Inheritance money may affect some of your benefits, particularly the means-tested types, which hinge on your income and savings staying below a certain level. If you’re concerned about losing your benefits upon receiving inheritance, learn effective ways how to avoid inheritance affecting benefits UK below.  

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How Inheritance Affects Benefits

Receiving inheritance, whether property or money, may affect your means-tested benefits. There are several types of benefits, but only the means-tested kinds get affected by inheritance or savings increase, as your eligibility hinges on your income staying below specific level (varies per benefit).  

Generally, your benefits remain unaffected if you receive an inheritance below £6,000. Between £6,000 and £16,000, your benefits may either start to reduce or get revoked. Above £16,000, you will stop qualifying for benefits. 

What if You Inherit a Property? If you intend to make it your primary residence, you will not worry about losing your benefits. You may owe inheritance tax, though. A property or an estate will only count toward your savings when you use it other than for residential purposes. 

What Are Means-Tested Benefits?

How to Avoid Inheritance Affecting Benefits UK 

Only means-tested benefits get affected when you receive inheritance. See if you receive government support through the following benefits:  

  • Universal Credit 
  • Housing Benefit 
  • Income Support 
  • Jobseeker’s Allowance 
  • Pension Credit 
  • Council Tax Relief 
  • Working Tax Credit 
  • Child Tax Credit 
  • Social Funds 
  • Other EU Welfare Benefits 

The limit for the above benefits varies, but usually, your inheritance will be reduced or revoked once it exceeds £6,000. Special rules apply. Take, for instance, people beyond pension age on Housing Benefit. They can have up to £10,000 before their Housing Benefit is affected.  

What Else Affects Your Benefits? Your eligibility for means-tested benefits depends on your total ‘capital,’ which includes your inheritance and savings. Other benefits-affecting sources included in financial assessments include redundancy pay, compensation payouts, or large deposits in savings accounts.  

What Benefits Are Not Affected by Inheritance?

If your benefits are non-means tested, it remains unaffected whether you receive inheritance or not. These include:  

  • State Pension 
  • Personal Independence Payment (PIP) 
  • Disability Living Allowance (DLA) 
  • Attendance Allowance 
  • Contribution-Based Employment and Support Allowance (ESA) 
  • Carer’s Allowance 

The benefits above remain unaffected by your inheritance as they are based on your personal circumstances, health, or contributions to National Insurance, rather than your financial situation.   

Pro-Tip: The Department for Work and Pensions (DWP) requires you to report any inheritance or savings increase. Moreover, even if you are confident that your benefits are non-means tested, HMRC will need this information to see if you owe inheritance tax.  

How to Avoid Inheritance Affecting Benefits UK

There are several strategies to prevent inheritance from affecting benefits in the future if you are leaving money to someone on benefits. If you are a beneficiary, good news—you can still manage your inheritance without losing your benefits.  

As the Legatee  

  • Establish a Trust: Set up a trust that can manage the inheritance for the beneficiary, ensuring the funds are not counted as capital. 
  • Gift Assets: Consider gifting assets during your lifetime, which can reduce the amount of inheritance received. 
  • Pay Off Debts: Use part of the inheritance to pay off any debts, which can help improve the beneficiary’s financial situation without increasing their capital. 
  • Invest in Exempt Assets: Encourage investment in pensions or other exempt savings vehicles that won’t affect means-tested benefits. 

Stay Tax-Efficient: Inheritance may affect not only your loved ones’ benefits but also their tax position. Once your assets exceed nil rate band of £325,000, they may end up paying more to the taxman than benefit from your inheritance. Be sure to consult tax professionals for estate and inheritance tax planning beforehand. 

As the Heir

  • Inform Authorities: Notify the relevant benefit authorities about the inheritance to ensure compliance and avoid penalties. 
  • Manage Capital Wisely: Keep your capital below the benefit thresholds by spending on necessary expenses or exempt assets. 
  • Consider Trusts: If applicable, explore setting up a discretionary trust to manage the funds without affecting your benefit eligibility. 

Beware of Asset Deprivation! If mitigating the impact of inheritance on your benefits is the only option, the best you can do is manage your money strategically. However, be sure to use legal means, as the tax authority can determine when you are using ‘asset deprivation’ to increase your benefits or remain eligible.  

FAQs on Inheritance and Benefits

No, solicitors are not legally required to inform the DWP directly about an inheritance. It is the responsibility of the individual who receives the inheritance to report it to the DWP if they are claiming means-tested benefits 

Inheritance counts as capital, and if your savings or capital exceed certain thresholds, it can reduce or even stop your Universal Credit payments. 

Inheritance in a trust can affect means-tested benefits like Universal Credit, but it depends on the type of trust. A Discretionary trust may now be counted under new rules, potentially reducing benefits. However, vulnerable person’s trusts or disabled person’s trusts are treated more favorably and might protect against inheritance affecting benefits. 

The value of the property may count as capital, which can affect your benefits if it exceeds certain thresholds. However, if the house is your primary residence, it may be exempt from being counted as capital. You will still be eligible to pay inheritance tax on it if it exceeds the nil rate band. 

Get Personalized Advice from Legend Fusions

Inheritance doesn’t have to disrupt your benefits. With the right strategies, you can protect both your inheritance and your eligibility for crucial support. Let Legend Fusions help you safeguard your wealth and manage your finances. Our professional accountants will help you with how to avoid inheritance affecting benefits in legal ways. Talk to our inheritance specialists today 

Reviewed by:
Junaid Usman

Apart from being a partner at Legend Fusions, Junaid is an expert on Business Tax including business management advisory services which has proven in the growth of company. He is a promising advisor with an ideology; “Any business success depends on the level of objectivity it maintains.”

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