Last updated: May 2026.
Before anything else: pause
The single most common regret reported by people who've received an inheritance is acting too quickly. The second-most-common is not acting at all for years, then losing real value to inflation.
A 3-6 month pause is usually the right window. During that time:
- Park the money in an instant-access savings account with FSCS protection (£85,000 per institution)
- Keep records of where it came from (you may need this later for HMRC or to prove source of funds)
- Don't tell more people than you need to
- Don't change your lifestyle yet, that step comes later, once decisions are made deliberately
The order of priorities
| Priority | What to do | Why this order |
|---|---|---|
| 1. Tax position | Confirm what's been declared, what's already been taxed, what you now own | You need to know the starting point before allocating anything |
| 2. High-interest debt | Clear credit cards, overdrafts, loans above ~6-7% APR | Guaranteed risk-free return at the interest rate you're paying |
| 3. Emergency fund | 3-6 months of essential expenses in instant-access savings | Protects everything that follows from forced asset sales |
| 4. Pension contribution | Use unused annual allowance + carry forward; particularly potent for higher-rate taxpayers | Tax relief at marginal rate; locked away for the long term |
| 5. ISA contribution | Top up to £20,000 in the current tax year | Tax-free growth in perpetuity; flexible access |
| 6. Larger goals | Property, business, gifting, longer-term investing | Once foundations are solid, deploy the remainder strategically |
Step 1: Understand your tax position
Inheritance Tax is paid by the estate before assets reach beneficiaries. So if you've received money, it's been taxed already, you don't owe IHT yourself. But things you do with it from here may be taxable:
- Income generated (interest, dividends, rent) is taxable as your income
- Capital gains on investments are taxable when you sell, see UK CGT planning
- Future gifts you make are subject to the seven-year rule from the date of your gift
Some inheritances carry specific tax considerations:
- Inherited ISAs from a spouse or civil partner: the surviving spouse gets an Additional Permitted Subscription (APS) equal to the value of the deceased's ISA, extra ISA allowance on top of the normal £20,000
- Inherited pensions: tax treatment depends on the deceased's age at death, see how pensions are taxed after death
- Inherited property: any future sale uses the probate value as the base cost for CGT
Step 2: Clear high-interest debt
If you have credit cards, overdrafts, or personal loans at 6-7%+ APR, clearing them with inheritance money is almost always the right move. It's a guaranteed risk-free return at the interest rate you were paying.
The exception: an interest-free or very-low-interest loan with a fixed end date. If you have a 0% balance transfer that ends in 14 months, paying it just before the rate kicks in is fine, you don't need to act today.
What about the mortgage? It depends. Compare your mortgage interest rate to the after-tax return you could realistically earn on investments over the same period. If your rate is 5% and you can earn 6-8% in equities over the long term, investment can be the better option. But the emotional value of being mortgage-free is real and shouldn't be dismissed, many people sleep better with no debt.
Step 3: Build (or top up) an emergency fund
Three to six months of essential expenses, in an instant-access savings account, FSCS-protected. This isn't an investment, it's insurance against forced asset sales when life throws something unexpected at you.
The most common reasons emergency funds get used: redundancy, sudden illness, urgent home repairs, helping family in crisis. Without one, the same emergencies often force you to sell investments at the worst moment (when markets are down) or take on debt at the highest rates.
Step 4: Use your pension allowance
For higher-rate (40%) and additional-rate (45%) taxpayers, pension contributions are the most tax-efficient single thing you can do with inherited money. Tax relief at your marginal rate effectively boosts the amount you invest by 67-82%.
The 2025/26 annual allowance is £60,000. If you haven't used the full allowance in the previous three years, carry-forward can let you contribute substantially more in a single tax year. See our pension carry-forward guide.
Worth flagging: from April 2027, unused pension funds will be subject to Inheritance Tax for the first time. This doesn't make pension contributions wrong, but it does change the calculus for estates likely to face IHT. See Pensions and IHT from April 2027.
Step 5: Use your ISA allowance
£20,000 per person per tax year. ISA growth is tax-free in perpetuity, withdrawals are tax-free, no notional value for IHT purposes either. The most flexible long-term wrapper available to UK residents.
If you've received a large inheritance and want to move it into ISAs as quickly as possible, you can:
- £20,000 in the current tax year
- Another £20,000 from 6 April when the new tax year starts
- If a spouse, another £20,000 each, £80,000 between you across two tax years
From April 2027, the Cash ISA portion of the £20,000 allowance is being capped at £12,000 for under-65s, see our Cash ISA changes guide.
Step 6: Larger goals and longer-term decisions
Once the foundations are in place, the remaining money can be deployed against bigger goals. The right answer depends entirely on your situation:
Property
Buying a home or paying down a mortgage are common moves. A separate property purchase (buy-to-let) has become considerably less tax-efficient since 2017, see our buy-to-let guide for the current position.
Investing for the long term
For money you don't need for 10+ years, a diversified equity-tilted portfolio inside an ISA or general investment account is the most common approach. Cash flow planning can help test how much you can take in retirement income from a given lump sum.
Giving to family
If you have more than you need, gifting to children or grandchildren can reduce your own future IHT exposure. Gifts become fully IHT-free after seven years. Annual exemptions and small gifts exemptions are available immediately. See tax-efficient giving.
Charitable giving
Gifts to UK charities are immediately IHT-free and provide income tax relief. Leaving 10%+ of your estate to charity reduces the IHT rate on the rest from 40% to 36%.
When to take professional advice
Roughly, the more of these apply, the stronger the case for taking advice:
- The inheritance is large enough to materially change your retirement picture
- It pushes you into a new income tax band or affects your annual allowance taper
- You're approaching retirement and need to integrate it with existing pensions
- You're a higher-rate taxpayer with limited prior planning
- The inheritance includes complex assets (business shares, property, foreign assets)
- You have your own family to provide for and the inheritance affects estate planning
An initial conversation with an adviser is usually free. The value comes from getting a second opinion on the order in which to do things, and sometimes from learning about options (carry forward, EIS, BR strategies) you didn't know were available.
Frequently asked questions
Do I have to pay tax on inherited money?
Inheritance Tax is paid by the estate before assets reach beneficiaries, you don't typically pay tax on the receipt of an inheritance. But once you own it, future income and gains are taxable in your hands. Inherited ISAs from a spouse benefit from the Additional Permitted Subscription rule. Inherited pensions are taxed differently depending on the age of the deceased, see our guide.
Should I pay off my mortgage with an inheritance?
Often yes, but not always. Compare your mortgage interest rate to the after-tax return you could realistically earn on investments over the same period. If your rate is 5% and you can realistically earn 6-8% in equities over the long term, investment can be the better option. But the emotional value of being mortgage-free is real and shouldn't be dismissed, many people sleep better with no debt.
Will my inheritance affect benefits I receive?
Yes, potentially. Means-tested benefits (Universal Credit, Pension Credit, Council Tax Reduction) take into account savings above £6,000 (with a sliding scale up to £16,000). Personal Independence Payment, State Pension and contribution-based benefits are not affected by savings.
How long should I wait before making big decisions?
Three to six months is a common rule of thumb for major decisions (buying property, large investments, lifestyle changes). The financial industry calls this a 'cooling-off' period, it lets grief settle, your relationship with the money mature, and avoids regret-driven decisions. Park the money somewhere safe and earn interest while you think.
Where should I park inherited money while I decide?
An instant-access savings account with FSCS protection (under £85,000 per institution, or £170,000 in a joint account) is the standard short-term answer. National Savings & Investments accounts have unlimited government backing. For amounts above the FSCS limit, spread across multiple institutions or consider an NS&I account.