Are all loans deductible against the deceased’s estate on death?

 In Gill's Blog

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Debts are usually seen as a useful way of reducing the value of an estate on death for the purposes of calculating any IHT due on that final transfer of value. But are all debts the same? Can we assume that any debt will be deductible?

General principles

Debts can only be deducted from the valuation of a deceased’s estate on death to the extent that they are imposed by law or are incurred for a consideration in money or money’s worth – s.5(5) IHTA 1984. In particular, where a debt is secured on an asset the debt would usually be treated as reducing the value of that asset on death – s.162(4) IHTA 1984.

Where a debt is secured on more than one asset the general law would assume that if one asset is the primary security, the debt would be regarded as being charged against it; but if both assets are charged as primary security, then the value of the assets will be reduced proportionately.

Limitations on the general principles

The Finance Act 2013 introduced three new sections which limit the deductibility of certain types of debts for IHT purposes:

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  • S.162A IHTA 1984 – which affects liabilities attributable to financing excluded property
  • S.162B IHTA 1984 – which affects liabilities attributable to financing certain relievable property
  • S.175A – which affects liabilities not discharged after death for non-commercial reasons

There are two key dates to bear in mind:

17 July 2013 – the amended rules apply to all transfers of value on or after 17 July 2013 which involve a debt subject to restrictions – s.162B IHTA 1984.

6 April 2013 – Any loans taken out to finance relievable assets before this date were grandfathered into the new rules – that is, if the loan was in respect of acquiring, maintaining or enhancing property which qualifies for Agricultural Property Relief, Business Property Relief or Woodlands Relief then the restrictions will not apply unless the loan is varied on or after this date.

Farming and business owners

When acting in the estate of a deceased farmer or other business owner it will be important to ascertain whether there are any debts which are secured on other property which were used to acquire, maintain or enhance relievable assets and if so when those debts were incurred. Any incurred post 17 July 2013 will be subject to the restrictions in s.162B IHTA 1984.

In the case of pre 6 April 2013 debts, do check if the terms of the loan have been varied post 6 April 2013 as this may bring with it a restriction on the ability to deduct the loan against non-relievable property.

If the loan was secured on both non-relievable property and relievable property it may be necessary to apportion the debt against the two types of property. HMRC expect you to undertake the apportionment of the debt at the date of the acquisition of the assets if the borrowing is used to buy the mixed property – IHTM28021.

Debts incurred by borrowing money from a donee

Remember that s.103 FA 1986 makes debts non-deductible from a person’s estate to the extent that the money borrowed derived from the deceased or was borrowed from a person who had had property derived from the deceased. This provision applies in relation to debts incurred after 17 March 1986 but property derived from the deceased at any time before that date can be taken into account.

It was this provision which disallowed the debt in the case of Phizackerly v HMRC [2007] STC 328.

Waiver of interest on NRB discretionary trust loans

A liability is deductible only if it is discharged on or after death, out of the estate, in money or money’s worth. So where the trustees of a NRB discretionary trust decide to waive the interest they are owed on their loan by the PRs of the surviving spouse who had the benefit of the loan, these rules mean that HMRC will not allow the interest element of the debt to be deductible in the estate of the surviving spouse for IHT purposes. Only the original sum borrowed and not the indexation on the loan, or other equivalent interest return, will be deductible because HMRC view the waiver as not a commercial decision.


It is all to easy to assume that the principle that a debt owed by the deceased will always reduce the taxable estate on death. This does not hold true in a number of different cases and great care is required to explore the 2013 amendments to the IHTA 1984 in a particular estate.

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