Proceeds of a will vs gifts for future IHT

Technosaurus

Hi everyone, I need some assistance and can't quite think how to word the question, so here's the context:

F-i-l has died quite suddenly, m-i-l is the sole beneficiary but my wife is the executor so everything goes 'through' her
M-i-l is herself financially comfortable and has a couple of pensions + personal savings that will keep it that way. 
We have just received notification from the taxman that fil has overpaid and there's a decent sum to pay back to his estate (£12k) - they are sending a cheque to my wife
M-i-l has said to just split that money equally between my wife and her sister , my s-i-l, to "treat yourself"

Questions: 
As executor, I assume my wife is duty bound to bank the cheque, transfer it to m-i-l in accordance with the will, and then she can do a bank transfer back, half to my wife + half to wife's sister?

If she does it this way, will that money count as a 'gift' from Mil to my wife and her sister, ie subject to IHT if mil passes away within 7 years? 

If it is not classed as a gift, would my wife be breaking any rules by simply transferring half to her sister after the cheque clears and bypassing MIL altogether? Would we need something in writing from MIL to confirm the arrangement for this particular sum of money?

Thank you

p00hsticks

The refund forms part of your late FILs estate and so is inherited by your MIL. 

If she wishes to pass it on to her children and avoid it counting s a gift for IHT purposes, then your MIL could do a deed of variation to your FILs will so that the money bypasses your mother and goes directly to them instead.

 However I think that this would then use up some of your FILs NRB and (possibly?) mean that the estate is no longer classed as an excepted estate, so may not be that advantageous...

It could also be considered as a deprivation of assets if your MIL was later to require any form of means tested benefits.

Keep_pedalling

However you transfer the money it is a gift from your MIL and at least £6,000 of it will fall under the 7 year rule (the rest could be covered by this and last year’s annual exemption if not already been used). This is nothing to be concerned about as the worse that can happen is that the estate pays the same amount of IHT as it would if no gift had been made.

Her estate (including gifts) would have to be exceed £650k before you would might have an IHT burden, and that could be as high as £1M if she is a home owner.

Technosaurus

Thanks @Keep_pedalling, very informative. 

Although we are obviously hoping mil has many more years left with us, due to fil's finances and depending on what happens with his pension and shareholdings (we believe they will transfer as cash but just going through the process now) then the £650k/£1m limits might actually come into view... so we were just trying to think of the most tax-efficient way of doing it. As you say, however we cut this it's a gift from her rather than anything else!

We don't mind paying IHT should it come to it once MIL passes away but obviously if there are any ways to reduce it then we're all ears, haha!

Technosaurus

Thanks @p00hsticks, you've summed it up perfectly! We'll keep things simple so 'gift' it is!