What Expenses Can Be Deducted from the Estate Value

Introduction

Inheritance Tax is charged on the net value of a person’s estate when they die. The executor or personal representative is responsible for valuing the estate accurately and reporting it to HMRC.

To reach the net value, you start with the total worth of all assets, then subtract allowable expenses, debts, and certain administration costs. These deductions can significantly reduce the estate’s taxable amount and the Inheritance Tax due.

Funeral expenses

Funeral costs are one of the main deductions allowed from an estate. HMRC accepts reasonable expenses for a person’s funeral or cremation, such as:

Funeral director’s fees.

Coffin, flowers, and transport.

Cremation or burial fees.

Church or venue fees for the ceremony.

Headstone or memorial costs.

You can also include the cost of a modest wake or gathering if it is clearly related to the funeral.

However, expenses that are not directly part of the funeral—such as catering for guests beyond a reasonable reception, travel for relatives, or memorial events held later—cannot be deducted.

Funeral expenses are deducted before calculating the net estate, even if they have not yet been paid at the time the Inheritance Tax return is submitted.

Debts owed by the deceased

All genuine debts and liabilities owed by the deceased at the date of death can be deducted from the estate. Common examples include:

Mortgages and secured loans.

Personal loans, overdrafts, and credit cards.

Household bills owed up to the date of death.

Unpaid income tax or other taxes.

Trade or business debts.

To qualify, the debts must have been the deceased’s personal responsibility and legally enforceable. You must keep written evidence, such as statements, loan agreements, or invoices.

If the deceased had taken out a joint loan or mortgage, only their share of the liability can be deducted.

Debts that are cancelled or covered by insurance after death (such as a mortgage paid off by life insurance) are not deductible because they no longer reduce the value of the estate.

Administration expenses

Certain expenses incurred in managing or administering the estate can also be deducted. These are the costs of collecting, maintaining, or distributing the estate’s assets.

Allowable administration expenses may include:

Professional fees for solicitors, accountants, or valuers handling the estate.

Costs of securing and insuring property during probate.

Postage, stationery, and reasonable travel expenses directly related to estate administration.

Bank charges for administering the estate’s accounts.

However, general costs for maintaining beneficiaries’ interests or ongoing management after the estate has been distributed are not deductible.

Administration expenses must be directly related to the estate itself, not to the personal affairs of the beneficiaries.

Property-related expenses

If the estate includes property, certain related costs can be deducted:

Mortgage repayments due up to the date of death.

Repairs needed to maintain the property’s condition before sale.

Insurance premiums covering the property after death (while awaiting sale).

Valuation or surveyor fees for probate purposes.

Improvements made to increase the property’s sale value are not deductible. Similarly, ongoing costs such as council tax, utilities, and maintenance after death are not usually deductible unless they were due before the date of death.

Tax liabilities and unpaid income

Any unpaid taxes owed by the deceased, such as income tax, Capital Gains Tax, or council tax, can be deducted from the estate.

If the deceased received income up to the date of death (for example, from employment, rent, or investments), any tax that would have been payable on that income is treated as a debt of the estate.

The executor should liaise with HMRC to confirm the correct figures before claiming the deduction.

Costs of selling assets

In some cases, costs associated with selling estate assets may be deductible, particularly if selling is necessary to pay debts or taxes. Allowable costs can include:

Estate agent or auction fees for selling property or valuables.

Legal fees associated with the sale.

Advertising costs to find buyers.

If the sale is purely for the convenience of the beneficiaries (for example, to distribute proceeds rather than physical items), HMRC may disallow the deduction.

What cannot be deducted

HMRC does not allow deductions for expenses that are personal to the beneficiaries or unrelated to the estate itself. Examples of non-deductible expenses include:

Costs of maintaining or improving property for the beneficiaries’ benefit.

Travel or accommodation expenses for family members.

Probate registry fees or court costs.

Costs of disputes between beneficiaries.

Monument or memorial expenses that go beyond a reasonable headstone.

Also, any gifts or payments made after death are not deductible, even if they are intended to fulfil the deceased’s wishes.

Example calculation

Peter’s estate is valued at £700,000. It includes a property worth £500,000, savings of £150,000, and personal items worth £50,000.

The estate has the following deductible expenses:

Funeral costs: £6,000.

Mortgage balance: £120,000.

Solicitor and valuation fees: £4,000.

Credit card debt: £3,000.

Total deductions: £133,000.

Net estate value: £700,000 £133,000 = £567,000.

The nil rate band (£325,000) and residence nil rate band (£175,000) are then applied, reducing the taxable amount to £67,000.

Inheritance Tax is payable at 40 percent on £67,000, giving a final tax bill of £26,800.

Keeping records

The executor must keep detailed records of all deductions, including invoices, receipts, and bank statements. HMRC may request evidence to support any claims made in the Inheritance Tax return.

If an expense is uncertain or disputed, it is better to list it separately in the return and explain it in writing to HMRC.

Common mistakes to avoid

Claiming deductions for personal or non-estate expenses.

Forgetting to include debts owed jointly or covered by insurance.

Overestimating administration costs without supporting documentation.

Failing to account for outstanding taxes or income at the date of death.

Accurate record keeping and professional advice can prevent costly errors or HMRC delays.

Conclusion

When calculating Inheritance Tax, you can deduct genuine debts, funeral expenses, and certain administration costs from the estate’s value. These deductions help determine the true taxable amount and ensure that the estate only pays tax on its real worth.

Executors should keep detailed records, seek professional valuations where needed, and ensure deductions are legitimate and fully documented. In complex estates involving property, business assets, or overseas investments, working with an accountant or solicitor can help ensure all allowable expenses are correctly applied and that the estate remains fully compliant with HMRC rules.