How do I cut my troublesome sister-in-law out of grandma’s inheritance?

My grandmother is 95, healthy and of sound mind. Sadly my mother passed away, so my grandmother’s wishes are to leave 50 per cent of her estate each to me and my brother.

My brother is married to his wife, however she has considerable mental health problems and their marriage is often rocky.

To avoid in the future potentially his wife being entitled to some of this inheritance we have discussed the option of my grandmother leaving 100 per cent to myself.

My brother and I have a very good and close relationship. This would keep the money safely under my control. I would then when the time is right use the money to provide things for my brother such as a car, holiday and so on.

My question is are there any tax implications on me spending potentially large amounts on ‘gifts’ for my brother?

Other information if relevant is that I have power of attorney for my grandmother. When my grandad died, he left everything to my grandmother so I understand his inheritance tax threshold will go to her.

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Heather Rogers replies: Many people wish to protect assets, either future or current, from potential claims from a spouse.

When a couple divorce the assets which are considered in a financial settlement are normally those classed as matrimonial assets.

These are assets which have been acquired during the marriage and include property, business interests, chattels and pensions, investments and cash.

I will run through the rules regarding divorce and inheritances, then turn to your specific question.

How are inherited assets dealt with in a divorce?

Inheritances are often an issue in divorce proceedings. Should a spouse who has inherited assets be able to retain these for themselves? The answer to that question depends on a variety of factors:

– When the inheritance was received

– Whether it has been spent and used during the marriage

– What other assets the couple have

– If there is enough in the pot to be shared between them

– The length of the marriage.

Depending on the circumstances, it may be possible to argue that the asset is not a matrimonial asset; in other words, it has not been absorbed into the assets of the couple, and therefore it remains outside the pot to be split.

However, if the couple’s finances are in a poor state and there are very few assets to split, then the inheritance may be deemed by the court to be up for grabs, especially if it has been paid into a joint account and is available for both spouses to use.

What about inheritances which have not yet passed to a spouse?

A court is unlikely to make a judgement on a potential inheritance. After all, finances and wills can change.

It is only if the person has recently passed away and the inheritance is definite and/or due very soon that the court might consider it to be relevant. It would need to be declared if received prior to a financial settlement being agreed.

How do you protect inheritances in case of a divorce?

You can make either a pre or post nuptial agreement, which can record the assets and the wishes of the parties.

Although not legally binding, these will usually be upheld by the court providing all the conditions are met.

You can also keep the inheritance separate from other marital assets and not use it during the marriage.

However, you need to take care about putting an inheritance into a trust.

If property such as a received inheritance is put into trust and this is deemed to be to avoid the other party having a claim on it, the court can challenge this under family law legislation.

Legal advice should be sought prior to any such action regarding trusts being considered.

If you are divorcing, always make sure you obtain a consent order from the court once your financial settlement has been agreed, to avoid future claims.

How might your brother protect his inheritance?

First off, you are correct that when your grandfather died, any unused ‘nil rate bands’ as regards inheritance tax will pass to your grandmother’s estate. See the box below for more on how inheritance tax works.

In your brother’s case, it sounds like divorce is a possibility. It is not yet definite, and so the circumstances would depend on when the inheritance was received by your brother.

He and his wife may get divorced and your grandmother might be still be alive.

If that was the case then providing that a consent order had been obtained from the court, no further claim could be made on your brother if he was then to inherit.

Regarding you inheriting the lot in case your sister-in-law has a claim on it in a divorce, you should consider the following points.

1. The inheritance would be in your estate meaning that all gifts you give your brother would fall under the seven-year rule.

My previous column on gifts and inheritance tax gets into the full detail.

However, the important rule to remember is that if you make gifts in your lifetime, then inheritance tax could be payable on them when you die, if they are made fewer than seven years before the date of your death.

2. Any gifts you give your brother would likely be considered matrimonial assets should he divorce, so if you gave cash or bought him a car this would leave him in the same situation as if he inherited himself.

3. Something could happen to you, or you and your brother could fall out.

Regarding your further options if your grandmother left everything to you, a deed of variation in your brother’s favour could be made within two years of your grandmother’s death.

A previous column explains how deeds of variation work, but the important issue here is it would mean that any change to the beneficiaries would be deemed to have come from the original will and not as a gift from you.

However, it is important to be careful that a deed of variation could not be seen as denying your brother’s wife financial relief.

Another option, if your grandmother chooses to do this, is for her to leave your brother’s share to him in a trust through her will.

This does not guarantee that no claim will be made by his wife, especially if he benefits from the trust during their marriage.

However, a ‘letter of wishes’ left with her will could be specific regarding your grandmother’s own intentions on this matter.

Whether a trust interest will be considered a financial resource and therefore a matrimonial asset in a divorce will depend on a number of factors and this is usually determined by the court.

Your grandmother could also leave part of her estate to any children of your brother and his wife, either outright or in trust, or with them having the right to capital and your brother to income, although the income would most likely be taken into account in a divorce.

Trusts can be complex to manage and tax returns are needed. There can also be periodic charges of inheritance tax depending on the amount invested and the type of trust used.

To conclude, there is no way of completely guaranteeing protection of a future inheritance. You should take advice from a solicitor before making any decisions, and most certainly regarding any setting up of a trust.

Ask Heather Rogers a tax question

Tax expert Heather Rogers answers our readers’ questions

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.

If you would like to ask Heather a question about tax, email her at taxquestions@thisismoney.co.uk.

Heather will do her best to reply to your message in a forthcoming monthly column, but she won’t be able to answer everyone or correspond privately with readers. Nothing in her replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

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If Heather is unable to answer your question, you can find out about getting help with tax here, including sources of free professional advice if you are elderly and/or on a low income.

You can also contact MoneyHelper, a Government-backed organisation which gives free assistance on financial matters to the public. Its number is 0800 011 3797.

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