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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
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Succession: The incidence of debts and legacies: Payment of uncharged debts out of the estate

The Administration of Estates Act 1925/S34 (3) sets out the order in which the deceased’s estate should be used to pay their debts and funeral costs and costs of administering the estate. It provides that a deceased person’s real and personal estate shall ‘be applicable towards the discharge of the funeral, testamentary and administration expenses, debts and liabilities payable thereout in the order mentioned in Part II of the First Schedule’ to the Act. The schedule is as follows

Order of Application of Assets where the estate is solvent

  1. Property of the deceased undisposed of by Will, subject to keeping back a fund sufficient to meet any pecuniary legacies
  2. Property of the deceased not specifically devised or bequeathed but included (either by a specific or general description) in a residuary gift, subject to keeping back a fund out of the property sufficient to meet any pecuniary legacies, if it has not already been provided for
  3. Property of the deceased specifically appropriated or devised or bequeathed (either by a specific or general description) for the payment of debts
  4. Property of the deceased charged with, or devised or bequeathed (either by a specific or general description) subject to a charge for the payment of debts
  5. The fund, if any, kept back to meet pecuniary legacies
  6. Property specifically devised or bequeathed, rateably according to value
  7. Property appointed by Will under a general power, including the statutory power to dispose of entailed interests, rateably according to value
  8. The order of application may be varied by the Will of the deceased

Point number 8 above means that the statutory order will always be subject to a contrary intention being shown in the Will. In that case, the court will require proof that the deceased set aside particular property for the payment of debts with the intention of freeing other property from the burden.

The seven classes of assets given in the schedule above are not totally comprehensive and other assets are available to pay creditors.

These are

  • funds payable to the estate upon the exercise of an option,
  • property subject to a donatio mortis causa (IHTM14900) (death-bed gift),
  • property subject to a general power of appointment (IHTM04034) exercisable by deed if it had been exercised.