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Paying debts in the wrong order — or paying beneficiaries before settling creditors — is one of the most serious mistakes an executor can make. It can result in personal liability for the shortfall. This guide explains the correct order of priority and how to identify all the estate's debts. For the creditor advertisement process, see our guide to advertising for creditors in The Gazette.
This page describes the law of England and Wales. Scotland and Northern Ireland deal with an insolvent estate under their own insolvency and succession law — in Scotland, for example, an executor faced with an insolvent estate may need to have the estate sequestrated.
It is often said that estate creditors always queue in a fixed order. They do not. Which rules apply depends on whether the estate is solvent.
If the estate is solvent — the assets cover the funeral, testamentary and administration expenses and all the debts — every creditor is paid in full, so no creditor ranks ahead of any other. What the law sets out for a solvent estate is the order in which the estate's assets are used up: section 34(3) of, and Part II of the First Schedule to, the Administration of Estates Act 1925. That order matters to the beneficiaries, because it decides whose gift is exhausted first (broadly: undisposed-of property, then residue, then property set aside for debts, then pecuniary legacies, then specific gifts). It is not a ranking of creditors, and a will can vary it.
If the estate is insolvent — the assets will not cover the debts — a statutory order of priority does apply, and paying out of order is what exposes an executor to personal liability. Article 4 of the Administration of Insolvent Estates of Deceased Persons Order 1986 applies the personal bankruptcy rules in the Insolvency Act 1986 to the estate, with one modification: reasonable funeral, testamentary and administration expenses have priority over the preferential debts.
| Priority | Category | Examples |
|---|---|---|
| Outside the ranking | Secured creditors, out of their security | A mortgage lender is paid from the charged property and is not affected by the order below. Any shortfall after the security is realised ranks as an ordinary unsecured debt |
| 1st | Reasonable funeral, testamentary and administration expenses | Funeral costs, probate fees, professional valuations, conveyancing on a sale, the executor's reasonable administration costs |
| 2nd | Ordinary preferential debts | Unpaid contributions to occupational pension schemes; arrears of pay owed to the deceased's employees, up to a prescribed limit |
| 3rd | Secondary preferential debts | VAT owed to HMRC, and deductions the deceased was required to take from payments to other people and pass to HMRC — PAYE and employees' National Insurance in particular |
| 4th | Ordinary unsecured debts | Credit cards, overdrafts, personal loans, utility arrears, council tax, rent arrears, medical bills, the deceased's own income tax and Class 4 National Insurance |
| 5th | Interest on those debts | Interest accrued since the date of death, on preferential and unsecured debts equally |
| 6th | Deferred debts | Credit provided by someone who was the deceased's spouse or civil partner at the date of death |
| Last | Beneficiaries of the estate | Only if a surplus remains — in which case the estate was not insolvent after all |
Within each level, creditors rank equally: if there is not enough to pay a level in full, the money available is shared out in proportion and nothing passes to the level below.
In an insolvent estate these rank ahead of the preferential debts. Only reasonable expenses take that priority — an elaborate funeral costing far more than the estate can bear may not be recoverable in full. HMRC applies a similar reasonableness test when deciding what funeral costs can be deducted for inheritance tax.
Testamentary and administration expenses include the executor's own reasonable costs of administering the estate: professional valuations, probate application fees, conveyancing fees on a property sale, accountancy fees, and postage and stationery.
A secured creditor holds security over a specific asset — most commonly a mortgage lender with a charge over the property. Because the security is the lender's, it sits outside the order of priority altogether: the lender takes what it is owed from the charged asset regardless of what else the estate owes. If the sale proceeds exceed the debt, the surplus falls into the estate for the other creditors. If they fall short, the shortfall ranks as an ordinary unsecured debt.
If the property is being transferred to a beneficiary rather than sold, the mortgage must be either repaid or taken over by the beneficiary with the lender's consent — the charge does not disappear on death.
Most everyday debts are unsecured: credit cards, bank overdrafts, personal loans, utility arrears, council tax and rent arrears. They rank equally — if there are insufficient funds to pay them all, each creditor receives a proportionate "pence in the pound" payment.
HMRC debts are not all in the same place. Unpaid income tax the deceased owed on their own account is an ordinary unsecured debt. But VAT, and deductions the deceased was obliged to make from payments to other people and hand over to HMRC — PAYE and employees' National Insurance in a business the deceased ran — are secondary preferential debts in an insolvent estate, and so are paid ahead of the ordinary unsecured creditors.
Inheritance tax rarely arises in an insolvent estate, because the deceased's debts are deducted in working out the value of the estate for inheritance tax in the first place.
For background on what debts survive death, see our guide to debts after death.
A deceased person's debts do not disappear on death — they are payable out of the estate, and it is the estate, not the executor personally, that owes them. An executor who pays them out of the estate in the right order is not personally liable for anything left unpaid.
The executor can be personally liable if they pay in the wrong order, or pay beneficiaries while debts remain outstanding: to the extent a creditor is left worse off by that, the executor may have to make it good from their own money.
An insolvent estate can also be dealt with formally, by petitioning the court for an insolvency administration order under the 1986 Order, which puts a trustee in place instead of the executor. That is a specialist area, and executors in that position often take legal advice before making any payment at all.
For the full process of distributing the estate once all debts are paid, see our guide to distributing cash to beneficiaries. For the full estate administration checklist, see our estate administration checklist.
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