Property Downsizing, Sell or Gift Effect on Inheritance Tax Residential Nil Rate Band

Main Nil Rate Band

The individual inheritance tax (IHT) nil rate band (NRB) in the UK is £325,000.  This means we can gift/transfer in life or death up to £325,000 inheritance free to anyone (note gifts in life/death to spouses or civil partners are inheritance tax (IHT) free anyway and do not use up any NRB.

Residence Nil Rate Band

In 2017 a new Residence Nil Rate Band (RNRB) for gifts of private dwellings to direct descendants of currently £175,000 (originally £100,000 in 2017) was launched in addition to the NRB.  This means that each individual that owns a home has total inheritance tax (IHT) nil rate band allowances on death of £325,000 (NRB) + £175,000 (RNRB) = £500,000 total inheritance tax allowances.

Transfers Between Spouses/Civil Partners

As transfers between spouses are already IHT free, if your spouse dies and leaves all wealth to you, they will not use up any of the own inheritance allowances meaning they have unused NRB £325,000 plus unused RNRB £175,000.  Total unused allowance on 1^st death £500,000. 

Any unused allowances are transferred to the surviving spouse meaning that on 2^nd death, the surviving spouse has:

• Their own total inheritance tax (IHT) nil rate band allowances on death £500,000 plus
• Unused spouse’s inheritance tax (IHT) nil rate band allowances £500,000
• Meaning total IHT allowances on 2^nd death of £1,000,000.

Residential Nil Rate Band if Downsize, Sell or Give Property Away

• HMRC recognises at the time of 1^st death (when the original property was owned), NRB and RNRB were not used despite being available and were carried over to the surviving spouse.
• The survivor then downsizes or sells the main dwelling totally meaning some or all of the RNRB may not be used on 2^nd death
• HMRC therefore allows a ‘Downsizing Addition’ for retaining some or all of the RNRB lost from 1^st death to be retained/added to normal NRB allowances on 2^nd death given that there may or may not be any property in the 2^nd death estate (e.g.  survivor had to sell up to fund care fees) but some money from the sale or downsizing of the property may still be in the estate on 2^nd death.

Guidance is given at:

https://www.gov.uk/guidance/how-downsizing-selling-or-gifting-a-home-affects-the-additional-inheritance-tax-threshold

Calculate ‘Downsizing Addition’

There are 5 stages to working out how much RNRB has been lost by downsizing or selling up entirely before 2^nd death.

1. Work out the RNRB that would have been available when the former home was sold or given away or when the move happened.  This figure is made up of the maximum RNRB due at that date (or £100,000 if it was before 6 April 2017) and any transferred RNRB available when the person dies.
2. Divide the value of the former home at the date of the move or when it was sold or given away by the figure in step 1 and multiply the result by 100 to get a percentage.  If the value of the former home is greater than the figure in step 1 the percentage will be limited to 100%.  If the value of the home sold is less than the figure in step 1, the percentage will be between 0% and 100%.
3. If there’s a home in the estate, divide the value of the home by the RNRB that would be available at the date the person dies (including any transferred RNRB).  Multiply the result by 100 to get a percentage (again this percentage cannot be more than 100%).  If there’s no home in the estate at the time the person dies this percentage will be 0%.
4. Deduct the percentage in step 3 from the percentage in step 2.
5. Multiply the RNRB that would be available at the time the person died by the figure from step 4.   This gives the amount of the lost RNRB (if no property at all) or if the survivor still has a property (and therefore their own RNRB) plus the lost RNRB Downsizing Addition from the 1^st death.

Note:  The amount of the "Downsizing Addition" available to the estate on 2^nd death depends on the value of any other assets the deceased (2nd death) leaves to  direct descendants.

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