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HMRC internal manual

Inheritance Tax Manual

Downsizing: The closely inherited property

To qualify for a downsizing addition not only must there have been a qualifying disposal, or a QFRI (IHTM46053), there must also be property or assets, other than the QRI, which are closely inherited (IHTM46013).

The downsizing addition can never exceed the value of the other property or assets which are closely inherited.

Example:

Emma’s estate includes a residential property interest valued at £100,000 and £600,000 of other assets when she dies in May 2019. She leaves £50,000 to her grandchild with the rest of the estate to her niece. The residential enhancement at the date of death is £150,000.

The default allowance (IHTM46024) is equal to the residential enhancement, £150,000. The estate is below the taper threshold (IHTM46023) so there is no reduction in the default allowance.

The residential property interest (£100,000) is less than the default allowance (£150,000) so it is possible for a downsizing addition to arise.

There is property other than any QRI which is closely inherited (the £50,000 left to the grandchild), so any downsizing addition would be limited to £50,000.

Whether there is actually any downsizing addition in this case would depend on whether Emma had downsized or disposed of any residential property interest after 8 July 2015 and, if she had, whether this resulted in any RNRB being lost (the ‘lost relievable amount’). The rules around calculating the lost relievable amount are at IHTM46059.