A director's loan account when the director dies

When a director dies, a loan account in credit is a debt the company owes the estate, and it goes on the inheritance tax account at its full value, with any interest due, unless recovery is impossible or not reasonably practicable. An overdrawn account is a debt the estate owes the company, which can be deducted only to the extent it is actually repaid out of the estate. If the company writes off an overdrawn balance after the death instead, the income tax charge falls on the estate rather than the deceased, and the company can reclaim any section 455 tax.

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What is a credit balance worth in the estate?

Section 166 of the Inheritance Tax Act 1984 says that, in valuing a right to receive a sum due under any obligation, it is assumed the obligation will be duly discharged. HMRC’s guidance at IHTM19010 applies this to every debt owed to the deceased: the full capital outstanding, plus any interest due at the date of death, is included as an asset of the estate.

IHTM10106 lists money owing to the deceased from a director’s loan account or current account with a company among the items that belong under debts due to the estate on the IHT400. Each debt is described on a separate schedule IHT416, which asks for the date and amount of the original loan, the balance and interest outstanding, the borrower, and evidence of the terms (IHTM19050). For a director’s account, the company’s ledger and the last accounts are the usual evidence. Our general guide to director’s loan accounts covers how the balance arises.

Can the executors put in a lower figure?

Only in limited cases. Section 166 allows a lower value if, or to the extent that, recovery of the sum is impossible or not reasonably practicable, and has not become so through any act or omission of the creditor. A company that is insolvent, or that could only repay by selling its trading premises at a loss, may justify a discount. IHTM19010 says that if a reduced figure is used, the executors must explain why and how it was calculated and provide supporting evidence; on the IHT416 that explanation goes at box 9.

Where the terms mean repayment can be deferred or made by instalments, IHTM19070 says the value has to be worked out under section 160 (open market value), and HMRC’s caseworkers refer such cases to Technical and its actuarial officer. The same paragraph suggests sums due from a company can be referred to Shares and Assets Valuation along with the deceased’s shares, since the two are connected: the company’s debt to the director reduces the value of its shares, so the two figures should be prepared on a consistent basis. Our page on valuing unquoted shares for IHT explains that side.

A balance the director waived during their lifetime is not in the estate at all, but IHTM19100 points out that the release itself may have been a chargeable transfer, and that in England and Wales a voluntary release without consideration must be made by deed to be effective. IHTM19080 says an amount written off is a gift that should appear on schedule IHT403.

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Does business relief cover a loan account?

Usually not. Business relief is given on a business or interest in a business, on shares, and on certain securities. HMRC’s Shares and Assets Valuation manual (SVM108070) notes that securities such as debentures or loan notes qualify only if they gave the transferor control or contributed to control, and that it is most unlikely to find securities that do. Executors should expect a credit loan account to be fully taxable even where the shares in the same company qualify for business relief. That can be a reason for a director to review a large credit balance during their lifetime.

How is an overdrawn account treated for inheritance tax?

An overdrawn balance is a liability of the deceased, listed on schedule IHT419 (debts owed by the deceased). Section 175A allows it to reduce the estate only to the extent it is discharged on or after death out of the estate, in money or money’s worth. IHTM28027 specifically mentions debts to family companies as the kind that might not be repaid in full, which is why the rule exists.

If the debt is not repaid, section 175A(2) still allows a deduction where there is a real commercial reason for leaving it outstanding, securing a tax advantage is not a main purpose, and nothing else in the Act disallows it. Section 175A(3) says there is a real commercial reason if the creditor is at arm’s length or an arm’s length creditor would not require repayment. A family company forgiving its late director’s debt will rarely meet that test. Section 175A(4) adds that a liability disallowed in this way is also ignored in measuring what the surviving spouse receives for the spouse exemption. See also our page on deducting debts from an estate.

What if the company writes off the overdrawn balance after the death?

Normally, when a close company releases a loan to a participator, the borrower is taxed under section 415 of the Income Tax (Trading and Other Income) Act 2005. Section 419 changes this where the borrower has died and the company releases the debt afterwards. If, at the time of release, the debt is due from the personal representatives in that capacity, no tax is charged under that Chapter. Instead the amount is treated as part of the aggregate income of the estate under section 664, so it flows through to the residuary beneficiaries. If the debt is by then due from someone else, for example a beneficiary who took it over, section 419(3) charges that person.

HMRC’s guidance at CTM61665 tells officers to report such releases, including whether the debt was due from the personal representatives. CTM61655 adds that from 24 March 2010 the company gets no loan relationship deduction for the amount released. And because the debt was not repaid out of the estate, the inheritance tax deduction for it is lost under section 175A.

How does the company recover section 455 tax?

If the company paid tax under section 455 of the Corporation Tax Act 2010 on the overdrawn balance, section 458 gives relief when the loan is repaid, released or written off. CTM61600 says the claim must be made within four years from the end of the financial year in which that happens, and that repayment by a third party on the debtor’s behalf counts, so payment by the executors is fine. Book entries can also count, but only from the date they are actually made.

Timing follows CTM61610. If the loan is cleared within nine months of the end of the accounting period in which it was made, relief is immediate and the tax need not be paid. If it is cleared later, relief is deferred until the due date for the accounting period in which repayment or release happens. The practical steps are covered in our page on section 455 repayment claims.

How might this work in practice?

Illustration only. Sam owned all the shares in a trading company and died with two balances to deal with.

Credit balance. His loan account with the company stood at £40,000 in credit, with no interest. The company had ample cash. The executors include £40,000 on schedule IHT416. The shares qualify for business relief; the loan account does not. When the company pays the £40,000 to the executors, that is simply repayment of a debt.
Overdrawn balance. Suppose instead the account was £25,000 overdrawn and the company had paid section 455 tax on it. If the executors repay £25,000 from the estate, the estate deducts £25,000 for inheritance tax and the company claims section 458 relief. If the company writes it off instead, the estate gets no deduction, the £25,000 is treated as income of the estate under section 664, and the company still claims section 458 relief but cannot deduct the write off.

What mistakes come up most often?

Leaving out interest that had accrued on a credit balance at the date of death.
Discounting a credit balance without evidence that the company could not pay.
Assuming business relief on the shares extends to the loan account.
Deducting an overdrawn balance on the IHT400 and then letting the company write it off, which reverses the deduction.
Forgetting that a post death write off is income of the estate, which affects the residuary beneficiaries’ tax.
Missing the four year window for the company’s section 458 claim, especially where the sole director has died and no one is running the company.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.

A director’s loan account when the director dies