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HMRC internal manual

Inheritance Tax Manual

Liabilities: restricted deductions: meaning of ‘out of estate’

In determining whether the loan has been discharged out of the estate, the word ‘estate’ has its normal meaning for Inheritance Tax (IHTM28027); but IHTA84/S175A(1)(a), extends this meaning for the purpose of this provision only to include any excluded property owned by the deceased. It is important here that the excluded property was ‘owned’ by the deceased, taking the natural meaning of the word ‘owned’. Excluded property that is also settled property in which the deceased had an interest is not property ‘owned’ by the deceased.

Although the meaning of estate is extended in this way, the normal rule that a liability can only be deducted against assets at the same title applies (IHTM28397). Other than in exceptional circumstances, in reality, assets in the Free Estate are not available to trustees to settle trusts debts.

There may be circumstances where the estate has very little in the way of liquid assets from which to repay a liability so the personal representatives may need to borrow money to actually repay the debts. Where this happens, with the result that the estate is charged with repaying that new debt, you can accept that the liability owed by the deceased has been repaid ‘out of’ the estate.


Kevin’s estate is valued at £750,000, £700,000 of which is attributable to his home. A mortgage of £100,000 is secured against the house. The executors borrow £100,000 to repay the mortgage and secure the new loan on the house, so that the beneficiary receives the property charged with the new debt. You may accept that the liability has been discharged out of the estate.

There is no need to raise any enquiries into the source of funds lent to the executors, including whether or not the beneficiary is the creditor for the new loan. Provided the mortgage has actually been repaid from funds charged against the estate, the deduction may be allowed as this has the same effect as the liability being discharged out of the estate had there been sufficient liquid assets.

It is possible that the beneficiary may be able to make a loan to the estate from the proceeds of an insurance policy held in trust outside the estate for the purposes of repaying the mortgage. Again, the source of the funds does not matter.