How are liabilities and debts accounted for in estate valuation during probate?

Liabilities are accounted for by identifying what was legally owed at the date of death, confirming the amount due, and deciding whether the liability can be deducted for the relevant probate and inheritance tax calculations. The estate should show the value of its assets separately from its liabilities, with a clear reconciliation from the gross estate to the net estate.

Start with the date of death

Most debts are assessed by reference to the date of death, rather than the date on which the executor completes the estate accounts. Statements received later may include interest, fees or payments made after death, so they need to be analysed rather than accepted as a single figure. The personal representative should establish:

• who was legally responsible for the debt;
• the balance outstanding at the date of death;
• whether interest or charges continued to accrue;
• whether any part of the balance had already been paid or disputed; and
• whether the liability is deductible for the calculation being prepared.

A liability that arose only after death is generally dealt with as an administration expense or estate transaction, not as a debt owed by the deceased at the date of death. This distinction matters because the figures used for estate accounts and inheritance tax reporting are not always identical.

Keep property values and secured borrowing separate

Where a property is subject to a mortgage or another charge, the property should normally be valued at its appropriate market value without simply reducing that value to produce a net figure. The borrowing is then shown separately as a liability. This gives a more accurate record of the gross estate and makes clear how the equity has been calculated.

For example, an estate account may show the full value attributed to a house, followed by the outstanding secured loan and any relevant adjustment for ownership. The lender’s redemption statement can confirm the balance, but it should be checked for early repayment charges, daily interest and other items that may not have existed at the date of death. A charge registered against a property is evidence of security; it does not, by itself, establish the exact amount currently owed.

Check ownership and shared responsibility

A debt connected with jointly owned property or a joint loan cannot automatically be treated as the deceased’s entire liability. The documents should be reviewed to establish whether the deceased was jointly and severally liable, liable for a defined share, or merely had an interest in an asset securing someone else’s borrowing. The treatment may also depend on how the asset was owned and how the debt was applied.

Joint bank accounts and jointly held property require similar care. The value included in the estate and the related liability should reflect the deceased’s beneficial interest, not merely the name appearing on an account or loan statement. Where the position is unclear, legal advice and supporting ownership records are preferable to an assumed equal division.

Separate enforceable debts from informal claims

Family loans, private agreements and verbal arrangements can be genuine liabilities, but the executor should look for evidence that the debt existed and was intended to be repaid. Useful evidence may include a signed agreement, bank transfers, correspondence, repayment records or an acknowledgement from the creditor. A claimed debt may be challenged where it was undocumented, had already been forgiven, was repayable only at the lender’s discretion, or represented a gift rather than a loan.

Loans involving connected persons receive particular scrutiny. The estate should record the lender, borrower, terms, repayment history and balance outstanding. The absence of commercial interest does not automatically make a loan invalid, but it can make the evidence and terms more important when the liability is reported.

Deal carefully with uncertain or disputed liabilities

Some claims cannot be fixed precisely when the valuation is prepared. Examples include a contractual claim, a guarantee that may be called upon, an overpayment being recovered, or a debt awaiting a final statement. These should not be treated as certain deductions without assessing the legal obligation and the likelihood that payment will be required.

The estate file should explain the basis for any provision or reserve, the amount used, and whether the figure is provisional. If a creditor’s claim is disputed, the executor may need to request evidence, negotiate with the creditor or obtain legal advice. An unsupported estimate can lead to an incorrect inheritance tax return, while ignoring a valid claim can overstate the taxable estate.

Consider insolvency and payment priority

If the liabilities appear to exceed the available assets, the estate may be insolvent. Executors should avoid distributing assets before establishing the position because creditors may have priority over beneficiaries. The order in which expenses and debts are paid can depend on the type of liability, the security held and the applicable law. Specialist insolvency advice is appropriate where there are insufficient funds, disputed debts or competing creditor claims.

In an insolvent estate, the valuation still needs to show assets and liabilities accurately. A property may have substantial market value but produce little or no surplus after the secured borrowing, sale costs and other enforceable claims are taken into account. This is different from saying that the property itself has a lower market value.

Use evidence to support every figure

Typical supporting records include mortgage redemption statements, loan agreements, credit statements, invoices, tax correspondence, care-fee records, insurance documents and written creditor confirmations. Keep a schedule showing the creditor, account reference, date of the statement, balance at death, subsequent payments, interest and the final amount accepted.

The completed schedule should be reconciled with the estate bank account and the executor’s accounts. If a liability is rejected, paid personally by a beneficiary, settled for less than the amount claimed or later found to be invalid, the reason and resulting adjustment should be documented.

Finally, liabilities should be reviewed separately for probate administration, estate distribution and inheritance tax reporting. The same payment may have a different accounting treatment depending on when it arose and the purpose for which the calculation is being made. Where the estate includes complex ownership, business interests, disputed claims or substantial secured borrowing, a solicitor or tax adviser can confirm the correct treatment before figures are submitted or assets are distributed.