You've inherited money

Do nothing, for now

Park it in an easy access savings account and leave it alone for three to six months.

Nothing about a lump sum gets worse for sitting still. Investments will still be there. Debts will still be payable. What changes is your capacity to think clearly, and decisions made in the first weeks after a bereavement are disproportionately regretted.

The exception is if you're carrying expensive debt, where clearing it is straightforward and obviously right.

You'll also find people appear. Family with suggestions, and occasionally firms who've noticed the probate record. "I'm not making any decisions for six months" is a complete answer to all of them.

What you'll actually be taxed on

The common assumption is that you pay inheritance tax on what you receive. Usually you don't.

Inheritance tax is paid by the estate, before anything is distributed. By the time money reaches you it's generally been dealt with. You receive the net amount and owe nothing further on it.

What you may owe tax on is what happens next:

Income from inherited assets — rent, dividends, interest — is taxable from the date of death, as your income.

Capital gains on inherited assets run from the probate value, not from what the deceased originally paid. Any gain built up during their lifetime is wiped clean. If you sell soon after and the market hasn't moved, there may be little or no gain at all. See Capital gains tax basics.

Inherited pensions are different again, and depend on the age at death. See What happens to what's left.

The two-year window most people miss

A deed of variation lets beneficiaries redirect an inheritance within two years of the death, and have it treated for tax purposes as though the deceased had left it that way.

It's genuinely useful and widely unknown. Common uses:

• Redirecting to your own children, skipping a generation, so it never enters your estate
• Passing to a charity, which can reduce the estate's inheritance tax
• Correcting a will that no longer reflects what anyone intended
• Equalising between siblings where the will didn't

The alternative — receiving it and gifting it on — starts a seven-year clock and keeps it in your estate if you die within it. A variation avoids that entirely.

Conditions apply, all beneficiaries affected must agree, and it needs doing properly. But two years is a long window and it's worth knowing the option exists before it closes.

If you inherited from a spouse

Different rules, and better ones.

Everything passes free of inheritance tax between spouses and civil partners, and their unused nil rate bands transfer to you — which is why a couple can often pass on up to £1 million between them.

Their ISA doesn't have to lose its tax status. You can claim an additional permitted subscription equal to the value of their ISA, on top of your own £20,000 allowance. This is separate from actually inheriting the money and it's frequently missed. Ask the provider.

Their pension may be available as beneficiary drawdown rather than a lump sum, which is usually the better option.

What to do with it

Once you've had time, the order is the same as for any money — see The order of operations. Briefly:

Clear expensive debt. Build or top up your emergency fund. Use your ISA allowance, and your pension if you're a higher-rate taxpayer and won't need access. Then invest what's left, if the horizon is long enough.

A large sum will exceed your annual ISA allowance, so filling it over successive years — with the balance held in a general account meanwhile — is the usual approach.

The one thing worth thinking about separately is whether this changes your plans rather than just your balance. Working fewer days, retiring earlier, helping children. That's a bigger question than where to put the money, and it's the one an inheritance most often makes possible.

Things that go wrong

Lending to family without agreement. Money lent within families after an inheritance is a reliable source of long-term damage. If you're going to help, decide whether it's a gift and say so.

Buying property because it feels solid. A buy-to-let is a business, with tax treatment that's become considerably less favourable, illiquidity, and work attached.

Investing all of it at once because it's sitting there. See Time in the market — phasing in is slightly worse on average and much easier to live with.

Doing nothing indefinitely. Six months of thinking is sensible. Five years in a low-interest account is inflation quietly taking a share.

This page is for general education only and isn't personal advice. Deeds of variation and inherited pension decisions have deadlines and are difficult to reverse.