How to Handle Debts and Liabilities in an Estate in the UK?

When someone dies, the practical job of working out what they owned, what they owed, and how to settle each falls to the personal representatives. The administration of debts is one of the most sensitive parts of that work because mistakes can leave the personal representatives personally liable for money the estate cannot pay.

This guide sets out how the process works in England and Wales under current 2026 rules. It covers what counts as a debt, the order in which different debts have to be paid, how to handle creditors who come forward late, what happens when the estate cannot pay everything, and the tax duties owed to HMRC.

Key Takeaways

Personal representatives are legally responsible for identifying assets and liabilities, settling debts and distributing the estate correctly. They can be personally liable if they get the order of payments wrong or distribute the estate before all debts are settled.
Debts must be paid in the correct legal order. In a solvent estate, secured debts are usually settled before unsecured debts. In an insolvent estate, the statutory order under the Administration of Insolvent Estates of Deceased Persons Order 1986 must be followed.
Section 27 of the Trustee Act 1925 lets personal representatives advertise for unknown creditors in The Gazette and a local newspaper, with a minimum two-month claim period. Following this procedure protects them from later personal liability for debts they did not know about.
HMRC must be notified of the deceased’s tax position. Inheritance tax is generally due by the end of the sixth month after the month of death, with interest running from that date.

Understanding the Role of Personal Representatives

When someone dies, the personal representative takes legal responsibility for administering the estate. This is either an executor named in the will, or an administrator appointed by the Probate Service where there is no valid will.

Their core responsibilities include:

locating financial documents
identifying all assets and liabilities
collecting funds owed to the estate
settling outstanding debts in the correct order
meeting any tax obligations owed by the deceased and the estate
distributing the remaining assets according to the will or the rules of intestacy

Beneficiaries do not receive their inheritance until estate debts and liabilities have been settled. Where an estate is complex or financially strained, professional advice from a solicitor or chartered tax adviser is generally a sensible step.

If multiple personal representatives are appointed, they must act jointly when managing estate finances. Disagreements between them can stall the administration and increase costs.

Identifying the Deceased’s Debts

The first task is to build a complete picture of what the deceased owed. This means going through bank statements, loan agreements, credit card accounts, store cards, utility bills, council tax records, mortgage documents and any business records.

Creditors should be formally notified of the death so they can submit any claims. The Death Notification Service (a free service supported by major UK banks and building societies) provides a single online channel to inform multiple financial institutions at once. The government’s Tell Us Once service performs the equivalent role for government departments, including HMRC, the Department for Work and Pensions, the Passport Office and the local council.

In most cases, only the person who signed the credit agreement is liable for the debt. Debts do not automatically transfer to family members. Unsecured debts are paid out of estate funds where there are sufficient assets. Where there are not, unsecured debts may be written off in part or in full.

A clear schedule of liabilities, kept up to date, helps the personal representatives pay debts in the right order and reduces the risk of disputes with creditors and beneficiaries.

Prioritising Debt Payments

Once debts are identified, they must be paid in the correct legal order. Beneficiaries should not receive distributions until liabilities are dealt with.

In a solvent estate, secured debts are generally paid first, followed by unsecured debts. Where the estate is insolvent, the strict statutory order under the Administration of Insolvent Estates of Deceased Persons Order 1986 and the Insolvency Act 1986 applies. Personal representatives need to follow the order carefully because paying a lower-ranking debt before a higher-ranking one can leave them personally liable for the shortfall.

Secured Debts

Secured debts, such as mortgages or hire purchase finance on a vehicle, are tied to specific assets. The secured creditor has rights against the underlying asset, so the secured debt is generally settled out of that asset before any surplus passes to other creditors.

If a secured debt is not paid, the lender can take steps to repossess the underlying asset. Where the deceased had a life insurance policy linked to the mortgage, the proceeds may clear all or part of the outstanding loan. Personal representatives should check the terms of any such policy carefully.

Unsecured Debts

Unsecured debts include credit cards, personal loans, overdrafts, store finance and certain household bills.

These are payable out of the estate’s available assets. Creditors cannot pursue surviving family members unless those family members were jointly liable on the original agreement (for example, as a joint borrower or guarantor).

If the estate does not have enough to pay unsecured debts in full, creditors may receive only part of what they are owed, or nothing at all. Accurate valuation of the estate’s assets is important before making any payments.

Managing Joint Debts

Joint debts need particular care. Where a debt was held jointly, the surviving party usually remains liable for the full amount, not just their share.

Creditors can pursue the surviving borrower directly. The estate may contribute to the debt where assets are available, but the legal responsibility sits with the surviving joint borrower under the principle of joint and several liability.

Where someone guaranteed the debt, the guarantor may also become liable if the estate cannot pay.

Open and early communication with the lender about a joint borrower’s death often helps avoid arrears charges and gives the surviving borrower time to arrange refinancing if needed.

Dealing with Unknown Creditors and Section 27 Notices

Unknown creditors are a real risk for personal representatives. If the estate is distributed and a creditor later comes forward with a valid claim, the personal representatives can be personally liable for the unpaid debt unless they followed the correct statutory procedure.

Section 27 of the Trustee Act 1925 gives a clear way to manage this risk. The personal representatives place a statutory advertisement (known as a Section 27 notice) in The Gazette and, where the estate includes land, in a newspaper local to the property. The notice gives any unknown creditor or claimant a minimum of two months to come forward.

If no claim is received within that period, the personal representatives can distribute the estate having regard only to the claims they actually knew about. They are then protected from personal liability to creditors they did not know about at the time of distribution.

A Section 27 notice does not protect against claims under the Inheritance (Provision for Family and Dependants) Act 1975, which gives certain family members and dependants up to six months from the grant of representation to bring a claim for reasonable financial provision from the estate. Personal representatives generally wait at least six months from the grant before distributing, for this reason.

Where there is uncertainty about who the creditors are, professional probate advice is worth taking before any money leaves the estate.

Insolvent Estates

An estate is insolvent where its liabilities exceed the value of its assets. The legal definition (in section 421(4) of the Insolvency Act 1986) is that an estate is insolvent if, when realised, it will not be enough to meet all the debts and liabilities in full.

In an insolvent estate, the personal representatives administer the estate for the benefit of the creditors, not the beneficiaries. The order of payment is set by the Insolvency Act 1986, as adapted by the Administration of Insolvent Estates of Deceased Persons Order 1986. In broad outline, the order is:

secured creditors, to the extent of the secured asset
reasonable funeral, testamentary and administration expenses (these have priority over preferential debts in a deceased estate, which is different from the position in a lifetime bankruptcy)
preferential debts, as listed in Schedule 6 to the Insolvency Act 1986
ordinary unsecured debts
interest on debts
deferred debts

All claims in a higher category must be settled in full before anything is paid to the next category.

Where an estate looks insolvent, personal representatives often consider applying for an Insolvency Administration Order. This brings in a trustee in bankruptcy to administer the estate under court supervision and protects the personal representatives from personal liability for steps taken after the order is made. Specialist legal advice is strongly recommended before applying for such an order, and before making any distributions out of an estate that may be insolvent.

Tax Obligations

Tax sits at the centre of estate administration. The personal representatives have to deal with HMRC on the deceased’s lifetime tax position up to the date of death and on the estate’s tax position during the period of administration.

Three taxes typically need to be considered:

Income tax on income arising during the administration period, such as rental income, savings interest or dividends from shares held in the estate. Tax up to the date of death is reported on the deceased’s personal self-assessment return; tax on the estate’s income during administration is dealt with separately, either through HMRC’s informal procedure for simpler estates or on a trust and estate tax return (SA900) for more complex ones.
Capital gains tax on any gains made by the estate when assets are sold during the administration period at a value above their market value at the date of death.
Inheritance tax, where the value of the estate (after available reliefs and allowances) exceeds the available nil-rate bands. The standard nil-rate band is £325,000 per person and the residence nil-rate band can add up to a further £175,000 where a qualifying residence passes to direct descendants and other conditions are met. Both nil-rate bands are frozen until 5 April 2030. Unused allowances may be transferable from a predeceased spouse or civil partner.

Inheritance tax is generally due by the end of the sixth month after the month of death. Interest starts to run from that date, even where the estate has not yet been administered. Where the estate does not hold ready cash, IHT can often be paid directly from the deceased’s bank or building society account before probate is granted, using HMRC’s Direct Payment Scheme on form IHT423. For property qualifying for Business Relief or Agricultural Relief, and for land, IHT can usually be paid in ten equal annual instalments, interest-free in the case of qualifying business and agricultural property under the rules in force from 6 April 2026.

Two further changes are worth flagging for personal representatives administering estates from 2026 onwards:

The Finance Act 2026 introduced a combined £2.5 million allowance for property qualifying for 100% Business Relief and Agricultural Relief, with 50% relief on the value above the allowance. This affects estates that include a trading business, farmland or qualifying shares.
From 6 April 2027, most unused pension funds and certain pension death benefits will form part of the IHT estate for the first time. Personal representatives administering an estate that includes pension wealth will need to take this into account when working out the IHT position.

Filing the right HMRC forms on time matters. The main forms are IHT400 (Inheritance Tax account) and a number of supporting schedules. Where the position is complex, professional guidance from a solicitor or chartered tax adviser helps personal representatives meet HMRC’s requirements without missing deadlines or reliefs.

Paying Funeral Expenses

Funeral expenses come ahead of most other debts. Banks usually release funds directly from the deceased’s accounts to pay the funeral bill, even before a grant of probate has been issued, on production of an invoice from the funeral director.

Where a relative or friend has paid the funeral costs personally, they can submit a claim against the estate to be reimbursed.

Help with funeral costs may be available from the government for people on certain low-income benefits. In England and Wales, the Funeral Expenses Payment is available through the Department for Work and Pensions. In Scotland, the equivalent is the Funeral Support Payment administered by Social Security Scotland.

Handling Utility Bills and Other Ongoing Expenses

Utility providers should be notified of the death promptly so they can transfer the account, close it, or stop further charges accruing.

Where other people remain living in the property, responsibility for ongoing bills will usually pass to them. Arrears that relate solely to the deceased’s period of occupation are paid out of the estate. Council tax exemptions can apply for periods after death, depending on whether the property is left empty and on the local authority’s rules.

If the estate is insolvent and there is not enough to pay all unsecured debts, some utility arrears may be written off as part of the wider creditor process.

Life Insurance Policies and Payouts

Life insurance can provide important financial support to family members.

Where a policy is written in trust for named beneficiaries, the proceeds are usually paid directly to those beneficiaries and fall outside the deceased’s estate. Funds paid out under a trust-held policy are not generally available to the estate’s creditors and do not increase the value of the estate for inheritance tax purposes.

Where a life policy is not written in trust, the proceeds are paid into the estate, are available to creditors, and form part of the estate for IHT.

Reviewing existing life policies and their trust status is one of the first steps in any estate administration where life cover is in place.

Property and Joint Ownership

How a property was owned significantly affects how it is dealt with on death.

Under a joint tenancy, the surviving owner automatically inherits the deceased’s share by the right of survivorship. The property does not pass under the will or the intestacy rules and may not need to go through probate to be transferred. The value of the deceased’s share is still relevant for IHT.

Under a tenancy in common, the deceased’s share forms part of their estate. It passes under the will or the intestacy rules and may need to be sold or transferred as part of the administration. A grant of probate (or letters of administration where there is no valid will) is usually required.

Where a property has a mortgage, the mortgage debt sits with the property regardless of how ownership is held. Personal representatives should engage with the lender early to agree what happens during the administration period.

Closing Bank Accounts

Closing the deceased’s bank accounts is one of the early administrative tasks.

Banks generally require a death certificate and proof of authority (usually the will and, where required, a grant of probate). Many institutions release smaller balances without a grant of probate, and the threshold for doing so varies between providers.

Prompt notification of each bank, building society and investment provider stops automatic payments going out, halts further interest charges on overdrawn accounts, and allows the estate’s funds to be consolidated for use in paying debts and distributing to beneficiaries.

When to Get Professional Help

Some estates can be administered without professional help. Many cannot, and the personal cost of getting it wrong falls on the personal representatives themselves. It is worth taking advice from a solicitor or chartered tax adviser where:

There is any uncertainty about the validity or interpretation of the will
Minor children or vulnerable beneficiaries are involved
The estate includes trust property
There are international assets
The deceased owned a business or shares in a private company
The estate may be insolvent
There are likely to be claims against the estate, for example under the Inheritance (Provision for Family and Dependants) Act 1975
The estate is complex enough that managing it would take significant time alongside other commitments

Coordinated advice from a solicitor and a tax adviser, working with the personal representatives, helps the administration run smoothly, reduces the risk of personal liability, and can help families avoid disputes that often arise when the position is unclear.

Summary

Handling debts and liabilities in an estate is a structured legal process with real consequences if it is done wrong. Personal representatives need to identify what is owed, settle debts in the order set by law, deal with unknown creditors using a Section 27 notice, take particular care over insolvent estates under the Administration of Insolvent Estates of Deceased Persons Order 1986, and meet the deceased’s and the estate’s tax obligations to HMRC on time.

With careful organisation, sensible use of statutory protections, and good professional advice where needed, even complex estates can be administered correctly and in line with current UK law.

Frequently Asked Questions

What happens if the estate does not have enough assets to pay all the debts?

The estate is treated as insolvent. Debts are paid in the statutory order set by the Insolvency Act 1986 and the Administration of Insolvent Estates of Deceased Persons Order 1986, starting with secured creditors, then reasonable funeral, testamentary and administration expenses, then preferential debts, then ordinary unsecured debts. Personal representatives should take legal advice before paying anything from an insolvent estate, and may need to apply for an Insolvency Administration Order.

Are surviving family members responsible for paying the deceased’s debts?

In most cases, no. Surviving family members are not responsible for the deceased’s debts unless they were a joint borrower, a guarantor, or otherwise jointly liable. Personal debts are paid from the deceased’s estate, and where the estate cannot pay them in full, the creditors usually have to write off the shortfall.

How do I notify creditors of the deceased’s debts?

Personal representatives should notify known creditors (banks, lenders, credit card providers, utility companies and the like) directly, with a copy of the death certificate. The Death Notification Service can speed this up for major banks and building societies. To deal with unknown creditors, the personal representatives place a Section 27 notice in The Gazette and a local newspaper, giving creditors a minimum of two months to come forward.

Do life insurance payouts go towards paying the deceased’s debts?

It depends on whether the policy was written in trust. If the policy is held in trust for named beneficiaries, the proceeds are paid directly to them and are not available to the estate’s creditors. If the policy is not in trust, the proceeds are paid into the estate and are available to creditors before any distribution to beneficiaries.

What should I do if I discover unknown creditors after distributing the estate?

If a Section 27 notice was correctly placed and the two-month period had expired before distribution, the personal representatives are usually protected from personal liability for debts they did not know about at the time. The creditor may still be able to recover from the beneficiaries who received the distribution. If a Section 27 notice was not placed, the personal representatives may be personally liable, in which case immediate legal advice is important.

When is inheritance tax due?

Inheritance tax is generally due by the end of the sixth month after the month of death. For example, if death occurs in March, IHT is due by 30 September. Interest runs from that date until payment. IHT on land and on certain Business Relief or Agricultural Relief property can usually be paid in ten equal annual instalments, with interest-free instalments available for qualifying business and agricultural property under the rules in force from 6 April 2026.

Can I distribute the estate before all debts are paid?

No. Personal representatives should not distribute the estate until they are satisfied that all known debts and tax liabilities have been paid (or set aside in full), and either a Section 27 notice has expired or they are confident there are no unknown creditors. Distributing too early can leave the personal representatives personally liable.

Disclaimer: The information provided is for general informational purposes only and does not constitute financial, tax or legal advice. The administration of estates is complex and depends on individual circumstances and current legislation. No action should be taken based on this content without a full, personalised review. Where appropriate, advice should be obtained from suitably qualified legal and tax professionals.

How to Handle Debts & Liabilities in an Estate? A Practical Guide