Investing an Inheritance: What Should You Do First?

March 12, 2026

Receiving an inheritance is life-changing, but it also brings complex decisions. Holding cash long-term may feel safe, but inflation quietly erodes its value. Here is a practical guide to making informed decisions about investing an inheritance.

Inheriting money can feel overwhelming. You may be managing grief at the same time as making financial decisions you have never faced before. The most important thing to know is this: there is no need to rush.

However, many people make the mistake of leaving inherited money in cash for too long, assuming it is the safest option. In reality, cash loses value in real terms when inflation runs above interest rates. A structured approach to investing can help your inheritance grow and work towards your goals.

First Steps After Receiving an Inheritance

Before making any investment decisions, take care of a few important practicalities:

• Deal with probate: Make sure the legal process of administering the estate is complete before funds are transferred to you.
• Check for outstanding Inheritance Tax: If IHT was due on the estate, ensure it has been paid. IHT is usually settled before funds are distributed.
• Review your own financial position: Consider whether you have any high-interest debt to pay off, emergency savings to top up, or existing ISAs and pensions to maximise before investing.
• Give yourself time: There is no obligation to invest immediately. Placing funds in a short-term savings account while you take advice is entirely reasonable.

The Risk of Holding Too Much Cash

Cash savings accounts offer security and accessibility, which makes them appealing after receiving an inheritance. But if inflation runs higher than the interest rate on your savings, the purchasing power of your money falls each year you hold it in cash.

For example, at 3% inflation, £100,000 in cash is worth the equivalent of just £74,000 in real terms after ten years, even if the nominal value remains the same.

For money you plan to hold for five years or more, investing in a diversified portfolio has historically provided better inflation-beating returns than cash. The March/April 2026 IFA Fundamentals newsletter highlights that many people instinctively reach for cash during uncertain times, but notes that balancing short-term needs with long-term investment goals is key.

How to Invest an Inheritance

A sensible approach is to split the inherited money into different buckets based on when you might need it:

• Short-term (within 3 years): Keep in accessible savings accounts or cash ISAs. This money should not be at risk from market volatility.
• Medium-term (3 to 7 years): Consider a balanced investment portfolio within a Stocks and Shares ISA. A mix of equities and bonds typically provides growth with some protection from volatility.
• Long-term (7 years or more): A more growth-oriented portfolio, potentially with a higher proportion of equities, can target higher returns over the long term.

Diversification is important regardless of timeframe. Spreading investments across different asset classes, geographies and sectors reduces the impact of any single investment performing poorly.

Tax-Efficient Wrappers

Where possible, hold investments inside tax-efficient wrappers:

• ISA: Up to £20,000 per year can be sheltered from Capital Gains Tax and Income Tax
• Pension: Contributions attract tax relief at your marginal rate; consider topping up your pension before the tax year ends
• General Investment Account: For amounts above the ISA and pension limits; Capital Gains Tax applies to gains above the £3,000 annual exempt amount

Tax Considerations When Investing an Inheritance

You do not pay Inheritance Tax personally on money you receive from an estate — any IHT due is settled by the estate before distribution. However, once you hold the money, future growth and income may be subject to tax.

• Capital Gains Tax: Applies to gains on investments held outside ISAs or pensions, above the £3,000 annual exempt amount
• Income Tax: Applies to interest and dividends above the personal savings and dividend allowances
• Inheritance Tax on your own estate: A large inheritance could increase the value of your own estate, potentially creating an IHT liability for your own beneficiaries. Gifting strategies and pension planning can help manage this.

Common Goals for Investing an Inheritance

People invest inheritances for many different reasons. The right strategy depends on what you want to achieve:

• Retirement income: Contributing to your pension or building an investment portfolio to supplement your pension
• Supporting children or grandchildren: Junior ISAs, gifts, or helping with property deposits
• Buying property: Either a primary residence or buy-to-let investment
• Long-term wealth building: A diversified portfolio for growth over 10 or more years
• Paying off debt: Clearing a mortgage or other borrowing before investing the remainder

Frequently Asked Questions

Do I pay tax on an inherited lump sum?

You do not pay Inheritance Tax personally on money you receive — this is settled by the estate. However, investment income and capital gains from the money after you receive it may be subject to Income Tax and Capital Gains Tax, depending on how you invest it.

How long should I wait before investing an inheritance?

There is no right or wrong answer. Placing funds in savings while you take advice is entirely sensible. The key risk to avoid is leaving large sums in low-interest cash for years, which allows inflation to erode their value.

Should I pay off my mortgage with an inheritance?

This depends on your mortgage interest rate compared to potential investment returns, as well as your attitude to debt. For some people, the peace of mind from being mortgage-free outweighs the potential investment gains. A financial adviser can help you weigh up the options for your specific situation.

For a complete overview of tax year end planning, read our tax year end planning guide. You may also find our article on smart gifting and IHT useful.

Get in touch with Off Piste Wealth to discuss how to invest an inheritance in a way that suits your goals and circumstances.