Downsizing your home can come at a cost.
The Residence Nil Rate Band (RNRB) did not initially include provisions for downsizing. But, following a consultation, new provisions were introduced for those downsizing their home after 8 July 2015. These provisions take account of downsizing in two cases:-
- The deceased downsized to a lower value property (or properties) after 8 July 2015 and before their death; or
- The deceased sold their only residence after 8 July 2015 and it was not replaced by another one.
In the first case, the deceased would qualify for the RNRB on the property held at death. A proportion of the RNRB that would have been available on the original higher value property, subject to the residence and additional assets in the death estate being closely inherited by children/grandchildren.
Let’s take a look at a possible situation facing Mary:
Mary had a house worth £400,000 that she sold on 1 January 2021 (when the RNRB was £175,000) and bought a new house worth £150,000. Mary died on 1 April 2021 and had assets, excluding the house, of £300,000 in her estate at this time. Prior to any downsizing relief, Mary would have a RNRB of £150,000 and would have lost out on £25,000 of the relief by downsizing.
On the assumption that Mary’s home, and at least £25,000 of the other assets, were inherited by her children or grandchildren then Mary can claim for the additional £25,000 of RNRB she lost out on by downsizing.
The second case covers a situation when a house has been sold or gifted out the deceased’s estate and not replaced. In these circumstances, if assets to the value of the RNRB at the time the house was sold are closely inherited, then the compensatory “additional” nil rate band equivalent to the RNRB can be claimed.
There must be assets in the estate equivalent to the RNRB closely inherited to qualify for this additional band, so be aware that there is no assistance when the property is gifted and no assets of an equivalent amount remain in the estate for passing on to children or grandchildren.
If the property is worth in excess of £2 million there are other considerations: the transfer of an unused RNRB, the type of house qualifying and who must inherit the assets.
These are simple examples of a very complex topic. Where the RNRB is passed to a surviving spouse, or the downsizing and death do not arise in the same tax year, detailed calculations are required and expert advice should be sought to ensure you are compiling with the regulations. If you would like to discuss these issues with our experts further then please do not hesitate to contact us.