First up, I think this really depends on how the loft conversion will work: for example, have you enough room to fit a static staircase? Without a static staircase, the use of the converted loft will be very limited in scope and fitting a static staircase can use up an entire first-floor single bedroom.
I moved into a house with a converted loft and, to be honest, it is redundant space because there is no static staircase to it and to fit one would carve a lot of feet out of one of the first floor bedrooms (so you lose a room to gain a room a floor above). Access is through pulldown steps onto the landing and they are somewhat of a health and safety risk really.
I suspect that it is possible this conversion may not actually add value to your home so I would think about it fairly carefully.
And I will probably get flamed for this but ... I think it is a little concerning that you have 3 young DCs, you are a SAHM, your DH is between jobs and one of his desires with this inheritance is to spend £30k creating a hobby room for himself in the loft at a time when you would like to return to work but find the cost of childcare prohibitive.
One of my concerns here would be that this hobby room could be a way to opt out of family life and certain obligations and duties by removing himself to a room in the eaves of the house. How long does he actually plan to use this room for in an average week, say? Particularly if he returns to work? If it is a question of ... well ... every Sunday morning, then why spend £30k on a room he will only use for four hours a week? If he intends to be up there every evening and at weekends, well, you do need to consider how you might feel about his absence from the general family living areas of the home.
I also do not consider paying off the mortgage as "using the inheritance for your family". To my mind, he is simply reducing his financial obligations: ie. now he no longer needs to earn to pay the mortgage. Of course, you could argue that, when he returns to work, you may benefit from the increase in disposable income that was once spent on the mortgage, but I am slightly unsure how that will directly benefit the children or yourself in the same way a well-considered plan for a £30k lump sum might.
"Using the inheritance for the family", to my mind, would be setting up some sort of savings vehicle/trust for each of the DCs so that when they reach a certain age, they have a portion of money to use as, say, a deposit on a home or pay for a particular professional qualification they may need.
I am not suggesting he does that, just that paying off the mortgage primarily benefits him in your domestic financial circumstances.