Thinking about selling or downsizing? How will the new residence nil rate band impact you?

Posted by Alison Craggs on
Thinking about selling or downsizing? How will the new nil residence nil rate band impact you?
The new residence nil rate band ("RNRB") is being introduced because family home values are pushing relatively modest estates over the existing nil rate band. But you don’t need to hang on to your home for your descendants to benefit from the relief. 

In order not to discourage the sale of properties that would qualify for the RNRB, the relief can apply if on or after 8 July 2015 you:

  • Downsize to a less valuable home; or
  • No longer own a home, for example, because you have sold or gifted your home and moved into residential care;

And leave some of your estate to your direct descendants.

Disposing of a home

Let’s take the example of Ethel, a divorcee, who sells her home in August 2017 for £250,000 and moves into a residential care home. She dies in May 2021 with an estate worth £500,000 which she leaves to her children.

Those administering estates themselves would often think that because Ethel did not own a property at her death, the RNRB would not apply. This would lead someone to deduct the ordinary nil rate band of £325,000 and calculate that £70,000 ((£500,000 less £325,000) x 40%) of inheritance tax would be payable. This would be incorrect. Blake Morgan can show you how by following three steps, we ascertain whether a RNRB could be claimed:

Step 1

Work out the available RNRB at the date of sale of the home.

 

In Ethel's case its £100,000 as the sale happened in the tax year 2017/18 when the RNRB was £100,000.

Step 2

Divide the value of the home at the date of sale by the figure in step 1 and multiply the result by 100 to get a percentage (capped at 100%).

 

So £250,000/£100,000 x 100 = 100%

Step 3

Multiply the RNRB that would be available at the date of death by the figure in step 2.

 

Because Ethel died in 2021, the RNRB is £175,000.

£175,000 x 100%= £175,000.

Despite Ethel not owning a property at her death, because of the downsizing provisions her executors could claim a RNRB of £175,000 in addition to her ordinary nil rate band of £325,000 meaning that no inheritance tax would be payable.

If using the above example, instead of leaving all of her estate to her children, Ethel had only left 10% to her children and 90% to her sister, because she has only left £50,000 (10% of £500,000) to her children the RNRB will be limited to that part of her estate.  The full £175,000 will not be available because she did not leave assets of that value to her direct descendants.

If Ethel had been widowed rather than divorced there may also be a transferrable spouse RNRB that could be claimed. The maximum RNRB available at both the date of death and the date of sale is increased to include the amount of any transferred RNRB.

Downsizing to a less valuable home

Now let’s suppose instead of selling her home, Ethel downsized and she sold her home in August 2017 for £250,000 and moved into a flat worth £130,000. She dies in May 2021 with an estate worth £500,000 which she leaves to her children.

You might think that the amount of the RNRB that can be claimed is £130,000, but that is not the case. We need to apply a 5 step test (3 of which are the same as above):

Step 1

Work out the available RNRB at the date of sale of the home.

 

So in this case £100,000.

Step 2

Divide the value of the home at the date of sale by the figure in step 1 and multiply the result by 100 to get a percentage (capped at 100%).

 

So £250,000/£100,000 x 100 = 100%

Step 3

Divide the value of the home on death by the RNRB at death.

 

So £130,000/£175,000 x 100 = 74.28%

Step 4

Deduct the % in step 3 from the % in step 2.

 

So 100% - 74.28% = 25.72%

Step 5

Multiply the RNRB that would be available at the date of death by the figure in step 4.

 

So £175,000 x 25.72% gives a downsizing addition of £45,000.

The downsizing addition of £45,000 is added to the RNRB of £130,000 giving a total RNRB for the estate of £175,000.

Conditions to this apply as follows:

  • The deceased’s personal representatives must make a claim for the downsizing addition within 2 years of the end of the month of death.
  • Only one disposal can be taken into account so if you sell or give away more than one property between 8 July 2015 and death your personal representatives can choose which disposal to take into account.
  • The value of the home for RNRB purposes will be the open market value less any liabilities secured on it such as a mortgage.

Remember just because you no longer own a property or downsize do not think that the RNRB will not apply. Make sure you keep a record of any sales or gifts of properties.

You may also want to think about whether you make specific gifts of your property or the sale proceeds to your descendants to make sure the relief is easily applied. Even if your descendants don't want to own your property, it is still worth considering leaving it to them because the RNRB will still be available, even if it is sold immediately after your death.

When you are making/reviewing your Will ensure your solicitor is aware if you previously owned a property or downsized and if as executors you are administering an estate make sure that you consider whether there is any lost RNRB that can be claimed.

Also don’t forget your situation may not be the same as Ethel's. This article is intended for general information purposes only and does not constitute legal or professional advice on specific transactions and problems.

For further information and advice, please contact the Succession and Tax Team.

About the Author

Photograph of Alison Craggs

Alison advises clients on the best structure for their Wills and prepares powers of attorney and administers estates. 

Alison Craggs
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