How to value the debts of an estate for probate
When someone dies, one of the important responsibilities of the personal representatives is to identify the assets and debts of the deceased.
An executor is appointed under a Will, while an administrator is appointed by the court where there is no Will or no executor able to act.
It is important to establish the value of the deceased’s assets and outstanding liabilities at the date of death. This information will be needed when completing the probate or confirmation application and calculating whether Inheritance Tax is payable.
Checklist of debts that may be owed by the deceased
To help you identify the liabilities of the estate, here is a checklist of some common debts and outstanding payments:
- Water bills and water rates.
- Telephone and mobile phone bills.
- Television and subscription service bills.
- Electricity bills.
- Gas bills.
- Personal loans and overdrafts.
- Credit card balances.
- Mail-order and catalogue debts.
- Rent arrears.
- Hire purchase agreements.
- Debts owed to other individuals.
- Outstanding Council Tax.
- Income Tax owed up to the date of death.
- Capital Gains Tax liabilities arising before death.
- Outstanding mortgage payments and other secured borrowing.
You should also check for unpaid insurance premiums, care home fees and other outstanding financial commitments.
Remember that some bills may relate to services provided after the death. These should be identified separately as expenses of administering the estate rather than automatically treated as debts existing at the date of death.
Funeral expenses
Reasonable funeral expenses are generally payable from the estate and can normally be deducted when calculating the estate’s value for Inheritance Tax purposes.
These may include:
- Funeral director’s fees.
- Burial or cremation costs.
- Flowers and other reasonable funeral arrangements.
- An appropriate gravestone or memorial.
The expenses must be reasonable and appropriate in the circumstances.
Help with funeral expenses
If the person arranging the funeral receives certain qualifying benefits, they may be eligible for help through the government’s Funeral Expenses Payment scheme in England and Wales.
Eligibility depends on the benefits received, the relationship with the deceased and other conditions.
In Scotland, the equivalent scheme is called Funeral Support Payment.
A Funeral Expenses Payment may have to be repaid from the deceased’s estate if sufficient funds subsequently become available.
For further information, visit www.gov.uk/funeral-payments or, in Scotland, www.mygov.scot/funeral-support-payment.
What happens next?
Once you have identified the assets and debts of the estate, review the information carefully.
You should establish:
- The total value of the deceased’s assets.
- The total outstanding liabilities at the date of death.
- Whether the estate is solvent or insolvent.
- Whether an application for a grant of probate or confirmation is required.
- Whether an Inheritance Tax return needs to be submitted.
Remember that not every liability is necessarily deductible for Inheritance Tax purposes. HMRC has specific rules governing which debts and expenses can be deducted.
Paying Inheritance Tax
If Inheritance Tax is payable, some or all of the tax will normally need to be paid before the grant of probate or confirmation can be obtained.
However, personal representatives may be able to use the deceased’s bank accounts or investments to pay the tax directly to HMRC through the Direct Payment Scheme.
In certain circumstances, they may also apply to postpone payment until after the grant has been obtained.
What if the estate is insolvent?
If the estate’s debts exceed the value of its assets, it is known as an insolvent estate.
In these circumstances, personal representatives must take particular care before making payments or distributing assets to beneficiaries.
There are legal rules governing the order in which creditors must be paid, and these differ between England and Wales and Scotland.
If the estate appears to be insolvent or there are other complications, professional legal advice should be obtained before taking further action.
Paying the deceased’s debts
The deceased’s outstanding debts generally need to be paid from the estate rather than from the personal savings or income of the executor or administrator.
If there are insufficient funds immediately available, personal representatives can contact creditors to explain the circumstances and discuss possible payment arrangements.
However, creditors are not obliged to agree to postpone payment.
Executors should also take care not to distribute the estate to beneficiaries before properly establishing and dealing with outstanding debts and liabilities. They may be personally liable if they breach their duties by distributing assets incorrectly.
Expert probate advice
For further information and practical guidance on identifying and valuing the assets and debts of an estate, read Lawpack’s DIY Probate Kit.
The kit provides guidance and assistance with the probate process, including the paperwork involved in administering an estate.