How to Include Debentures in a Will

Debentures are a form of financial instrument that can form part of a person's estate on death. For people planning their estate in England and Wales, understanding what debentures are, how they are treated under the law, and how to include them in a will is important for clear, effective estate planning. This guide explains the legal principles, practical steps and considerations involved in including debentures in a will.

What Is a Debenture?

A debenture is a financial instrument representing a medium‑ to long‑term loan to a company. It is effectively a document evidencing that a company owes the holder a specified amount, often with interest. In UK commercial practice, a debenture typically creates a security interest such as a fixed or floating charge over a company's assets as security for that debt. Debentures can be transferable and are regarded as securities in many statutory tax contexts.

Debentures differ from shares in that they represent debt owed by the company, not ownership of the company's capital. Holders of debentures generally do not have voting rights at shareholder meetings, but they may have rights to receive interest payments and, in some circumstances, priority in an insolvency.

Although debentures are used mainly in business finance, individuals may hold them as investments, including as listed corporate securities.

Debentures and Estate Planning

Are Debentures Part of a Deceased Person's Estate?

Yes. Unless a debenture includes specific legal provisions that cause it to transfer automatically on death, a debenture held by an individual in their own name typically forms part of their estate when they die. It is treated in the same way as other securities such as stocks, shares or bonds for the purposes of estate administration and inheritance tax reporting.

In other words, a testator (the person making the will) can nominate a beneficiary to receive their debentures through the terms of the will, and executors must identify and value them as part of the estate.

Debentures vs. Other Securities

For inheritance tax (IHT) and estate administration purposes, HM Revenue & Customs includes “debentures and other securities” alongside stocks and shares when valuing an estate. Executors must include them in the appropriate schedules of inheritance tax returns when submitting information to HMRC as part of applying for probate.

Drafting a Will That Includes Debentures

Identify the Debentures You Hold

Before drafting your will, compile a comprehensive list of all debentures you own, including:

• Name of the issuing company or entity.
• Type of debenture (fixed or floating charge or listed corporate security).
• Nominal value and any accrued interest.
• Certificate or account details showing ownership.

This list helps executors locate and value the assets after your death.

How to Provide for Debentures in a Will

There are two principal ways to deal with debentures in a will:

1. Specific Gift
You can make a specific gift of particular debentures to a named beneficiary. For example:

“I give all my holdings of XYZ Company debentures held in my name at the date of my death to A, B or C in the proportions set out below…”

A specific gift ensures that the named beneficiary receives those debentures specifically rather than having their value distributed through the residuary estate.

2. Residuary Clause
Many wills leave the bulk of the estate (the residue) to beneficiaries after specific gifts and debts are satisfied. If you do not make a specific gift of your debentures, they will typically fall into the residuary estate and be distributed according to the residuary clause.

Executors then sell or transfer the debentures as part of administering the estate. For listed debentures or traded securities, an executor may need to obtain valuations or arrange sale and distribution of proceeds.

Practical Considerations for Executors

Valuation and Probate

Debentures must be valued at the date of death for inheritance tax purposes. If the company's securities, including debentures, are listed on a recognised exchange, the executor should use the market value at the date of death. HMRC guidance requires including these values on the inheritance tax return (IHT400).

If the total estate exceeds the threshold for probate, executors must apply for a grant of probate before dealing with any securities or transferring them to beneficiaries.

Transfer or Sale

After probate, executors can:

• Transfer the debentures directly to beneficiaries named in the will (if the investment provider allows direct transfer), or
• Sell them and distribute the proceeds to beneficiaries, particularly if the beneficiaries prefer monetary distribution or if transfer is impractical.

Executors should obtain information from the company's registrar or broker on how to transfer ownership.

Debentures with Special Terms

Some debentures may contain provisions that affect what happens on death-for example, convertibility into shares, redemption terms, or rights that vary on change of holder. Executors and beneficiaries should review the product documentation to avoid unintended consequences.

Tax and Financial Considerations

Inheritance Tax

Debentures form part of the estate's value for inheritance tax purposes. If the total value of the estate exceeds the inheritance tax threshold (nil‑rate band), IHT may be payable before assets are distributed. A debenture's market value on the date of death is included in the estate valuation.

Income and Interest

If interest on the debentures accrues up to the date of death but is unpaid, that interest may also form part of the estate but may be treated differently for tax purposes. Executors should seek appropriate guidance where necessary.

Common Questions

Can I list the specific debentures in my will?
Yes. A will can refer to specific securities, including debentures. However, ensure the description is clear and up to date so executors can identify them easily. Avoid including detailed account numbers in the will itself. Instead, maintain a separate asset schedule.

What if the debenture matures before I die?
If the debenture matures and is redeemed before death, it will cease to exist at death. The will should be reviewed if assets change materially over time.

What about joint holdings?
If the debenture is held jointly with another person, rights of survivorship may apply, meaning it passes automatically to the surviving holder rather than forming part of your estate. Executors should confirm ownership status at death.

Does holding debentures in an ISA affect estate treatment?
Investments held in tax‑efficient wrappers such as ISAs are outside that wrapper on death for inheritance tax valuation; the underlying value still forms part of the estate. Executors should obtain valuations accordingly.

Key Takeaways

Debentures are financial instruments evidencing debt owed by a company and can form part of an individual's estate on death. In England and Wales, these assets are included in estate valuations for inheritance tax and administered by executors according to the terms of the will. Debentures may be gifted specifically by name or fall into the residuary estate. Executors must identify, value and deal with them after death, often applying for probate before transfer or sale.

Careful identification and clear instructions in the will help ensure that debentures are distributed according to your intentions. Regular review of your will is advisable where investment holdings change over time.