How to Avoid Inheritance Affecting Benefits in the UK?

Receiving an inheritance can have significant consequences for individuals who rely on means-tested benefits in the UK.

Since these benefits are calculated based on an individual’s income and savings, a lump sum inheritance could push them over the financial thresholds, resulting in reduced payments or even complete loss of entitlement.

For this reason, careful estate planning and will-making are essential for those who wish to leave money to a loved one who depends on means-tested benefits.

By understanding the rules and applying the right strategies, individuals can ensure that their inheritance does not negatively impact their financial support.

In this article, we will explore how inheritance affects benefits, the legal ways to protect entitlements, and strategies to manage inheritance effectively.

How Does Inheritance Affect Means-Tested Benefits in the UK?

In the UK, means-tested benefits are financial aids provided to individuals based on their income and savings. These include:

• Universal Credit
• Income Support
• Pension Credit
• Housing Benefit
• Council Tax Reduction

When an individual receives an inheritance, it is counted as capital and can impact their benefit entitlement. The Department for Work and Pensions (DWP) considers savings, investments, and lump-sum payments when assessing eligibility.

Here are the key savings limits for means-tested benefits:

Benefit Type	Savings Below £6,000	Savings £6,000 – £16,000	Savings Above £16,000
Universal Credit	Full entitlement	Benefit amount reduced	No entitlement
Housing Benefit	Full entitlement	Reduction applies (£10,000 limit for pensioners)	No entitlement (except pensioners with Pension Credit)
Pension Credit	Full entitlement	No impact until £10,000	Above £10,000: £1 income per £500 of savings
Tax Credits	Not affected by savings	Not affected by savings	Not affected by savings

Even if an individual has not yet received the inheritance into their bank account, it is still considered part of their capital.

Attempting to spread out payments over time or redirect inheritance using a Deed of Variation is unlikely to be effective, as the DWP may classify this as deprivation of assets, a deliberate attempt to reduce savings in order to continue claiming benefits.

What Are the Legal Ways to Avoid Inheritance Affecting Benefits?

There are several legal and legitimate ways to structure inheritance to avoid loss of benefits:

Discretionary Trusts

A discretionary trust is a legal arrangement where trustees manage assets on behalf of the beneficiary.

Since the recipient does not have direct ownership of the funds, the inheritance is not counted as personal capital, ensuring it does not affect their means-tested benefits.

Acceptable Spending of Inheritance

Certain purchases may be considered acceptable uses of inheritance without being seen as deprivation of assets, such as:

• Paying off existing debts (credit cards, loans)
• Investing in home improvements
• Purchasing essential household items (e.g., furniture, appliances)
• Buying medical equipment or disability aids

However, excessive spending or transferring the inheritance to others in an attempt to lower savings could be considered a deprivation of assets by the DWP.

How Can Setting Up a Trust Protect Benefits?

A trust allows assets to be managed on behalf of a beneficiary while preventing them from losing means-tested benefits. The most commonly used type is a Discretionary Trust, which:

1. Holds the inheritance on behalf of the beneficiary
2. Distributes funds at the trustees’ discretion
3. Protects against capital being counted towards benefit thresholds

To set up a trust, it is advisable to:

• Consult a solicitor with experience in inheritance and benefits law
• Appoint reliable trustees
• Define the purpose of the trust in a legally binding trust deed

What Is the Deprivation of Assets Rule and How Does It Affect Benefits?

The deprivation of assets rule prevents individuals from deliberately reducing their savings to continue claiming means-tested benefits. Examples of actions considered deprivation of assets include:

• Giving away money to family members
• Transferring property ownership to someone else
• Making large, unexplained withdrawals from a bank account

If the DWP determines that a person has intentionally reduced their capital, they may still treat them as if they own the money, which could lead to a loss of benefits.

What If You Inherit a Property While on Benefits?

Inheriting a house instead of money generally does not immediately affect benefits. However, it can raise complications if the property is sold, rented out, or increases the total value of an individual’s assets.

If the estate value exceeds the nil rate band (£325,000), inheritance tax (IHT) may be payable. Strategies to reduce IHT include:

• Leaving the property to a spouse or civil partner (tax-free)
• Using the Residence Nil Rate Band (£175,000 additional threshold)

Selling the property can affect benefit eligibility as the proceeds will count as capital, potentially disqualifying the recipient from means-tested benefits.

What Are the Best Ways to Manage Inheritance Without Losing Benefits?

Receiving an inheritance while on means-tested benefits can be financially beneficial, but if not handled correctly, it can lead to a loss of entitlement.

Proper planning and strategic decision-making can help individuals retain their benefits while making the most of their inheritance.

Here are some of the best ways to manage an inheritance without negatively impacting benefit eligibility.

Use the Inheritance for Essential Expenses

One of the most effective ways to legally reduce capital without it being considered deprivation of assets is to spend the inheritance on necessary expenses. Acceptable ways to use inheritance include:

• Paying Off Debts: Clearing outstanding credit card balances, loans, or mortgage payments is a responsible use of funds that does not affect benefit entitlement.
• Home Improvements: If the individual owns their home, they can invest in repairs, renovations, or modifications (e.g., insulation, double glazing, or accessibility features like ramps or stairlifts).
• Buying Essential Household Items: Purchasing furniture, appliances, or other necessary home essentials can improve living conditions without being considered deprivation of assets.
• Medical or Disability-Related Expenses: Inheritance can be used for private healthcare treatments, therapy, or purchasing disability aids without affecting benefits.

Set Up a Discretionary Trust

A Discretionary Trust is one of the most effective ways to ensure that an inheritance does not count as personal capital while still allowing access to funds when needed. This type of trust works as follows:

• The money is placed into the trust rather than given directly to the beneficiary.
• A group of trustees (usually family members or a solicitor) manage and control the funds.
• The beneficiary does not have direct access to the money, meaning it is not counted towards their means-tested benefits.
• Funds can be released at the discretion of the trustees to cover specific needs, such as rent, education, or healthcare.

Steps to Set Up a Trust:

1. Consult a Solicitor – Professional legal advice ensures the trust is correctly set up and complies with UK law.
2. Choose Trustees – Select reliable individuals to oversee the trust.
3. Create a Trust Deed – This legal document outlines the rules and purpose of the trust.
4. Transfer Inheritance to the Trust – The funds are moved into the trust instead of being given directly to the beneficiary.

Invest in Exempt Assets

Certain assets are not counted as capital for means-tested benefits. Using inheritance to invest in these assets can help maintain benefit entitlement. Some exempt assets include:

• A Primary Residence: If the beneficiary does not already own a home, purchasing a house to live in will not count as capital.
• A Car or Mobility Vehicle: Buying a car, especially for disability purposes, is not considered as part of means-tested assessments.
• Personal Possessions:  Valuable items such as jewellery, furniture, or electronics are not usually counted as capital.

However, purchasing unnecessary luxury items with the intention of reducing savings could be flagged as deprivation of assets, so purchases should be justifiable.

Convert Savings into a Funeral Plan

Pre-paid funeral plans are another way to manage inheritance without it being counted as capital for benefit purposes.

These plans allow individuals to prepay for funeral costs, ensuring expenses are covered while protecting their benefits.

Use Inheritance for Education or Training

If the recipient of the inheritance wants to improve their career prospects, they can use the money for education or vocational training.

Investing in tuition fees, professional courses, or skills development can improve future job opportunities while ensuring benefits eligibility remains unaffected.

Make Charitable Donations or Gifting within Limits

Donating a portion of inheritance to charity is an option for those who do not need the full amount.

However, large or frequent donations could be investigated as deprivation of assets if the DWP suspects an individual is giving away money simply to stay under the savings limit.

Small gifts, such as birthday or Christmas presents to family members, are usually not considered deprivation of assets, but large one-off transfers should be avoided.

Seek Professional Financial Advice

Managing an inheritance while on means-tested benefits can be complex, and professional financial advice is strongly recommended. A benefits specialist, solicitor, or financial advisor can help:

• Assess the best way to use the inheritance without affecting the benefits
• Advise on trusts and other legal protections
• Explain tax implications (e.g., inheritance tax, capital gains tax)
• Ensure compliance with DWP regulations

Report the Inheritance to the DWP Immediately

Failing to report an inheritance can lead to overpayments, which must be repaid and could result in fines or legal consequences.

Even if an individual believes their inheritance will not affect their benefits, it is essential to notify the DWP immediately and seek advice on how to proceed.

Conclusion

Receiving an inheritance does not have to result in losing means-tested benefits.

By using trusts, spending wisely, investing in exempt assets, and seeking professional advice, individuals can protect their financial support while making the most of their inheritance.

Proper planning is crucial to ensure compliance with DWP regulations and to avoid unintended financial penalties.

Would you like to explore legal solutions tailored to your situation? Consulting a benefits expert or solicitor can help you navigate these complex rules with confidence.

Frequently Asked Questions (FAQs)

Can I refuse an inheritance to keep my benefits?

Yes, but this may still be considered deprivation of assets, affecting benefit eligibility.

Will putting inheritance in a partner’s name affect benefits?

Yes, the DWP may treat this as deliberate asset deprivation.

What happens if I inherit a house while on benefits?

Owning a property does not immediately disqualify you, but selling or renting it could affect benefits.

How quickly do I need to report inheritance to the DWP?

You must inform the DWP immediately after receiving an inheritance.

Can I use inheritance for funeral costs without losing benefits?

Yes, funeral costs are an acceptable use of inheritance.