What happens to debt when you die?

The value of any outstanding debts and liabilities at the date of your death will be deducted from the value of your estate. Examples of debts and liabilities include:

  • a mortgage;
  • a loan;
  • unpaid credit card bills;
  • legally enforceable gambling debts; and
  • bills for services you have received but not (yet) paid for (such as building work fees).

Any pay-out from a payment policy (in relation to a loan or credit card debt) or a mortgage protection policy should be added to the value of your estate.

Certain liabilities may not be deductible from the value of your estate after your death. These include money that:

  • is not repaid out of your estate on or after your death;
  • was used to buy property not subject to inheritance tax; or
  • was used to purchase or carry out works (whether to improve or maintain) on property qualifying for Business, Agricultural or Woodlands Relief.

For further information on whether a property is subject to inheritance tax, see our page Inheritance tax relief.

Debts

If you own any debts jointly with another individual, then your share in the debt should be deducted from the value of your estate.

Gambling debts may be deducted from the value of your estate only if they are legally enforceable. Debts incurred from illegal gambling or from gambling in Northern Ireland are not legally enforceable. They would therefore not be deducted from the value of your estate.

You may have guaranteed to pay someone else’s debt in the event that they cannot do so themselves. If at the date of your death this debt has not been paid, the value of the outstanding debt may be deducted from the value of your estate.

Any debts you owe to relatives or close friends should not be deducted from your estate unless they are legally enforceable. There are two instances in which such a debt will be regarded as being legally enforceable:

  • if you and the close friend or relative who lent you the money enter into an agreement (written or verbal) in relation to repaying the loan; or
  • if evidence exists of you making repayments to that close friend or relative.

It may be more difficult to prove the existence of a verbal agreement than a written agreement. Therefore, if you enter into an agreement with a close friend or relative regarding repayment of the loan, the best course is to record it in writing.

Other liabilities

If you have taken out a mortgage on a property, the remaining value of that mortgage as at the date of your death should be deducted from the value of the property to which it relates. If it exceeds the value of the property, the excess should be deducted from the total value of your estate.

For example:

  • A house was purchased with the aid of a £150,000 mortgage; there is £50,000 outstanding on the mortgage, so £50,000 is deducted from the value of the house at the date of death. If the value of house at the date of death is £200,000, that leaves a value of £150,000.

Although you cannot predict with any certainty what the value of the property will be, you can probably say in advance how much there will be outstanding on the mortgage at any given time in the future, because repayments are usually made by regular instalments.

As with joint debts, if you have a joint mortgage, only your share of the mortgage should be taken into account when calculating the value of your estate.

Funeral and related expenses may also be deducted from the value of your estate, such as flowers and the fee paid for the headstone.