A debt reduces the estate for inheritance tax if the deceased actually owed it at death, it was legally enforceable, it was incurred for value received or imposed by law, and it is repaid out of the estate. Since 17 July 2013 debts that are not repaid, or that funded excluded property, are generally disallowed, and loans used to buy assets qualifying for business or agricultural relief reduce those assets first. Separate anti avoidance rules disallow loans from people the deceased had given money or property to.

What is the basic rule?

Section 5(3) of the Inheritance Tax Act 1984 says a person’s liabilities are taken into account in valuing their estate, except where the Act provides otherwise. HMRC’s manual at IHTM28002 sets the starting conditions: the debt must have been owed at the date of death, it must be legally enforceable, and it must either be imposed by law (such as a tax bill) or have been incurred for consideration.

Section 5(5) adds that a debt the deceased took on voluntarily counts only to the extent it was incurred for consideration in money or money’s worth. HMRC’s example at IHTM28382: if someone agrees to pay £20,000 for a property worth £12,000, intending to benefit the seller, and dies before paying, only £12,000 can be deducted.

Ordinary debts cause no difficulty. GOV.UK lists mortgages, loans, credit cards, overdrafts, household bills and bills for goods or services received but not yet paid, such as building work, decorators or accountants. Income tax owed up to the date of death is also deductible, although HMRC checks that a large tax bill does not point to assets missing from the estate (IHTM28150). Funeral costs are deducted under a separate rule; see funeral expenses and inheritance tax.

Where do debts go on the IHT400, and what cannot be claimed?

  • Box 80: mortgages and secured loans on property shown in the account.
  • Box 81: funeral expenses.
  • Box 82: other liabilities, listing each creditor and why the money was owed.
  • Schedule IHT419: loans, including from friends and relatives, money others spent on the deceased’s behalf, guarantee debts, liabilities linked to life policies, and cases where the deceased both made a gift to and borrowed from the same person. A mortgage on a house shown on IHT405 goes in box 80 instead.

The IHT400 notes are clear that fees for professional services carried out after death cannot be deducted. That rules out probate fees, solicitors’ and estate agents’ fees and valuation fees for administering the estate. The exception is fees for recovering an income tax or capital gains tax refund that is included as an asset; by concession HMRC allows fees up to 10% of the repayment (IHTM28041). Uncleared cheques can be deducted if they paid for goods or services, but not if they were gifts. The wider form is covered in completing the IHT400.

Which assets does a debt reduce first?

Section 162(4) requires a debt charged on a particular asset, such as a mortgage, to be deducted from that asset as far as possible. That has consequences HMRC’s manual spells out at IHTM28210: a mortgage on a house left to a spouse or civil partner reduces the exempt house and cannot be moved across to reduce chargeable assets. A mortgage secured on several properties is apportioned between them, and business debts of a sole trader or partner are set against the business assets first under section 110(b).

Section 162B adds a further rule for liabilities incurred on or after 6 April 2013 to acquire, maintain or enhance assets qualifying for business relief, agricultural relief or woodlands relief. The loan is deducted from those assets before the relief is calculated, even if it is secured on something else. In HMRC’s example at IHTM28020, £450,000 borrowed against a house to buy AIM shares worth £575,000 reduces the shares to £125,000 before business relief, so the loan gives no extra saving against the house. Any excess of the loan over the relievable assets is set against the rest of the estate. See business relief and agricultural property relief.

Why must the debt actually be repaid?

For deaths on or after 17 July 2013, section 175A allows a debt only to the extent that it is actually repaid out of the estate after the death. It targets debts to relatives, family trusts and companies that might otherwise be written off.

An unpaid debt can still be deducted if three conditions are met (IHTM28029): there is a real commercial reason for not repaying it, securing a tax advantage is not a main purpose of leaving it outstanding, and it is not disallowed by another rule. A commercial reason exists where the lender is at arm’s length, or an arm’s length lender would not require repayment, for example a bank happy to continue a business overdraft for the beneficiaries who take over the business.

In practice, the IHT400 notes say executors can include debts on the expectation that they will be repaid and do not need to send proof of repayment with the form. If a debt is known not to be repaid, it should be left out or included only to the extent it will be repaid, and HMRC must be told if a debt that was included is later not paid. Executors who borrow to clear a debt, for example refinancing a mortgage secured on the house, are treated as having repaid it out of the estate (IHTM28028).

What about loans used to buy excluded property?

Section 162A disallows a loan used, directly or indirectly, to acquire, maintain or enhance excluded property, and the disallowance applies whether or not the loan is repaid. The typical case in HMRC’s manual (IHTM28014) is a person who is not a long term UK resident borrowing against UK assets to buy a property abroad. There is an exception where the excluded property has since been sold and the proceeds are chargeable, or the property has itself become chargeable. A parallel rule in section 162AA, for deaths on or after 17 July 2014, covers money borrowed to fund certain foreign currency bank accounts.

How are loans from family and friends treated?

HMRC’s manual at IHTM28323 says there must have been an agreement, written or oral, at the time the money was advanced that the deceased would repay it, or conduct such as repayments showing it was treated as a loan. An unsupported statement by the lender after the death is not enough. Payment for past services is past consideration and not deductible without a proper agreement made at the time (IHTM28382), and a voluntary promise made by deed is not deductible because no consideration was received.

Money a relative or friend spent on the deceased’s behalf, such as groceries in the last months of a serious illness, is usually allowed. HMRC looks harder where the person claiming lived with the deceased, and especially at spending on repairs to a house that person is due to inherit (IHTM28330). Statute barred debts (six years for a simple contract, twelve for a deed) can be deducted in England, Wales and Northern Ireland if the executors actually pay them; in Scotland a prescribed debt is extinguished and cannot be deducted (IHTM28384).

A guarantee the deceased gave for someone else’s borrowing is deductible only for the part the borrower cannot repay. If the borrower can repay in full, nothing is deductible, and if the guarantee was given when the borrower was unlikely to repay, the guarantee itself may have been a lifetime transfer (IHTM28355 and IHTM28356).

What is the rule on gifts to and loans from the same person?

Section 103 of the Finance Act 1986 applies to debts incurred on or after 18 March 1986. It disallows a debt to the extent that the lender’s money came from property derived from the deceased. HMRC’s example at IHTM28361: Andrea gives property worth £100,000 to Boris, Boris borrows £100,000 against it and lends that sum back to Andrea, and Andrea dies eight years later. Without the rule, the gift would have dropped out after seven years while the £100,000 debt reduced Andrea’s estate. Under section 103 the debt is disallowed, and any repayments Andrea made in her lifetime are treated as potentially exempt transfers when made (IHTM28362). IHT419 box 5 asks about any gift followed by a loan from the same person.

How might this work in practice?

Illustration only. An estate includes a house worth £400,000 with a £60,000 mortgage, £3,000 of utility and credit card bills, and an £8,000 loan from the deceased’s daughter supported by a signed note and monthly repayments. The house is left to the surviving spouse; the rest goes to the children. The mortgage reduces the exempt house and does not reduce the chargeable estate. The bills are deductible in box 82. The loan is shown on IHT419 and is deductible provided the executors actually repay the daughter, which they record with a bank transfer. The solicitor’s fees for the administration are not deductible.

What mistakes come up most often?

  • Deducting probate, legal or valuation fees incurred after the death.
  • Setting a mortgage on a spouse exempt house against chargeable assets.
  • Claiming a family loan with no evidence it was made as a loan.
  • Deducting a debt that the family later decides to waive, without telling HMRC.
  • Ignoring the rule that loans used to buy relievable assets reduce those assets first.
  • Missing a gift and loan back to the same person, which section 103 disallows.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.