Do You Pay Tax on Inherited Money in the UK? 2026/27 Guide

Clients regularly ask advisors a fundamental question when receiving a bequest: Do you pay tax on inherited money in the UK?

The short answer is that the beneficiary does not typically pay income tax on the inherited capital sum itself. Instead, HMRC levies Inheritance Tax (IHT) directly on the deceased’s estate before the executors distribute the funds.  However, complex rules dictate the taxability of gifts made before death, the income generated by the inheritance after receipt, and massive changes approaching the taxation of inherited pensions.

This guide breaks down the precise IHT thresholds, exemptions, and upcoming legislative shifts for the 2026/27 tax year.

1. Who Actually Pays the Tax?

When a beneficiary receives a pecuniary legacy (a specific sum of money), they receive the exact amount stated in the will, provided the estate contains sufficient funds to settle its debts and taxes first.  The beneficiary does not receive taxable income and faces no immediate income tax liability on the capital sum.

The personal representatives (executors) hold the legal liability to pay any Inheritance Tax due out of the estate’s general assets before distributing the remaining money to the beneficiaries.

2. The 2026/27 Inheritance Tax Thresholds

An estate only pays IHT if its total value exceeds specific tax-free allowances. For the 2026/27 tax year, the government has frozen these critical thresholds:

• The Nil-Rate Band (NRB): The standard tax-free threshold remains fixed at £325,000.  The government has introduced legislation to maintain this freeze through to the 2029/30 tax year, suspending standard inflation indexation.
• The Residence Nil-Rate Band (RNRB): An additional allowance of £175,000 applies when an individual passes a qualifying residence to direct descendants.  However, a taper threshold strictly reduces this RNRB by £1 for every £2 that the estate’s net value exceeds £2 million.

Because spouses and civil partners can transfer their unused allowances to each other, a surviving spouse can effectively shield up to £1 million (combining two £325,000 NRBs and two £175,000 RNRBs) from HMRC.

3. Inheritance Tax Rates

If the estate exceeds the combined available nil-rate bands, HMRC charges IHT on the excess value.

• Standard Rate: The estate pays tax at a flat rate of 40% on the chargeable value above the nil-rate band.
• Charitable Relief: If the deceased left at least 10% of their net estate to charity, the tax rate drops to 36% on the relevant component of the estate.

4. The 7-Year Rule for Cash Gifts (PETs)

Individuals often attempt to reduce their estate’s IHT exposure by gifting money during their lifetime. If the donor makes an outright gift of cash and survives for seven years, the gift becomes completely exempt from IHT.

However, if the donor dies within seven years, the gift operates as a Potentially Exempt Transfer (PET) and becomes a chargeable transfer added back into the estate.  If the total value of gifts exceeds the £325,000 nil-rate band, the recipient of the gift (not the estate) becomes personally liable for the tax on that specific gift.

To soften the blow, section 7(4) of the Inheritance Tax Act 1984 applies “taper relief” to the tax charge on gifts made between three and seven years prior to death:

• More than 3 but not more than 4 years: Tax charge reduced to 80%.
• More than 4 but not more than 5 years: Tax charge reduced to 60%.
• More than 5 but not more than 6 years: Tax charge reduced to 40%.
• More than 6 but not more than 7 years: Tax charge reduced to 20%.

Lifetime Exemptions

Certain cash gifts bypass the 7-year rule entirely. Transfers between spouses or civil partners enjoy a 100% exemption.  Additionally, individuals can utilise an annual exemption of £3,000 per tax year, and can make unlimited small outright gifts of up to £250 per person per year without triggering any IHT consequences.

5. Ongoing Taxes: Post-Death Income

While the inherited lump sum escapes income tax, the beneficiary must pay tax on any money the inheritance subsequently generates.

If the inherited money sits in an interest-bearing bank account, any interest paid or credited after the date of death qualifies as taxable savings income.  If the personal representatives hold the funds in the estate during administration, the interest forms part of the estate’s income.  Once the executor pays the legacy to the beneficiary, any future interest or investment yield becomes the beneficiary’s personal taxable income.

6. Major Changes Approaching: Pensions in 2027

Currently, most pension death benefits pass to beneficiaries entirely free of Inheritance Tax because they sit outside the deceased’s estate.

However, the government enacted fundamental changes via the Finance Bill 2025-26. Starting on 6 April 2027, the law brings unused pension funds and pension death benefits squarely within the scope of the deceased’s estate for Inheritance Tax purposes.  Personal representatives will become liable for reporting and paying the IHT on these inherited pensions, removing a major tax-planning distortion that existed following the 2015 pension freedoms.

Summary Table: Taxation on Inherited Money (2026/27)

Review your clients’ lifetime gifting strategies and pension nominations ahead of the April 2027 pension inclusion date, ensuring they maximise their £3,000 annual exemptions and understand that while they may not pay income tax on a cash inheritance, any subsequent investment yields will be fully taxable.