Can you refuse an inheritance?

An inheritance can be lifechanging for many people.

A substantial windfall might enable you to buy your first home, pay off their mortgage or start a business, but there may be some instances where the legacy is unwelcome.

Alternatively, you might decide that another person might benefit from the inheritance more.

For some people an inheritance might cause more problems than it solves and it would be more tax effective to pass it on to someone else.

Whatever your reasons, you can refuse an inheritance.

Here’s what you need to know.

Why refuse an inheritance?

There are multiple reasons why people might decide to refuse an inheritance.

These include:

• Other people need the gift more: If you do not need the money, you may think it would make more sense for it to go to your children or grandchildren.

• Tax issues: Accepting the gift would increase the value of your estate and the inheritance tax that will be payable on it when you die.

• Personal concerns: You may simply decide that you don’t want to inherit from that individual for personal reasons, for example you had fallen out since the will was written, or you were estranged.

How to refuse an inheritance

There are two ways to formally refuse an inheritance:

• Disclaiming the inheritance

• Using a deed of variation

Which option is right for you will depend on why you want to refuse the inheritance.

Disclaiming an inheritance

If you do not want to inherit and you don’t have any concerns or preferences about what happens to the money, you can disclaim your inheritance within two years.

To disclaim an inheritance you simply need to let the executor of the will know that you do not want it.

That money, gift or asset, will then go back into the estate and be distributed in line with the instructions of the will.

If there wasn’t a will, the estate will be allocated according to the rules of intestacy.

You should inform the executor of your decision in writing.

If you have received several gifts in a will, you can choose to accept some and not others, but you cannot disclaim part of a gift.

Say, for example, you have been left an item of jewellery and £20,000.

You could decide to take the money and disclaim the jewellery. However, you cannot take £10,000 and disclaim the rest of the money.

Deed of variation

If you want a say in who gets your inheritance – for example you want it to go to your children or grandchildren – you can use a deed of variation.

This can be helpful if you think they’ve got a greater need for the inheritance than you.

It could also be helpful from an estate planning point of view, if you are worried that it will increase the amount of tax that your loved ones will eventually pay.

With a deed of variation, the gift will be regarded by HMRC as a legacy from the deceased, rather than a gift from you, for inheritance tax and capital gains tax purposes.

You might hear this referred to as being ‘read back’ into the will.

You can use a deed of variation for all or part of your inheritance and it can be diverted to the new beneficiaries directly or into a trust, if you want more control.

You can also use a deed of variation if you want your inheritance to go to the charity of your choice.

For a deed of variation to be effective for tax purposes, it needs to be written, signed and witnessed within two years of the deceased’s death.

You can also only use a deed of variation to deal with your inheritance. You cannot use one to alter how other parts of the estate have been distributed.

Can’t I just give away my inheritance?

You could decide to give away your inheritance yourself, without using a deed of variation.

While this might feel like the simplest solution, it could have unintended tax consequences.

This is because it would be regarded by HMRC as a gift from you, not the deceased.

From an inheritance tax point of view, it would therefore mean that the gift becomes a potentially exempt transfer, which means that you would need to live for a further seven years for it to wholly fall outside your estate.

If you gave away an asset you inherited and its value increased during the period that you owned it, there could also be a potential CGT bill.

However, again, this would be avoided if the gift was diverted using a deed of variation.

Preparing a deed of variation

If you are considering a deed of variation it’s important to get professional legal advice to ensure it is drafted correctly and that there are no unintended consequences.

• The deed of trust needs to be formalised in writing, signed and witnessed.

• It can only be made by the person in receipt of the inheritance.

• It needs to be written within two years of death for tax benefits to apply.

• It should state whether you want to be ‘read back’ into the will for IHT and or CGT purposes.

The value of professional advice

Refusing an inheritance is a big decision, but in some circumstances it could be the right thing to do for your family and have significant tax advantages.

Whatever you reasons for turning down an inheritance, it makes sense to get professional advice.

A solicitor will be able to guide you on the best way for you to refuse an inheritance and, if necessary, prepare a deed of variation for you.

It may also be sensible to get financial advice too, especially if you’re refusing an inheritance as part of your own estate planning or are not sure of the best ways to gift money to children or grandchildren.

Let Unbiased match you with a financial adviser that can help you decide what you should do with your inheritance.