Sarah Bradford explains how the benefit of the new inheritance tax residence nil rate band can be retained if you downsize or sell your home.
In his summer 2015 Budget, the Chancellor, George Osborne, announced plans to introduce a new residence nil rate band (RNRB) for inheritance tax (IHT) purpose from April 2017. The new nil rate band, which will be available in addition to the existing IHT nil rate band, is to be introduced progressively, as follows:
- £100,000 for 2017/18;
- £125,000 for 2018/19;
- £150,000 for 2019/20; and
- £175,000 for 2020/21.
From 2021/22 onwards, it will be increased in line with the consumer prices index (CPI).
Where an estate has a net value of £2 million or more, the RNRB is withdrawn at the rate of £1 for every £2 by which the value of the estate exceeds £2 million. The existing nil rate band, frozen at £325,000 until the end of 2020/21, remains available regardless of the value of the estate.
Availability of the RNRB
The RNRB is available in respect of deaths which occur on or after 6 April 2017, broadly where a residence is passed on death to a direct descendant. It will apply to reduce the tax payable by an estate on death, but will not reduce tax on lifetime transfers that are chargeable because of death.
As with the IHT nil rate band, the unused portion of the RNRB is transferable to the surviving spouse or civil partner. This will be the case where the surviving spouse or civil partner dies on or after 6 April 2017, irrespective of when the first spouse or civil partner dies.
The RNRB is only available in respect of one residential property. However, where the deceased had more than one property in his or her estate, the deceased’s personal representative is able to nominate which property is to benefit from the RNRB. The RNRB is not available in respect of certain properties, such as buy-to-let and other investment properties, which may be owned by the deceased but not lived in as a residence.
Further, the RNRB is only available where the residence is passed to a direct descendant. This is a child of the deceased (including a step-child, adopted child or foster child) and any lineal descendants. Thus, it is not available if a property is left to a sibling or parent or partner (although spouses and civil partners of direct descendants are eligible).
Downsizing and the RNRB
In later life, many people choose to move to smaller, more manageable properties. The government has recognised this, and provisions are therefore to be introduced to preserve the availability of the RNRB where the deceased has, on or after 8 July 2015, downsized to a less valuable residence or sold their residence (maybe to move into a residential home or to live with a relative) and left assets of an equivalent value to direct descendants.
The RNRB band will be preserved where the deceased has:
The measure will ensure that an estate remains eligible for the proportion of the nil rate band that is foregone as a result of downsizing or selling the residence. This reinstated RNRB is available on death and is referred to as the ’additional RNRB’. The additional RNRB and the RNRB available on death in respect of any residence left to direct descendants at that time cannot exceed the RNRB for the tax year in which the death occurred.
For the additional RNRB to be available, further conditions must be met:
As long as these conditions are met, there is no limit on the period between the downsizing and the date of death. Further, the individual can downsize any number of times between 8 July 2015 and the date of death without jeopardising the availability of the additional RNRB. It is also possible to dispose of part of the property (such as land occupied with it) or a share of the property and retain entitlement to the additional RNRB. If the property is given away, the additional RNRB is available if assets of an equivalent value are left to direct descendants. For the purposes of the additional RNRB, the value of the property is the net value after deducting any mortgage or other charge secured on it.
As with the RNRB, the additional RNRB is tapered away at the rate of £1 for every £2 by which the value of the estate exceeds £2 million.
Example 1: Downsizing from a house to a flat
Betty was widowed in May 2015. In July 2020, she sells the family home for £500,000, and moves into a flat which costs £200,000. At the time of the sale, she would be entitled to the RNRB of £175,000 plus 100% of the unused RNRB inherited from her late husband – a further £175,000 giving her a total available RNRB of £350,000. By downsizing, she has potentially lost the chance to use £150,000 (£350,000 - £200,000) of the RNRB. This is 42.85 % of the available RNRB at the time she downsized.
Betty dies in March 2021. At the time of her death, her flat is worth £210,000. She leaves this, with the remainder of her estate worth £700,000 to her only daughter, Julie. The estate is able to use a RNRB of £210,000 to shelter the property from IHT. Additional RNRB of £149,975 (i.e. 42.85% of £350,000) is calculated, being the proportion lost as a result of downsizing. But as the additional RNRB (£149,975) and the RNRB (£210,000) together (£359,975) exceed the RNRB for the 2021/21 tax year of £350,000, the additional nil rate band is capped at £140,000 (£350,000 less RNRB used of £210,000).
The RNRB and additional RNRB are available on death, together with the nil rate band of £325,000 and any proportion of the nil rate band unused on her late husband’s death.
Example 2: Moving into care
Albert’s wife, Lily, moves into a residential care home. To release funds, in June 2019 Albert sells the family home for £350,000, and moves into rented accommodation. By selling the property he has foregone the RNRB of £150,000 (100%).
He dies in October 2020, leaving assets worth £200,000 to his children and the remainder of his estate to his wife. At the time of his death, the RNRB was £175,000. He no longer has a residence, but is entitled to the additional RNBR equal to 100% of the RNRB at the time of his death (i.e. £175,000), which can be set against the assets of £200,000 left to his children before utilising his IHT nil rate band.
It is possible to downsize and still preserve the RNRB. However, the new residence or equivalent assets must be passed to a direct descendant etc. on death to qualify.
This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.