What to do with a large inheritance or lump sum in the UK

Reviewed by Matt Conradi, Head of Advisory, Netwealth | [October 2026]

An inheritance is the transfer of assets from a deceased person to their chosen beneficiaries, typically distributed according to the instructions outlined in their will or trust. Receiving one changes your financial situation overnight. It might come from a family estate, the sale of a business, or a life insurance policy. The financial decisions you make in the months that follow will shape your financial health for decades.

Key takeaways

Inheritance tax is usually paid by the estate before assets are distributed, so most beneficiaries owe HMRC nothing directly.
You may owe capital gains tax if you later sell inherited assets that have risen in value since the date of death.
Evaluating your short-term and long-term financial goals before investing is essential, as those goals significantly influence your investment strategy.
A lump sum of £50,000 or more can benefit from professional investment management rather than a DIY platform.

The right sequence matters. A common mistake is investing before addressing more pressing financial obligations.

Step	Action	Why it comes first
1	Understand your tax position	IHT is usually paid by the estate; CGT may fall to you on disposal
2	Build an emergency fund	Three to six months of living expenses before any long-term commitment
3	Clear high interest debts	Interest on debt often exceeds potential investment returns
4	Maximise ISA and pension allowances	Shelter the first portion from income tax and capital gains tax
5	Invest the remainder	Build a diversified portfolio aligned to your financial goals

Source: Netwealth

What we often see with clients is that step one takes longer than expected, and that is rarely a bad thing. The tax position on inherited assets is often more nuanced than it first appears, and understanding it clearly shapes every decision that follows. Netwealth's financial planners work through this stage with clients before any investment decisions are made.

If you would like help working through any of these steps, speak to our team.

What to do with inheritance money: tax implications first

Before making any financial decisions about inheritance money, you need to understand what tax has already been paid on your behalf and what obligations, if any, now fall to you personally.

Do you pay inheritance tax as a beneficiary?

In the UK, inheritance tax (IHT) is charged at 40% on estates valued over £325,000, with potential exemptions for married couples and civil partners, allowing them to pass on up to £1,000,000 tax-free if certain conditions are met. IHT is paid by the estate before assets are distributed. As a beneficiary, you don't usually have to pay inheritance tax from your own funds.

Inheritance Tax (IHT) rule	Current position
Nil-rate band (NRB)	£325,000 per person
Inheritance Tax rate	40% on the part of the estate above the available threshold
Spouse and civil partner exemption	Transfers between spouses or civil partners are generally exempt from Inheritance Tax
Residence nil-rate band (RNRB)	An additional £175,000 may be available when a qualifying home is passed to direct descendants
Potential combined allowance for a couple	Up to £1 million in qualifying circumstances where unused allowances can be transferred between spouses or civil partners
Who pays Inheritance Tax?	Usually paid from the estate before assets are passed to beneficiaries

Source: GOV.UK Inheritance Tax

The spousal IHT exemption means a spouse or civil partner can also inherit any unused nil rate band and residence nil rate band, effectively doubling the threshold available on second death.

A deed of variation allows beneficiaries to redirect inherited wealth to others, if effected within 2 years of death. This can help avoid increasing personal inheritance tax liabilities, for example by redirecting assets to children or grandchildren rather than absorbing them into an already substantial estate.

If you receive a gift from someone who subsequently dies within 7 years, the seven-year gift rule may mean some inheritance tax falls due on that gift, depending on its value and proximity to the date of death. Always take financial advice if you're uncertain about your position.

Capital gains tax on inherited assets

CGT on inherited assets works differently from other capital gains. When you inherit shares, residential property, or other assets, the valuation at the date of death for inheritance tax purposes becomes your base cost. You don't pay capital gains on appreciation that accrued during the deceased's lifetime. Capital gains only crystallise when you sell or dispose of the assets after inheriting them.

Taxpayer	CGT rate from April 2026	Annual exempt amount
Basic rate taxpayer	18%	£3,000
Higher or additional rate taxpayer	24%	£3,000

Source: GOV.UK Capital Gains Tax rates

If you inherit property and later sell it, your capital gains are calculated from the probate value, not the original purchase price. Tax treatment depends on your individual circumstances, so always take financial advice before selling inherited property or a large portfolio of inherited shares.

Probate, legal fees and what to expect.

Applying for probate is the process of legally validating a will and giving the executor authority to distribute the estate, including settling debts and distributing assets. This can take several months, and legal fees on complex estates are often higher than people expect.

The court fee for estates over £5,000 is set by HMRC and subject to change: check the current figure at GOV.UK before applying.

Scenario	Document required	Who manages the estate
Valid will exists	Grant of probate	Named executor
No will, or executors unable to act	Letters of administration	Court-appointed administrator

Source: GOV.UK Applying for probate

Taking time before making financial decisions is something Netwealth's planners actively recommend. As our CEO, Charlotte Ransom wrote in response to a reader who had inherited £240k: "...the most important thing to do initially is to allow time to adjust to any new circumstances and not feel the need to rush any decisions, financial or otherwise."

A period of three to six months is a reasonable baseline before committing to anything long term.

Assessing your financial situation before you invest

Before investing inheritance money, you need an honest picture of your financial situation. That means reviewing income, debts, monthly living expenses, and your existing savings. A clear view of your financial health prevents the most common mistake: investing before addressing more pressing financial circumstances.

Building an emergency fund

Creating an emergency fund with three to six months' worth of living expenses is a crucial step before investing an inheritance, ensuring you have a financial safety net for unexpected expenses. Hold this in a low-risk, accessible savings account rather than in bank accounts that don't earn competitive interest.
If you already have an adequate emergency fund in place, this step is done. If not, set it aside before committing any inheritance money to longer-term investments.

Clearing high interest debts first

Before investing an inheritance, it's advisable to pay off high interest debts. The interest on debt across credit cards, personal loans, and other unsecured borrowing can often exceed potential investment returns. Clearing high interest debts first effectively reduces the drag on your inheritance, as the interest you avoid paying is a certain saving in a way that investment returns are not.

Mortgage debt is more nuanced. At lower interest rates, investing the inheritance may generate better long-term returns than overpaying a mortgage. A financial planner can model this against your personal circumstances and financial goals.

Where to put inheritance money: bank accounts and wrappers

Once your emergency fund is in place and high interest debts are cleared, the next step is deciding where to put inheritance money. Leaving it in bank accounts while you plan is sensible, but the most tax-efficient starting point is your annual wrappers.

ISA and pension: the most tax-efficient starting point

The table below compares the two most important wrappers to prioritise before investing the remainder.

Feature	ISA	Pension
Annual limit	£20,000	£60,000 (or 100% of earnings)
Tax relief on contributions	No	Yes, at your marginal rate
Tax on growth and income	None	None until withdrawal
Tax on withdrawal	100% tax free	25% tax free (capped at £268,275); rest taxed
Carry forward unused allowance	No	Yes, up to 3 prior tax years
Access	Anytime	Age 55 (57 from April 2028)

Source: GOV.UK ISA rules; GOV.UK pension annual allowance

Money invested in a Netwealth ISA is sheltered from income tax and capital gains tax on all future returns. A Netwealth pension attracts tax relief at your marginal rate (higher and additional rate taxpayers can claim the full amount through self-assessment), making it one of the highest-value uses of inheritance money available.

If you have a spouse or civil partner, both of you can use individual allowances, effectively doubling the tax-free amount you can shelter in a single tax year. If you have children, you can also use their ISA (if they're an adult) or Junior ISA (if they're a minor) allowances where appropriate, for additional family tax planning efficiency.

Setting your financial goals and risk tolerance

It's important to evaluate your short-term and long-term financial goals when deciding how to manage an inheritance, as these goals can significantly influence your investment strategy. Are you investing for income in retirement, capital preservation, long-term growth, or a combination?

Your risk tolerance, time horizon, and personal circumstances all shape the right answer. If you're risk averse or close to retirement, capital preservation matters more than growth. If you have a long investment horizon, a higher equity allocation may be appropriate. Rather than generic market guidance, these are personal financial decisions that good advice should be built around.

Making financial decisions about the remainder

For inheritance money above your ISA and pension limits, a clear investment strategy is essential. This is where financial advice earns its cost.

Building an investment portfolio for a large lump sum

Diversifying investments across different asset classes, such as stocks, bonds, and cash, is crucial to minimise risk and maximise potential returns when managing a large inheritance. A well-constructed investment portfolio for a lump sum of £50,000 or more typically spreads capital across the following:

Asset class	Risk level	Role in portfolio
Stocks (equities)	Higher	Long-term growth; stock market exposure
Bonds	Lower	Stability and income; balances equity volatility
Cash	Lowest	Capital preservation and liquidity
Property funds	Medium	Diversification and income; subject to strict rules on liquidity

Source: Netwealth

A gradual approach to investing, where you invest a regular, fixed amount over time, can help mitigate the impact of market volatility and is often recommended for new investors. Rather than committing the full sum at once, you average out your entry points across different market conditions. Netwealth offers a staggered investment facility for clients wishing to adopt this approach.

Tax-efficient investing at this level means thinking beyond ISAs and pensions. Offshore bonds, general investment accounts structured for tax efficiency, and trust arrangements all have a role depending on your financial goals and tax position. Your investment portfolio needs to be reviewed regularly as market conditions, personal circumstances, and financial goals evolve.

Lump sums from a business sale: different considerations

A large lump sum from a business sale carries different tax implications than an inheritance.

Factor	Inheritance	Business sale
Tax on receipt	IHT paid by estate; beneficiary usually pays nothing	Capital gains tax on sale proceeds
Applicable CGT rate	18% or 24% (calculated from probate value)	18% (BADR, all taxpayers) or 24% (standard, higher rate taxpayers)
Lifetime relief limit	N/A	£1 million (Business Asset Disposal Relief)
Timing flexibility	Limited	Can time across tax years to reduce liability
Immediate obligations	None for most beneficiaries	CGT payable via self-assessment

Source: GOV.UK Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) caps the CGT rate at 18% on qualifying gains up to a £1 million lifetime limit from 6 April 2026, regardless of income tax band.This benefits higher rate taxpayers who would otherwise pay 24% standard CGT on a business disposal. The rules are strict and conditions must be met before the sale takes place.

Working with business sale proceeds

We regularly work with clients who have received proceeds from a business sale, as well as those moving from cash to investment for the first time after a liquidity event. In practice, the financial position of someone who has just sold a business is rarely as straightforward as the headline figure suggests. Getting the right structure in place early makes a meaningful difference to what you can do with the proceeds.

Earnout arrangements, deferred consideration, and warranties all affect when proceeds are actually available to invest and how they should be structured.

When to seek financial advice and expert guidance

Estate planning is essential to ensure your assets are distributed according to your wishes, and it can help minimise inheritance tax while providing financial security for your loved ones. For estates of any complexity, professional input is usually worthwhile. As a lump sum grows, tax implications, investment options, and estate planning considerations increase in complexity.

Expert guidance pays for itself at this level. A qualified financial adviser or financial planner can help you:

Structure your inheritance across accounts in the most tax-efficient way
Model the impact of different investment strategies against your financial goals
Consider intergenerational wealth planning and how to pass on wealth tax-efficiently to loved ones
Avoid costly mistakes on capital gains tax, inheritance tax, and pension tax rules

A discretionary investment manager handles these decisions on your behalf, within your agreed strategy. This typically delivers stronger risk-adjusted returns than managing a portfolio yourself on a DIY platform.

Plan your investment strategy with Netwealth

For anyone who has received a large inheritance, sold a business, or come into a significant lump sum another way, the financial decisions you make in the first 12 months have an outsized impact on your long-term financial situation.

At Netwealth, our investment specialists work with clients to build personalised, tax-efficient investment strategies for lump sums. We integrate ISA, pension, and general account management into a single coordinated approach, regularly reviewed as your individual circumstances and financial goals evolve. Our online planning tools let you model different scenarios and see how your decisions might play out over time, before committing to anything.

Speak to our team today and take control of your financial future.

Please note: the value of your investments can go down as well as up. Netwealth offers advice restricted to our services and does not provide independent advice across the market. This article doesn't constitute financial advice and shouldn't be interpreted as a personal recommendation.

Frequently Asked Questions

What should I do first with a large inheritance?

Understand the tax position first: what has already been paid by the estate, and what CGT obligations, if any, now rest with you. Once that's clear, build an emergency fund if you don't have one, clear high interest debts, then maximise ISA and pension allowances. Evaluating your short-term and long-term financial goals before investing will guide everything that follows.

Do I pay inheritance tax on money I receive?

Inheritance tax is usually paid by the deceased's estate before assets are distributed. As a beneficiary, you don't normally have to pay inheritance tax from your own funds. Exceptions include gifts made within 7 years of death and certain trust arrangements. A solicitor can confirm your exact position.

How do I invest £500,000 tax-efficiently in the UK?

Start with the full £20,000 ISA allowance and consider a pension top-up using carry-forward for unused allowances from prior years. For the remainder, a diversified investment portfolio across different asset classes, managed for your risk tolerance and financial goals, is the standard approach. For this level of investment, CGT rates and allowances alongside income tax planning are key considerations.

What is the capital gains tax position on inherited assets?

You don't pay CGT on gains that accrued before the date of death. Your base cost is the probate valuation. CGT applies only to gains arising after you inherit, when you sell or dispose of an asset. From April 2026, rates are 18% for basic rate taxpayers and 24% for higher rate taxpayers, with a £3,000 annual exempt amount.

When does financial advice make more sense than DIY?

As a lump sum grows, tax-efficient investing, estate planning, and portfolio management typically become more complex than a DIY platform can handle well. At that point, a discretionary investment manager making ongoing decisions within your agreed strategy tends to produce better outcomes than self-directed management, particularly over a long investment horizon.

How does Netwealth manage a large investment portfolio?

Our investment specialists build a personalised strategy across ISA, pension, and general investment accounts, making discretionary investment decisions within your agreed risk parameters. We review your portfolio regularly and adjust as your financial goals, personal circumstances, and market conditions evolve.

What does Netwealth charge for investment management?

Our fees are transparent and structured to be competitive with larger wealth managers while delivering a genuinely personalised service. We're happy to discuss your situation and provide a clear picture of costs before you commit.