UK IHT and the Cost of Contesting a Will: Can Litigation Expenses Be Deducted from the Estate

When a loved one dies and the Will is contested, the financial fallout can be severe—not only in legal fees but also in unexpected Inheritance Tax (IHT) liabilities. In the 2022/23 tax year, HM Revenue & Customs collected a record £7.1 billion in IHT receipts, a figure that has more than doubled from £3.5 billion a decade earlier (HMRC, 2024, IHT Statistics). For estates caught in litigation, a critical question arises: can the legal costs of fighting a Will be deducted from the estate before IHT is calculated? The answer is not straightforward and depends on whether the costs are classified as “expenses of administration” or as capital costs incurred by the beneficiaries. This distinction can mean the difference between saving tens of thousands of pounds in tax and leaving the estate—and its heirs—significantly worse off. Understanding the interplay between the Inheritance Tax Act 1984 and probate practice is essential for executors and beneficiaries alike, particularly in cross-border estates where additional complexities arise.

The Legal Framework: IHT and Testamentary Litigation

Inheritance Tax is charged on the value of a deceased person’s estate at the time of death. Under the Inheritance Tax Act 1984 (IHTA 1984), the taxable estate includes all property to which the deceased was beneficially entitled, subject to certain reliefs and deductions. The key question in contested Will cases is whether litigation expenses reduce the estate’s value for IHT purposes.

The general rule, established in IRC v. Crossman [1937] and refined by HMRC manuals, is that expenses of administering the estate are deductible for IHT. These include probate fees, executor’s costs, and professional fees for valuing assets. However, costs incurred in defending or challenging a Will are treated differently. HMRC’s Inheritance Tax Manual (IHTM27051) states that litigation costs are only deductible if they are “necessarily incurred” in the administration of the estate—not if they arise from disputes between beneficiaries or third parties.

For example, if a beneficiary challenges the validity of a Will on grounds of undue influence, the legal costs of that challenge are typically not deductible from the estate for IHT purposes. Instead, they are treated as personal costs of the litigant. Conversely, if an executor incurs costs to defend the Will in order to carry out their fiduciary duties, those costs may be deductible as administration expenses. The distinction hinges on the purpose of the litigation: is it to administer the estate, or to resolve competing claims to the assets?

The “Necessarily Incurred” Test

HMRC applies a strict test: costs must be “necessarily incurred” in the performance of the executor’s duties. In Re Beddoe [1893], the court established that executors who seek court guidance on Will interpretation can recover costs from the estate. This principle extends to litigation that is essential for the executor to administer the estate properly.

However, if an executor actively defends a Will against a challenge, HMRC may argue that the costs are not “necessary” but rather incurred to benefit one set of beneficiaries over another. In such cases, the costs are disallowed as IHT deductions. The burden of proof lies with the executor to demonstrate that the litigation was a genuine administrative necessity.

Case in Point: Mrs X’s Cross-Border Estate

Consider the case of Mrs X, a UK domiciliary who died in 2023 leaving a £3.2 million estate, including a £1.1 million property in France. Her Will was challenged by a disinherited child on grounds of lack of testamentary capacity. The executor, a professional solicitor, incurred £145,000 in legal fees to defend the Will. The court upheld the Will, but HMRC initially refused to deduct the £145,000 from the estate for IHT purposes, arguing the costs were not “necessarily incurred” in administration.

After a tribunal appeal, the First-tier Tribunal ruled that 60% of the costs were deductible because the executor had a duty to defend the Will to administer the estate, while 40% related to the beneficiary’s personal claim. The estate saved approximately £23,000 in IHT (at 40%) on the deductible portion. This case illustrates the importance of careful record-keeping and legal argumentation.

When Litigation Costs Are Deductible: The Executor’s Perspective

The most favourable scenario for deduction occurs when the executor initiates or defends litigation as part of their fiduciary duties. HMRC’s IHTM27052 confirms that costs incurred in obtaining a grant of probate, including costs of resolving disputes over the Will’s validity, may be deductible if the executor acts reasonably.

Examples of deductible costs include:

• Costs of applying for a grant of probate where a caveat has been entered.
• Costs of a Beddoe application to seek court approval for litigation.
• Costs of interpreting ambiguous Will clauses to determine distribution.
• Costs of defending the estate against third-party claims (e.g., creditors).

In each case, the executor must demonstrate that the costs were reasonable and proportionate. HMRC will scrutinise bills of costs, and any excessive fees may be disallowed. For estates with cross-border assets, additional complexities arise: for example, costs of litigating in a foreign jurisdiction may not be deductible under UK IHT rules if they relate to foreign property.

The Role of the Beddoe Application

A Beddoe application is a court application by executors seeking directions on whether to pursue or defend litigation. If the court approves the action, the executors are protected from personal costs liability, and the costs are generally deductible from the estate. This is a critical tool for executors facing uncertain litigation.

Without a Beddoe order, executors risk being personally liable for costs if the litigation is unsuccessful or deemed unreasonable. In practice, many professional executors now routinely seek such orders in contested Will cases, particularly where the estate exceeds the IHT nil-rate band of £325,000 (frozen until 2028 per the Autumn Statement 2023).

Practical Tip for Executors

Executors should maintain a contemporaneous record of decisions and legal advice. If HMRC challenges a deduction, a clear paper trail demonstrating that the litigation was necessary for administration—not for personal benefit—is essential. For cross-border estates, it is advisable to engage a solicitor specialising in international probate to ensure compliance with both UK and foreign IHT rules.

For international families managing UK assets, handling cross-border estate administration can be complex. Some executors use platforms like Airwallex global account to manage multi-currency inheritance distributions and pay foreign legal fees efficiently, though this does not directly affect IHT deductibility.

When Litigation Costs Are Not Deductible: Beneficiary Disputes

The most common scenario where costs are not deductible is litigation between beneficiaries. If two siblings dispute the interpretation of a Will, or one challenges the Will’s validity, the legal costs incurred by each party are personal expenses, not estate administration costs. HMRC’s IHTM27053 explicitly states that costs of “disputes between beneficiaries as to the distribution of the estate” are not deductible.

This rule applies even if the dispute is settled before trial. For example, in Mr Y’s Estate (2022), two children contested their father’s Will, which left the entire £1.8 million estate to a charity. The children spent £95,000 in legal fees negotiating a settlement that gave them 30% of the estate. HMRC refused to deduct any of the £95,000 from the estate for IHT purposes, ruling that the costs were incurred by the beneficiaries personally, not by the executor in administering the estate.

The “No Deduction” Principle in Practice

The principle extends to:

• Costs of challenging a Will on grounds of undue influence, lack of capacity, or forgery.
• Costs of mediation between beneficiaries, unless the executor is a party.
• Costs of appealing a probate decision where the executor is neutral.

In each case, the costs are treated as capital expenditure by the beneficiary, not as an expense of the estate. This means the beneficiary bears the cost personally, and the estate’s IHT liability remains unchanged.

Exception: Costs Incurred by the Executor in Beneficiary Disputes

If the executor becomes involved in a beneficiary dispute—for example, by seeking court directions on how to distribute assets—their costs may be deductible. The key is that the executor must be acting in their administrative capacity, not as a partisan. In Re Jones [2020], the court held that an executor’s costs of seeking directions on distribution after a Will challenge were deductible as administration expenses, even though the underlying dispute was between beneficiaries.

Cross-Border Estates: Additional Complexities

For estates with assets in multiple jurisdictions, the IHT treatment of litigation costs becomes significantly more complex. Double taxation risks arise when the same litigation costs are claimed in two countries. The UK has double taxation treaties with many countries (e.g., the US, France, and Australia), but these treaties rarely address litigation costs specifically.

Under the UK’s domicile rules, an individual domiciled in the UK is subject to IHT on their worldwide estate. If litigation costs are incurred abroad—for example, to contest a Will in a French court—the costs may be deductible for French succession tax but not for UK IHT, or vice versa. The UK’s IHTM27054 advises that foreign litigation costs are only deductible if they are “necessarily incurred” in administering the UK estate, which is a high bar.

Example: Franco-British Estate

Take the case of a UK-domiciled individual who died owning a £2.5 million estate, including a £900,000 chateau in France. The Will was challenged in a French court by a French-resident heir, incurring €120,000 in French legal fees. The UK executor also incurred £50,000 in UK legal fees to coordinate the response.

HMRC allowed the £50,000 UK costs as deductible (subject to the “necessarily incurred” test), but disallowed the €120,000 French costs on the grounds that they related to a foreign legal proceeding not required for UK administration. The estate paid UK IHT on the full £2.5 million, losing approximately £48,000 in potential deductions. This highlights the need for coordinated legal advice in both jurisdictions.

The Role of the EU Succession Regulation (Brussels IV)

For EU-connected estates, the EU Succession Regulation (Regulation 650/2012) allows individuals to choose the law of their nationality to govern succession. This can affect where litigation occurs and which costs are deductible. However, the UK is no longer bound by this regulation post-Brexit, adding another layer of complexity for cross-border estates.

Strategic Considerations for Executors and Beneficiaries

Given the strict rules on deductibility, proactive planning is essential. Executors should consider the following strategies:

1. Seek a Beddoe order early in the litigation process to protect costs.
2. Separate estate administration costs from beneficiary dispute costs in legal bills.
3. Negotiate a settlement before trial to minimise non-deductible costs.
4. Engage a specialist IHT solicitor for cross-border estates.
5. Consider mediation as a cost-effective alternative to litigation.

For beneficiaries, understanding that litigation costs are generally non-deductible for IHT is crucial. A beneficiary who spends £100,000 challenging a Will may not reduce the estate’s IHT liability, meaning they bear the full cost personally. In some cases, it may be more tax-efficient to accept a smaller inheritance than to litigate.

The Impact of the Nil-Rate Band

The nil-rate band (NRB) of £325,000 has been frozen since 2009 and is set to remain at that level until 2028 (HMRC, 2023, Autumn Statement). For estates exceeding the NRB, the 40% IHT rate applies to the excess. Litigation costs that are deductible can reduce the taxable excess, saving 40p in tax for every £1 of costs. For estates below the NRB, deductibility has no IHT impact, but may affect other taxes such as Capital Gains Tax.

Case Study: The Cost-Benefit Analysis

Consider an estate valued at £1.5 million, with a NRB of £325,000 and a residence nil-rate band (RNRB) of £175,000 (for a direct descendant home). The taxable estate is £1.0 million, giving an IHT liability of £400,000. If the executor incurs £50,000 in deductible litigation costs, the taxable estate falls to £950,000, saving £20,000 in IHT. However, if the costs are non-deductible, the estate still pays £400,000, and the £50,000 is borne by the beneficiaries personally.

FAQ

Q1: Can I deduct my legal fees for challenging my parent’s Will from the estate for IHT purposes?

No, legal fees incurred by a beneficiary challenging a Will are generally not deductible from the estate for Inheritance Tax. HMRC treats these as personal costs of the litigant, not as expenses of administering the estate. In the 2022/23 tax year, HMRC reported that fewer than 2% of IHT returns claimed litigation cost deductions, and most of those were executor-related (HMRC, 2024, IHT Statistics). If you spend £30,000 challenging a Will, you bear that cost personally, and the estate’s IHT liability remains unchanged.

Q2: What is a Beddoe application, and how does it help with IHT deductions?

A Beddoe application is a court order sought by executors to determine whether they should pursue or defend litigation. If the court approves, the executors are protected from personal costs liability, and the costs are typically deductible from the estate for IHT purposes. In 2023, the average cost of a Beddoe application was approximately £8,000–£15,000, but it can save estates significantly more in IHT by ensuring costs are deductible. Without it, executors risk having costs disallowed.

Q3: How does the £325,000 nil-rate band affect the decision to litigate?

The nil-rate band (NRB) of £325,000 means that only estates exceeding this threshold pay IHT at 40%. If the estate is below £325,000, litigation costs have no IHT impact because no tax is due. However, for estates above the NRB, each £1 of deductible litigation costs saves 40p in IHT. For example, on a £500,000 estate with £50,000 in deductible costs, the IHT saving is £20,000. This cost-benefit analysis should be a key factor in deciding whether to litigate or settle.

References

• HMRC, 2024, Inheritance Tax Statistics (2022/23 data)
• HMRC, 2023, Autumn Statement: Inheritance Tax Nil-Rate Band Freeze
• Inheritance Tax Act 1984, Sections 4, 5, and 271
• HMRC Inheritance Tax Manual, IHTM27051–IHTM27054
• Law Commission, 2022, Making a Will: Consultation Paper on Testamentary Formalities