Test of insolvency

Section 421(4) of the Insolvency Act 1986 (ia 1986) provides a statutory test to establish whether an estate is insolvent: the estate of a deceased person is insolvent if, when all assets are realised, it will be insufficient to meet in full all the debts and other liabilities to which the estate is subject.

An estate is not insolvent if debts and liabilities can be settled even if none of the legacies can be paid. In an insolvent estate, the beneficiaries will receive nothing and the debts and liabilities will not be paid in full, if at all.

For example, Elizabeth’s estate contains just one bank account with a balance of £50,000. There is no IHT liability as the estate has the full basic nil rate band available and a funeral plan is in place to meet the funeral costs. The debts and liabilities of the estate amount to £12,000. By her Will, Elizabeth left £40,000 each to The Green Party and Greenpeace. Although there are insufficient assets in the estate to pay the legacies