Guidance

Inheritance Tax on main residence nil-rate band and downsizing proposals: technical note

Updated 7 October 2015

1.Introduction

At Summer Budget 2015, the government announced it will phase in a new residence nil-rate band (RNRB) from 6 April 2017 when a residence is passed on death to a direct descendant.

It will be:

• £100,000 in 2017 to 2018
• £125,000 in 2018 to 2019
• £150,000 in 2019 to 2020
• £175,000 in 2020 to 2021

It will then rise in line with the Consumer Price Index (CPI) from 2021 to 2022. This will reduce the burden of Inheritance Tax for most families by making it easier to pass on the family home to direct descendants without a tax charge.

Further details about the measure are available in the tax information and impact note. The relevant legislation is included in clause 9 of the Finance Bill (2) 2015.

The government also announced that legislation would be included in Finance Bill 2016 to make sure that those who wish to downsize to a less valuable property or cease to own their own home are not discouraged from doing so.

This technical note provides further detail on the proposals, and asks whether the details need further clarification. It also seeks views on the issues and practical difficulties in implementing the proposals. The note and the comments received will inform the legislation that will be presented in the draft 2016 Finance Bill.

2.Policy aim

The government recognises that individuals may wish to downsize to a smaller and often less valuable property later in life. Others may have to sell their home for a variety of reasons, for example, because they need to go into residential care. This may mean that they would lose some, or all, of the benefit of the available RNRB. However, the government intends that the new RNRB should not be introduced in such a way as to disincentivise an individual from downsizing or selling their property.

Consequently, the government announced that where part or all of the RNRB might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence the lost RNRB will still be available - provided that the qualifying conditions were met. The RNRB would apply where the residence is sold (or is no longer owned) on or after 8 July 2015. This proposal will ensure there is no disincentive to downsize or sell a home from the date the RNRB was announced at the Summer Budget.

3.Policy design

The proposal would apply to situations where the deceased:

• downsized to a less valuable residence and that residence, together with assets of an equivalent value to the ‘lost’ RNRB, has been left to direct descendants
• sold their only residence, and the sale proceeds, or other assets of an equivalent value, have been left to direct descendants
• has otherwise ceased to own their only residence, and other assets of an equivalent value have been left to direct descendants

The broad intention is that an estate would be eligible for the proportion of the RNRB that is foregone as a result of downsizing or disposal of the property as an addition to the RNRB that can be used on death. For the purposes of this note this will be referred to as the ‘additional RNRB’.

The qualifying conditions for the additional RNRB would be broadly the same as those for the RNRB, that is the:

• individual dies on or after 6 April 2017
• property disposed of must have been owned by the individual and it would have qualified for the RNRB had the individual retained it
• less valuable property, or other assets of an equivalent value if the property has been disposed of, are in the deceased’s estate (this would also include assets which are deemed to be part of a person’s estate)
• less valuable property, and any other assets of an equivalent value, are inherited by the individual’s direct descendants on that person’s death - direct descendants are the same as those in relation to the RNRB

In addition, the following conditions would also apply:

• the downsizing or the disposal of the property occurs after 8 July 2015
• subject to the condition above, there would be no time limit on the period in which the downsizing or the disposals took place before death
• there could be any number of downsizing moves between 8 July 2015 and the date of death of the individual
• downsizing would also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it
• where a property is given away, assets of an equivalent value to the value of the property when the gift was made must be left to direct descendants
• the value of the property would be the net value i.e. after deducting any mortgage or other debts charged on the property
• the additional RNRB would be tapered away in the same way as the RNRB if the value of the estate at death is above £2m
• the additional RNRB would be applied together with the available RNRB but the total for the two would still be capped so that they would not exceed the limit of the total available RNRB for a particular year
• a claim would have to be made for the additional RNRB in a similar way that a claim is made to transfer any unused RNRB to the estate of a surviving spouse or civil partner

4.Examples

The following examples illustrate how the additional RNRB would apply and how it would be calculated.

Example 1

A widow sells a home worth £400,000 in August 2020 and moves to a home worth £210,000. At the time of the sale the available RNRB is £350,000 as, had she died at that time, her executors would be able to make a claim to transfer all the unused RNRB from her late husband. By downsizing, she has potentially lost the chance to use £140,000 or 40% of the available RNRB which could have applied had the more valuable home not been sold.

When the widow later dies in October 2020, the home is worth £225,000 and is left to her children together with £500,000 of other assets. The estate can use an RNRB of £225,000. However, the widow was eligible for an RNRB of £350,000 had she not downsized. The estate can therefore claim an additional RNRB of 40% of the available RNRB (40% x £350,000) or £140,000. This would give a total RNRB of £365,000 (£225,000 + £140,000). But this is more than the maximum available RNRB (£350,000) so the additional RNRB is restricted to £125,000 to ensure that the total amount used does not exceed the maximum available.

In addition, the existing nil-rate band together with any transferable nil-rate band claimed from her late husband’s estate can be applied to the remaining assets in the estate.

Example 2

A husband sells a home worth £300,000 in July 2020 and moves to a home worth £140,000. At the time the available RNRB is £175,000. He has potentially lost the chance to use £35,000 or 20% of the available RNRB which could have applied had the more valuable home not been sold.

When he dies in December 2020, the home is worth £175,000 and is left to his son with the remainder of the estate passing to his wife. The estate can use the RNRB of £175,000 to the full and since the RNRB was fully used on death, there is none to transfer to the widow. However, none of the existing nil-rate band has been used, so it can be transferred and will be available on the widow’s death along with her own RNRB.

Example 3

A widower gives away his home worth £400,000 to his children in May 2020 and moves into rented ‘later living’ accommodation. At the time of the gift the available RNRB is £350,000. He has potentially lost the chance to use £350,000 or 100% of the available RNRB which could have applied had he not given away his home.

When he dies in February 2021, within 7 years of the gift, his estate is worth £600,000 and is split between his four children. As there is no qualifying residence in his estate, it cannot use RNRB directly. But the estate is eligible for additional RNRB up to the maximum 100% of the available RNRB at his death or £350,000.

The position for the gift of the house is considered first. RNRB only applies to the assets in the estate, so it is not available in respect of the gift of the house. However, the estate can claim the full transferable nil-rate band (TNRB) of £650,000 so there is no tax to pay on the gift of £400,000. The balance of £250,000 TNRB remains available to be set against the estate.

RNRB is applied first against the estate of £600,000, leaving a remainder of £250,000. The balance of TNRB from his late wife’s estate is applied to this amount so no tax is payable as a result of the death.

5.Questions

HM Revenue and Customs (HMRC) would welcome views from representative bodies, individuals, practitioners, solicitors, and other professional advisors who have an interest in the proposals.

Question 1

Do any of the policy design details above or conditions need further clarification? Please illustrate the problem using examples if possible.

Question 2

What are the issues and practical difficulties which might arise when implementing the proposal and complying with the conditions?

6.Responses

Please send responses to the questions above by email to ihtandtrustsconsult.car@hmrc.gsi.gov.uk. HMRC is also willing to meet interested groups to discuss the proposals. Please send an email to the address above if you would like HMRC to set up a meeting.

Alternatively, you can write to:

Assets and Residence Policy
Room G47
100 Parliament Street
London
SW1A 2BQ

The deadline for receiving responses is 16 October 2015.