financial institution. This means, if the balance of one of your accounts exceeds this amount, your wealth could be at risk should the provider go out of business. This is also the case if two different banks operate under the same licence.
Flagstone's savings platform lets you see how much of your cash is protected under the FSCS, giving you the peace of mind to save at scale.
Temporary high balance protection
The FSCS has temporary high balance (THB) protection, which can cover events such as receiving an inheritance. This policy can protect balances up to £1.4m for six months, starting from when the funds legally belong to you.
After this six-month period, the standard £120,000 limit applies, so it’s worth using this window to split the balance across providers if you intend to keep your money in cash.
What can you do with different inheritance amounts?
What you choose to do with an inheritance will depend on your short- and long-term financial goals, as well as the size and make-up of your inheritance.
£100,000
If you have an inheritance of £100,000, you could keep the full amount in one savings account for a while and stay within the FSCS protection limit of £120,000, provided your deposit is eligible.
Making use of your full Cash ISA allowance means you can benefit from tax-free interest. If you do this every year, you can gradually build your tax-free earnings.
£300,000
With an inheritance of around £300,000 in cash, you can consider spreading this amount across at least three different financial institutions. This helps to ensure your eligible deposits are protected by the FSCS.
If you don’t need access to the full amount right away, you could consider a longer-term investment strategy rather than holding your entire inheritance in cash. Investing in assets such as property or shares has the potential to deliver higher long-term growth, but at a greater risk of loss if something goes wrong.
With £300,000, you may wish to consider lifetime gifting. Depending on the circumstances, lifetime gifting can lower the value of your estate before you pass away, ensuring your children keep more of what you intend to pass on. You can also see them benefit from your generosity. But there are limits and rules to consider before you gift money.
£1m+
An inheritance of over £1m represents a significant addition to your wealth. With this amount you can significantly diversify a financial portfolio and make a comprehensive estate plan if you plan to gift money to younger generations.
But holding a sum of this size in cash could mean you’d need to spread your wealth across nine or more providers to sit fully within the FSCS limit, provided your deposits are eligible. The THB protection of £1.4m for six months is especially useful in this case, giving you a window to arrange your funds strategically.
Opening an account with a savings platform can make it easier to manage a broad portfolio.
In exchange for increased risk to your funds, investment opportunities such as shares, property, or Venture Capital Trusts (VCTs) have the potential to deliver higher long-term returns than savings accounts alone.
Depending on the value of your existing estate, there is a risk that IHT could affect your legacy plans, especially if you avoid using the seven-year rule to gift money early.
An inheritance this large can also reduce the allowances available for your own estate. The RNRB tapers by £1 for every £2 that your net estate exceeds £2m. It usually no longer applies if the estate exceeds £2.35m.
Seek professional advice if you're unsure how to structure your wealth as tax-efficiently as possible, ensuring it aligns with your long-term goals.
Frequently asked questions on what to do with inheritance money
What should you prioritise with inheritance money?
An inheritance could provide the opportunity to support your family during your lifetime, cover planned purchases, or reposition the money in savings and investments for long-term security. A savings platform like Flagstone can help you build a savings portfolio at scale.
Whatever you choose to do with your inheritance, it’s important to understand your tax position and how the new lump sum will influence your own estate.
Do you have to declare inheritance money to HMRC?
Generally, you don’t need to declare the inheritance itself to HMRC unless you’re the executor. The executor is responsible for paying the IHT due before distributing wealth to beneficiaries.
But if you make any income from the inheritance, including earning rent from a property or capital gains from selling an asset, HMRC can charge you Income Tax or CGT.
Should I gift my inheritance money rather than keep it?
Taking advantage of annual gifting allowances during your lifetime can be a strategic way to reduce your estate while providing for your loved ones.
It’s important to consider that some gifts can still count towards your estate for IHT purposes if made fewer than seven years before you pass away. Although, this depends on the value of your estate and whether it exceeds the relevant IHT thresholds.
Use your inheritance to secure a financial legacy
Understanding tax implications and how to manage wealth can help you align what you inherit with your long-term financial goals.
You might even begin your own estate planning for IHT purposes by taking advantage of gifting allowances. Receiving an inheritance can push your estate further towards or above the available IHT thresholds.
In the short term, an inheritance can help with specific commitments such as supporting family members, a property purchase, or upcoming tax bills. But for longer-term wealth that can benefit future generations, placing some inheritance into high-interest savings accounts, Cash ISAs, and investments, like property or shares, can help to grow your money.
If you’re weighing up how to invest your inheritance money, a financial adviser can help you balance the risks against your long-term goals.
Grow inherited cash with Flagstone
When it comes to inheriting lump sums, spreading your wealth across multiple accounts can protect, preserve, and grow your cash.
Flagstone gives you access to hundreds of high-interest savings accounts from 65+ banks.
And there’s no need for multiple applications and logins. Flagstone helps you manage savings accounts in one place, with one login, and a minimum deposit of £10,000.
