Inheritance and Bankruptcy UK: What Happens to a Beneficiary's Inheritance?

Updated: 16 May 2026 • Reading time: 8 min

Leaving an inheritance to someone who is — or may become — bankrupt can have serious unintended consequences. Rather than benefiting the person you intended to help, the inheritance may go straight to their creditors. Understanding how bankruptcy interacts with inheritance law is essential for anyone writing a will where a beneficiary has financial difficulties.

The Trustee in Bankruptcy’s Power Over Inheritance

When a person is made bankrupt in England and Wales, a trustee in bankruptcy (TIB) is appointed. The TIB’s job is to gather in the bankrupt’s assets and distribute them among creditors. The TIB does not just have power over assets the bankrupt owned at the date of the bankruptcy order — they also have power over after-acquired property.

Under section 307 of the Insolvency Act 1986, after-acquired property includes any property that the bankrupt acquires or becomes entitled to acquire after the bankruptcy order is made. This expressly covers inherited assets. The TIB can serve notice on the bankrupt within 42 days of learning of the inheritance, at which point the property vests in the TIB for the benefit of creditors.

Disclaimer: Does Refusing Inheritance Help?

A bankrupt beneficiary might consider formally disclaiming (renouncing) their inheritance, on the basis that if they never accept it, the TIB cannot claim it. This logic is flawed. Section 307(4) of the Insolvency Act 1986 gives the TIB the right to apply to the court to have a disclaimed inheritance vest in the bankruptcy estate anyway.

The courts have consistently refused to allow bankrupt beneficiaries to use disclaimer as a mechanism to defeat creditors’ claims. Re Goss-Custard [2013] confirmed that the TIB can pursue an inheritance even where the bankrupt has disclaimed it. Disclaimer is therefore not a reliable solution.

The Role of Timing: When Did the Entitlement Arise?

Whether the TIB can claim depends on when the right to the inheritance arose, not when the assets are actually received. The right to inherit arises at the date of deathof the testator. So if:

• The testator dies while the beneficiary is bankrupt — the TIB can claim the inheritance
• The bankrupt is discharged before the testator dies — the inheritance is safe; it belongs to the (now discharged) former bankrupt outright
• The testator dies during the bankruptcy but the estate takes over a year to administer — the TIB can still claim, even if the bankrupt is discharged before the assets are paid out

Timing therefore matters enormously. If a testator is terminally ill, the timing of their death relative to a beneficiary’s bankruptcy discharge can make a significant difference.

Discharge from Bankruptcy

Standard bankruptcy in England and Wales lasts one year, after which the bankrupt is automatically discharged (unless a Bankruptcy Restrictions Order has been made). On discharge, the bankrupt is released from their pre-bankruptcy debts. Any inheritance received or entitlement arising after discharge belongs to the former bankrupt and cannot be claimed by the TIB (in relation to the old bankruptcy estate).

Protective Trusts: The Estate Planning Solution

The most effective way to protect an inheritance from a beneficiary’s potential bankruptcy is to use a protective trust or discretionary trust in your will, rather than an outright gift.

Protective Trusts (s.33 Trustee Act 1925)

A protective trust gives the beneficiary a determinable life interest — they receive the income from the trust fund while solvent. If a “forfeiture event” occurs (such as bankruptcy, an attempt to assign their interest, or a court order charging the interest), the life interest automatically comes to an end. The trust then converts to a discretionary trust, with a class of beneficiaries including the original life tenant.

Once converted to a discretionary trust, the beneficiary has no fixed entitlement — only the possibility of receiving benefits at the trustees’ discretion. A TIB cannot claim a discretionary interest because it is not a property right; it is merely a hope.

Discretionary Trusts

Alternatively, you can simply leave the inheritance in a discretionary trustfrom the outset. The trustees decide if, when, and how much any beneficiary receives. Because the bankrupt has no fixed entitlement, the TIB has nothing to claim. The trustees can make discretionary payments for the benefit of the bankrupt (e.g. paying their living expenses directly) without those payments being claimable by the TIB.

This approach requires careful drafting and appropriate trustee selection, but it is widely used by testators who have a financially vulnerable beneficiary.

Individual Voluntary Arrangements (IVAs)

An IVA is a formal agreement with creditors to pay back debts over time — a private alternative to bankruptcy. If a beneficiary is subject to an IVA and receives an inheritance, the IVA terms will typically require them to declare the windfall to their insolvency practitioner. The IVA supervisor may have the power to claim a portion of the inheritance for creditors under the terms of the IVA. The precise treatment depends on the IVA’s windfall clause, which varies between arrangements.

Practical Steps When Drafting Your Will

• Consider whether any intended beneficiary has significant debts, is a spendthrift, or has an addiction
• Use a discretionary or protective trust for financially vulnerable beneficiaries rather than outright gifts
• Choose trustees who understand the situation and can exercise discretion wisely
• Include a letter of wishes (non-binding) to guide trustees on your intentions for the vulnerable beneficiary
• Review your will regularly — a beneficiary’s financial circumstances can change, and the will should reflect the current position
• Seek legal advice if a beneficiary is already bankrupt when you are writing your will

Frequently Asked Questions