IHT Liabilities and Deductions: What Debts Reduce the Taxable Estate
Genuine debts reduce the estate for IHT — mortgages, credit cards, tax arrears, and funeral costs. But anti-avoidance rules block artificial debts from cutting the IHT bill. Here is what is and is not deductible.
Deductible vs Non-Deductible at a Glance
Deductible from IHT estate
- ✓Outstanding mortgage balance
- ✓Personal loans and credit cards
- ✓Income tax / CGT / NIC arrears owed at death
- ✓Utility bills outstanding at death
- ✓Council tax arrears
- ✓Hire purchase outstanding balance
- ✓Bank overdraft
- ✓Reasonable funeral expenses
- ✓Reasonable headstone / memorial costs
NOT deductible
- ✗s103 FA 1986 — artificial debts (borrowed to fund gifts that return to estate)
- ✗Debts without consideration (gratuitous promises)
- ✗Debts secured on excluded property (against non-UK assets of non-dom)
- ✗Income tax arising post-death (during administration)
- ✗Contingent/future liabilities not certain to crystallise
- ✗Estate administration costs (solicitor, valuation fees)
- ✗Wake and post-funeral reception costs
- ✗Funeral costs covered by pre-paid funeral plan
Frequently Asked Questions
What liabilities and debts are deductible from the IHT estate?
Under s5 IHTA 1984, the value of a person's estate for IHT is reduced by any liabilities they had at the date of death. Deductible liabilities include: (1) Mortgages — the outstanding balance of any mortgage secured on UK property; (2) Personal loans and credit cards — outstanding balances at date of death; (3) Income tax arrears — unpaid income tax, capital gains tax, or national insurance contributions owed to HMRC at the date of death; (4) Utility bills — outstanding gas, electricity, council tax, phone bills at date of death; (5) Professional fees — outstanding fees owed to solicitors, accountants, or advisers incurred before death; (6) Hire purchase agreements — outstanding balance on any HP agreement; (7) Overdrafts — bank overdraft balance. The liability must be a genuine legal obligation to pay, must have been incurred for consideration (something was received in return), and the creditor must be able to enforce it.
Are funeral expenses deductible from the IHT estate?
Yes — reasonable funeral expenses are deductible from the IHT estate under s172 IHTA 1984. This includes: (1) The funeral director's costs — coffin, burial or cremation, service costs; (2) Reasonable headstone or memorial costs; (3) Flowers sent by the family. Note: the deduction is for 'reasonable' expenses — an extravagant funeral does not receive an unlimited deduction; HMRC may query unusually high costs. What is NOT deductible: the cost of a wake or reception after the funeral; the costs of administering the estate (probate solicitor fees, valuation costs) are not funeral expenses and are not deductible for IHT. Funeral costs that are reimbursed by a pre-paid funeral plan are not deductible (as there is no net cost to the estate). Report funeral expenses on form IHT400 under 'Debts and liabilities'.
What is the s103 Finance Act 1986 anti-avoidance rule for artificial debts?
Section 103 Finance Act 1986 is a powerful anti-avoidance rule that prevents IHT avoidance through artificial borrowing. It works as follows: if a deceased person borrowed money and used it to make a gift (or otherwise transfer value to another person), and the gift or asset eventually returns to the estate (or an associated person), the debt is not deductible from the IHT estate. In practice: suppose a father borrows £500,000 from a bank and gives the cash to his son. The son then lends £500,000 to a trust from which the father benefits. On the father's death: the loan from the bank (£500,000) would normally reduce the IHT estate. But s103 FA 1986 blocks this deduction — the borrowed money was used to make a gift, and the gift 'returned' to the estate through the trust arrangement. The result: the loan is not deductible, and the estate is taxed on the full value including the £500,000. HMRC actively challenges these schemes.
What debts are NOT deductible for IHT purposes?
Several categories of liability are specifically excluded from deduction: (1) Debts not incurred for consideration — liabilities created gratuitously (e.g. a promise to pay money to someone without receiving anything in return) are not deductible under s175 IHTA 1984; (2) s103 FA 1986 artificial debts — borrowed money used to fund gifts that return to the estate (see above); (3) Liabilities secured on excluded property — where a liability is charged against property that is excluded property for IHT purposes (e.g. non-UK assets of a non-domiciled person), the debt is only deductible against that excluded property, not against UK estate; (4) Income tax liabilities post-death — tax arising after death (e.g. the administration period income tax) is not deductible from the IHT estate at death; (5) Potential future liabilities — contingent liabilities (e.g. a guarantee that has not yet been called in, or possible future claims) are generally not deductible unless they are certain to materialise.
How are liabilities reported on the IHT400?
Liabilities of the estate are reported on form IHT400 in the 'Debts and liabilities' section (pages 8-9 of the standard IHT400, 2026). For each liability: provide the creditor's name and address, the nature of the debt (mortgage, personal loan, credit card), and the amount outstanding at the date of death. Supporting evidence: attach bank statements or mortgage statements showing the balance on the date of death; final bills for utilities or service charges. For mortgages: the lender provides a mortgage redemption statement at the date of death. For credit cards and loans: the provider issues a statement showing the date-of-death balance. Note: if a liability is disputed or uncertain in amount, HMRC may accept a reasonable estimate pending resolution. If a liability is subsequently settled for less than the amount claimed, the executors must notify HMRC and the IHT may need to be recalculated.
IHT Planning Starts with a Will
Structuring your estate properly — including which debts will be outstanding at death — is part of good estate planning. The WillSafe kit from £19.97 for England and Wales.