We are in a similar situation. Firstly I would check out what overpayments your mortgage company allows before making decisions. I would pay off as much as you are allowed...reason being that on savings accounts you can only get about 2% at the moment (bit more if you are prepared to tie it up for longer), and so much better use of cash to pay off debts.
Oh and just noticed that you want to get work done on house...how much will that cost? Better to use the inheritance money on that, than having to raise it elsewhere.
Then use up your ISA allowances (money for a rainy day).
Also, can you use a bit for something fun? A holiday or something nice to remember the person who left the cash?
Can you invest half and use half to make a payment on the mortgage? Then with any interest you make on the investment over pay the mortgage? That way you are reducing your mortgage, but keeping some aside for a rainy day /work on the house?
Mortgage is £200k on a crap fixed rate for 2 more years.
What would be the most financially savy way of utilising the inheritance, bearing in mind that we would like to do some work on the house, but can also really see the appeal of reducing the monthly mortgage payments.
Income not likely to change in near future but is comfortable (ish) at the moment.