Inheritance can come as a blessing, but it’s also a big responsibility. Whether you inherit £10,000 or £200,000, inherited money can completely change a person’s life. Therefore, you should know how to manage it responsibly and how to invest an inheritance effectively to take full advantage of the opportunity.
Inheritance money, if used judiciously, can help you start a new career, complete your education, buy a new home, plan for retirement or save for unexpected expenses. However, if it is not managed carefully, an inheritance may not last as long as expected. Therefore, how the money is used should be carefully planned.
|
Do I need a big inheritance to invest? |
No, you can start even with a small amount |
|
First thing to do with an inheritance |
Review your financial situation and high-interest debt |
|
Save it or invest it |
It depends on your goals, time horizon and financial position |
|
Most important thing to do? |
Plan how to use it |
What to do with inheritance in the UK
You may be wondering what to do with an inheritance when you first receive it, as it may feel like lifelong financial security. However, it needs to be managed carefully if its benefits are to last in the long term. Therefore, people who receive an inheritance should review their financial situation before deciding how to use the money.
Pay off high-interest debts
As much as you might be tempted to make a grand purchase with your inheritance, one of the first steps to consider is paying off high-interest debt. Take stock of your financial situation, including any loans, mortgages, and credit card balances, before deciding which debts to repay first.
The priority of payments should generally reflect the interest rate you are paying. For instance, credit card debt is usually more expensive and carries a much higher interest rate than mortgages. Therefore, inheritance may be better used to pay off credit card debt and personal loans before lower-interest borrowing such as a mortgage.
This way, you can save on monthly interest costs and better manage your finances. Whether it is better to repay debt or save will depend on the interest charged on the debt compared with the return available on savings.
Save or invest
After paying off debts, the next logical step in inheritance planning is to save some of the inheritance money while investing the rest for the future. Instead of giving in to the temptation of spending all of the inheritance on luxuries, you may want to consider saving or investing part of it tax-efficiently.
You can keep a significant part of your inheritance money for rainy days in savings accounts. A tax-efficient way to save or invest is to use an ISA, up to the annual ISA allowance of £20,000 for the 2026/27 tax year. The money can be held in a cash ISA, a stocks and shares ISA, or split across different types of ISAs.
You can also invest the inheritance money with a long-term perspective. You can invest it in various financial instruments, including stocks, bonds, foreign exchange, commodities, or property. Investing your money and having a solid investment strategy may help you work towards long-term returns, for example through dividends, interest payments or rent. Moreover, you can manage investment risk through diversification across various securities, industries, and geographies.
Invest in a pension
Investing part of an inheritance into a pension fund can be a tax-efficient way to save for retirement. For the 2026/27 tax year, the standard annual allowance is £60,000, although a lower allowance may apply in some circumstances and tax relief on personal contributions is subject to individual limits. You can usually take up to 25% of your pension tax-free, subject to the standard lump sum allowance of £268,275.
The tax treatment of pension death benefits is changing. From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of an estate for Inheritance Tax purposes. Overall, using part of an inheritance to contribute to a pension can support long-term retirement planning, but the relevant tax rules and allowances should be considered carefully.
Charity
Many people also consider donating a portion of their inheritance money to charity. It can be a way to share some of the benefits of an inheritance with others. The inheritance then becomes not only a gift to you but also a means for others to benefit.
Keep some for personal enjoyment
If you have inherited a large sum of money, you’re well within your rights to spend some of it on personal luxuries. However, it’s essential to first consider your debts, savings, investments and longer-term financial needs before indulging yourself.
After careful financial planning, you can use any remaining inheritance money for a holiday, luxury purchases, home renovations, or anything that makes you happy. Your inheritance planning doesn’t have to entail penny-pinching
Emotional aspects of dealing with inheritance
Inheritance often brings a complex mix of emotions, ranging from gratitude and excitement to guilt and anxiety. The sudden responsibility of managing a substantial sum of money can be overwhelming, especially when it comes from a loved one who has passed away. The pressure to make the right decisions, coupled with the desire to honour the intentions of the deceased, can create a complex emotional situation.
Investing your inheritance wisely may seem like the obvious goal, but the path to doing so may be complicated by emotional considerations. It’s not just about financial gain; it’s about respecting a legacy, understanding family dynamics, and navigating personal values and goals. Balancing these emotional factors with practical financial planning is essential to make the most of an inheritance, ensuring that it serves as a positive force in your life rather than a source of stress or conflict.
How is inheritance taxed in the UK?
You do not usually pay tax simply because you receive an inheritance in the UK. Any Inheritance Tax due is normally paid by the estate before the assets are distributed. However, tax may become due later if the inherited assets generate income or are sold at a gain.
For the 2026/27 tax year, the standard Inheritance Tax nil-rate band is £325,000. A further residence nil-rate band of up to £175,000 may apply when a qualifying home is passed to direct descendants. The standard Inheritance Tax rate is 40% on the part of the estate above the available thresholds. These thresholds are currently set to remain at the same levels until 5 April 2031.
Transfers to a spouse or civil partner are generally exempt from Inheritance Tax. A reduced rate of 36% may apply if at least 10% of the net estate is left to charity.
|
Tax point |
2026/27 position |
|
Tax when receiving an inheritance |
Usually none for the beneficiary at the point of inheritance |
|
Nil-rate band |
£325,000 |
|
Residence nil-rate band |
Up to £175,000 where the conditions are met |
|
Standard Inheritance Tax rate |
40% above the available thresholds |
|
Spouse or civil partner |
Transfers are generally exempt from Inheritance Tax |
|
Charitable legacies |
A 36% rate may apply if at least 10% of the net estate is left to charity |
|
Tax after inheriting |
Income Tax may apply to income generated by inherited assets and Capital Gains Tax may apply when inherited assets are sold at a gain |
For Capital Gains Tax, the annual exempt amount for individuals is £3,000 in 2026/27. The tax is generally based on the gain made after inheritance rather than on the fact that the asset was inherited.
Tips for investing your inheritance
As discussed, inheritance can provide significant financial opportunities if managed carefully. Unfortunately, without a clear plan, inherited wealth can be spent more quickly than expected. Therefore, careful financial planning is an important part of managing an inheritance.
For larger or more complex inheritances, you may want to consider speaking to a financial planner or financial adviser. An independent financial adviser can help you assess your financial position and consider the options available to you.
A financial adviser can also help you assess possible ways to invest the inheritance based on your risk tolerance, age, short- and long-term goals and current financial position.
If you do not want to hire a financial adviser for your inheritance planning, several financial institutions offer tailored financial services based on your investor profile. This investor profile will match you with an investment portfolio that suits your risk profile.
Practical examples of managing an inheritance
Someone who inherits £20,000 and has £4,000 of high-interest debt could consider clearing that debt first, keeping part of the remaining money as an emergency fund and investing the rest through an ISA, depending on their goals and risk profile.
With a £100,000 inheritance, the options may be broader. For example, part of the money could be kept in accessible savings, up to £20,000 could be invested through an ISA in the 2026/27 tax year, and further amounts could be considered for a pension or a diversified investment portfolio, subject to the relevant rules and the investor’s circumstances.
These examples are illustrative only. The appropriate approach will depend on individual financial circumstances, tax position, objectives and attitude to risk.
Take your time before making financial decisions
It is critical to take your time before spending your inheritance and avoid making rushed financial decisions. It’s natural to be tempted to quit your job as soon as you receive £100,000 in inheritance or use the inheritance money to buy your dream car. However, it’s key to pause, reflect, and make sound financial decisions by learning how to invest £100,000.
To do this, you may want to keep the inheritance in a secure bank account for some time while you consider your options rather than frittering it away. After you’ve reviewed your overall financial position, the money can be withdrawn and put to use. You should take your time and understand the process and the consequences before making major financial decisions.
What happens to an unclaimed inheritance?
Please note that when someone dies without a valid will and without known entitled relatives, their estate may pass to the Crown as bona vacantia. To claim an unclaimed inheritance without a valid will, you must check if the estate is listed with the Crown and find out if you are an entitled relative. If you are an entitled relative, you must make a claim to the appropriate body representing the Crown. Claims are generally accepted within 12 years of the estate being administered, while fully documented claims may be considered up to 30 years from the date of death.
Making the most of your inheritance
The bottom line is that inheritance can bring significant changes to a person’s financial situation. If managed effectively, it can help reduce financial pressure and support greater long-term financial security. Therefore, it is important to have a clear financial plan when you receive an inheritance.
The inheritance money can be used to meet financial obligations, save and invest for the future, plan for a comfortable retirement, create a stable financial future for future generations, and improve your quality of life. It’s important to consider carefully how inherited wealth fits into your wider financial plans.
FAQ
First, consider any high-interest debt and whether you have an adequate emergency fund. You can put the rest of the money in a savings account, spend part of it or consider investing it, depending on your goals and financial circumstances.
The same principles that apply to a £10,000 inheritance can also apply to £20,000. You may choose to divide the money between debt repayment, emergency savings and investments. If you are eligible and have your full allowance available, £20,000 is also the overall ISA allowance for the 2026/27 tax year.
First, review your overall financial position, including any high-interest debts and emergency savings. You can then consider whether to save or invest the money, give part to charity, make pension contributions or spend some of it on yourself.
You do not usually pay tax simply because you receive an inheritance. Any Inheritance Tax due is normally dealt with by the estate, although Income Tax or Capital Gains Tax may apply later if inherited assets generate income or are sold at a gain.
Yes, provided you are eligible and have unused ISA allowance. The overall ISA allowance is £20,000 for the 2026/27 tax year, and it can be split across eligible types of ISA.
Yes, but the usual pension contribution and tax-relief rules still apply. The standard annual allowance is £60,000 for 2026/27, although a lower allowance may apply in some circumstances.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
