What Taxes Do You Pay on Inheritance? A Complete Guide for UK Beneficiaries

When a loved one dies and leaves you money, property, or investments, one of the first questions that comes to mind is:

What taxes do I have to pay on my inheritance?

In the UK, the inheritance tax system is full of misconceptions, many people assume they’ll be taxed on everything they receive, while others overlook liabilities that may arise later.

The truth is: you don’t usually pay tax on the inheritance itself, but there are important exceptions depending on what you inherit, how it’s structured, and whether you later sell or earn income from it.

In this guide, Belgravia Capital Wealth Management explains exactly which taxes may (or may not) apply when you inherit assets in the UK. We’ll cover:

• Who pays inheritance tax and when

• Whether you pay income tax or capital gains tax on what you inherit

• What happens when you inherit property, pensions, shares or trusts

• How to plan around these taxes and preserve your inheritance

Do You Pay Inheritance Tax as a Beneficiary?

In most cases, no, you do not pay inheritance tax on what you inherit.

Instead, inheritance tax (IHT) is usually paid by the estate before any distribution is made.

The executor or administrator calculates the total value of the deceased’s estate, deducts any allowances or reliefs, and pays any IHT due directly to HMRC.

Once that’s done, the remaining assets are passed to beneficiaries free of tax.

So if you inherit:

• Cash

• Property

• Investments

• Possessions

You generally receive them tax-free at the point of inheritance, unless there’s a specific liability attached.

However, other taxes can arise depending on how and when you use or dispose of the asset.

What If You Receive a Gift Before Someone Dies?

This is a key exception. If you received a lifetime gift from someone who dies within seven years of giving it, inheritance tax may apply - especially if the total gifts exceeded the IHT threshold.

In this case:

• The estate may be liable for the tax

• But if the estate can’t pay, the recipient may become liable

This rule applies to gifts of cash, property, shares, or other valuable assets.

Is Inheritance Classed as Income?

No, an inheritance is not treated as income for tax purposes. You do not have to include it on your Self Assessment tax return or pay income tax just because you received a bequest.

However, income tax may apply later, depending on how you use or receive income from the inheritance.

Let’s explore the common scenarios where tax is due after inheritance.

Capital Gains Tax (CGT) on Inherited Assets

Although you don’t pay tax at the time of inheritance, capital gains tax may apply if you later sell an inherited asset for a profit.

Example:

You inherit a property worth £500,000 at the time of death.

Five years later, you sell it for £650,000. The £150,000 gain is potentially subject to capital gains tax (after deducting allowances and costs).

The good news is that CGT is calculated using the value of the asset at the date of death, not when it was originally purchased by the deceased. This can reduce the gain significantly.

CGT may apply to:

• Property (except your main residence)

• Shares and investments

• Collectables and antiques

Income Tax on Inherited Income-Producing Assets

You do pay income tax on income generated by inherited assets after you receive them. This includes:

You must declare these on your Self Assessment return if they exceed your personal allowances.

Tax on Inherited Pensions

Whether tax is due on a pension you inherit depends on:

• The type of pension (defined benefit, defined contribution)

• Whether the deceased was under or over 75 at death

• Whether you take it as a lump sum or income

Key rules:

• If the pension holder died before age 75, the pot can usually be inherited tax-free

• If they died after 75, withdrawals are taxed at the recipient’s marginal income tax rate

• Some pensions allow a lump sum; others provide income for life

Pensions are generally not part of the estate if held in trust, meaning they usually escape inheritance tax, but tax may still apply when you draw the funds.

The rules around pensions and IHT are due to change from 2027.

What About Inherited ISAs?

ISAs are tax-efficient during life, but on death, their tax-free status ends immediately. The value of the ISA becomes part of the estate and may be subject to IHT.

However, if you’re the spouse or civil partner of the deceased, you’re entitled to an additional ISA allowance equal to the value of their ISA at death, called the Additional Permitted Subscription (APS).

This allows you to shelter the inherited ISA value in your own tax-free wrapper.

Do You Pay Inheritance Tax on Trust Distributions?

If you receive income or capital from a trust set up by someone who has died, tax may apply depending on:

• The type of trust

• Whether it distributes income or capital

• Whether the trust already paid tax at source

You may have to:

• Declare the income on your tax return

• Claim a tax credit for any tax already paid by the trust

• Pay further tax if you’re a higher-rate taxpayer

This is a complex area, and professional advice is strongly recommended.

Do You Pay Council Tax on an Inherited Property?

If you inherit a property and it remains unoccupied, council tax may still be due. However, local authorities often offer:

• Exemptions for up to 6 months if probate is ongoing

• Discounts on empty homes or those being renovated

Once the property is occupied or sold, normal council tax rules apply. Check with the local council for specific exemptions and deadlines.

Is There Tax on Selling Inherited Property?

If you decide to sell the inherited property, you may owe capital gains tax on any gain since the date of death.

• If the property increases in value before you sell it, that gain is taxable

• If you move into the property and live there, it may become your main residence, which can exempt it from CGT

Using professional valuation at the time of death is crucial for establishing a correct tax base.

Common Misconceptions About Taxes on Inheritance

Let’s clear up a few myths:

“If I inherit money, I have to pay tax on it”

Not true. The estate usually pays the tax before you receive anything.

“I need to report my inheritance to HMRC”

Only if you earn income from it or sell assets later.

“My inheritance is tax-free forever”

It’s tax-free when received, but taxes may apply later based on how you use it.

Planning Ahead to Reduce Tax on Inheritance

Whether you’re about to inherit or planning to pass on assets, good advice now can save tax later. We help families:

• Minimise inheritance tax through trusts and gifting

• Prepare for income tax on investments or pensions

• Structure estates for multiple generations

• Maximise ISA and pension allowances for spouses

Conclusion: What Taxes Do You Pay on Inheritance in the UK?

In the UK, you don’t usually pay tax at the point of inheritance. Inheritance tax is paid by the estate, not the beneficiary. But tax can arise after inheritance through:

• Income tax on earnings from inherited assets

• Capital gains tax when you sell them

• Income tax on inherited pensions or trust payments

Understanding these rules means fewer surprises and smarter choices about what to do with your inheritance.

If you’ve received a significant inheritance or expect to, now is the time to get expert guidance.

Contact Belgravia Capital Wealth Management at contact@belgraviacapital.co.uk

for bespoke advice on inheritance tax planning, trusts, pensions, and protecting your legacy.