IHT - Deceased's liabilities |
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| Introduction |
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This guide is designed to help our customers to obtain a grant of representation, complete an account of the deceased's estate, and pay any inheritance tax (IHT) which may be due.
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It also gives advice about lifetime gifts and the taxation of discretionary trusts.
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The proposals in the Finance Bill 2006 affect the meaning in this article regarding:
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- Gifts into certain kinds of trusts;
- The tax treatment of trusts, known as interest in possession trusts, in which the beneficiaries have a right to benefits;
- The ending of an interest in possession during a beneficiary's lifetime;
- The treatment of funds in alternatively secured pensions on death.
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This article will be updated as necessary when the Finance Bill is enacted.
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What deductions can I make for debts and liabilities?
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You can deduct all the legally-enforceable debts that the deceased actually owed at the date they died. For example, household bills, credit card debts and bills for goods and services the deceased received but had not paid for before death.
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What can I deduct for mortgages or other secured loans?
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You can deduct the mortgage or secured loan from the property it is charged against. If the mortgage is for more than the value of the property, the excess can be deducted from other assets. If the mortgage was secured on joint property you can only deduct the appropriate share of the mortgage.
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If the deceased had a mortgage protection policy, you will need to include the value of the policy as an asset of the estate as well as deducting the mortgage as a liability.
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Can I include funeral expenses as a deduction?
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You may include a deduction for funeral expenses and a reasonable deduction for the mourning expenses of the immediate family. You may also deduct the cost of a tombstone or headstone marking the site of the deceased's grave.
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Can I deduct the value of uncashed cheques?
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You can deduct uncleared cheques for goods and services provided to the deceased before death and credit card debts.
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But, if the deceased had written a cheque to make a gift before they died and the cheque had not cleared by the death, you cannot treat the cheque as a deduction. You need to value the deceased's bank account without deducting the cheque and not include the intended gift in the IHT200 or IHT205 forms.
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What about money owing to relatives or close friends?
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You will need to show us that the debt is legally enforceable as only legally enforceable debts can be deducted as liabilities of the estate. If there was a written or oral agreement between the deceased and the lender at the time the debt was created, showing that the deceased intended to repay the amount lent, then we will normally be able to accept that the debt is a liability of the estate.
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Alternatively, if the deceased could be regarded as having accepted the money advanced as a loan by conduct (usually because the deceased made repayments), then the debt is likely to be accepted as a liability of the estate.
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In Scotland loans may now be proved by any competent means. This may include for example, statements by third parties, repayments, relevant bank statements, writings by the borrower, and other means. Often a combination of means will be necessary to show that the transaction was a loan.
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You can read more about the law relating to debts in the IHT manual.
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Can I deduct the costs of administering the estate?
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No, you cannot deduct fees for professional services carried out after the death. This means that probate fees, any solicitors' or estate agents' fees and any valuation fees incurred in dealing with the deceased's estate cannot be deducted.
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Tell me about gambling debts
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You cannot claim a deduction for gaming debts. This is because these debts cannot be legally enforced. The exception to this is where the bet was through a totaliser run by the Racecourse and Betting Control Board. This is because a totaliser is regarded as neither gaming nor wagering. You may deduct a debt due to an agent who has laid such a bet on the deceased's behalf.
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What can I include for guarantee debts?
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A guarantee debt is a promise to pay the debts of another person (the borrower) should that person not be able to repay those debts. This usually arises when a borrower cannot obtain monies from an individual or financial institution unless they receive such an undertaking from a third party.
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If the deceased agreed to act as a guarantor and at the time of death the loan had not been repaid a deduction may be due in respect of the outstanding loan, depending on the resources of the borrower and providing that consideration has been given for the loan. You can read about consideration and guarantee debts in the IHT manual.
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If the borrower has no financial resources the whole of the outstanding liability will be deductible but the guarantee may be a gift.
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If the borrower has sufficient resources to repay the loan then the debt is not allowable. There is no gift.
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If the borrower can repay part of the outstanding loan, the deduction is limited to that part of the loan that cannot be met by the borrower and which will have to be met by the deceased. The guarantee may be a gift.
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