When a loved one passes away, dealing with their estate can be daunting. One question that often comes up is whether debts can be deducted from the estate before calculating Inheritance Tax (IHT). Let’s break this down in simple terms.

The Short Answer: Yes, But There Are Rules

In general, debts that the deceased owed when they died can be deducted from the estate’s value before working out how much IHT is due. However, as with most things involving tax, it’s more complicated. There are some important rules and exceptions to keep in mind.

What Counts as a Deductible Debt?

For a debt to be deductible, it needs to tick two boxes:

1. It must be legally enforceable.
2. It must either be imposed by law (like taxes) or be a debt for which the deceased received something in return.

Some common examples of deductible debts include:

• Mortgages and loans
• Credit card balances
• Utility bills
• Unpaid income tax or capital gains tax
• Medical bills (including hospital and doctor’s fees)

The Cheque Conundrum

Here’s where things get a bit tricky. Let’s say the deceased wrote a cheque before they died, but it hadn’t cleared the bank by the time they passed away. Is this a deductible debt? It depends:

• If the cheque was for goods or services (like paying a builder), it’s likely to be allowed as a deduction.
• If it was a gift cheque that had yet to clear, it’s not considered a valid debt and can’t be deducted.

Why? Because a cheque is basically an instruction to the bank that can be cancelled up until it’s cleared. So, in the eyes of the law, the debt is finalised once the cheque clears.

Funeral Expenses: A Special Case

Although funeral expenses aren’t technically a debt of the deceased (as they’re incurred after death), they can still be deducted from the estate before calculating IHT. This is a bit of common sense from the taxman!

Timing is Everything

Remember, only debts that existed when the person died can be deducted. Any debts incurred after death (except funeral expenses) don’t count for IHT purposes.

A Word of Caution

If you’re dealing with a large estate or complex debt, it’s worth getting professional advice. The taxman tends to look closely at debt deductions, especially if they significantly reduce the IHT bill. This is particularly true for debts owed to family members or loans taken out shortly before death.

While debts can indeed be deducted from an estate before calculating IHT, it’s important to understand what qualifies as a deductible debt. Always keep proper records and, when in doubt, seek professional advice. After all, getting it right means more for the beneficiaries and less stress for you as the estate administrator.

Remember, dealing with a loved one’s estate is about more than just numbers. Take your time, seek support when needed, and don’t be afraid to ask for help with the complex bits. That’s what professionals are there for!