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HMRC internal manual

Inheritance Tax Manual

Downsizing Calculations: Where there is a qualifying residential interest in the estate: How to calculate the lost relievable amount

Where the person has ‘downsized’ to a lower value property the calculation of the downsizing addition is provided by IHTA84/S8FE(9). The lost relievable amount is calculated using the following steps:

Step 1   Work out the RNRB that would have been available when the disposal took place. This figure is made up of the residential enhancement (IHTM46022) at the date of disposal plus any transferred RNRB which is available at the date of death. If the disposal occurred between 8 July 2015 and 5 April 2017 this figure is £100,000. This is the person’s ‘former allowance’

Step 2   Express the value of the person’s QFRI (IHTM46053) as a percentage of the person’s ‘former allowance’, but this is limited to a maximum of 100%.

Step 3   Express the QRI as a percentage of the person’s allowance on death (this will be the default (IHTM46024) or adjusted allowance (IHTM46025), where the QRI is so much of VT as is attributable to the QRI. If the QRI is the higher amount, the percentage is capped at 100%.

Step 4   Subtract the percentage given by step 3 from the percentage given by step 2. If the result is a negative value it should be taken as 0%. The result is P%.

Step 5   The person’s lost relievable amount is equal to P% of the person’s allowance on death  

Example: The downsizing addition and RNRB

In May 2018 Maurice downsized from a large house worth £500,000 to a small flat which was valued at £105,000 on his death in September 2020. He left the flat to his son, and the rest of his estate worth £200,000 to his two daughters. Conditions A to F, in section 8FA, are met.

The residential enhancement in 2018-19 is £125,000.

The residential enhancement in 2020-21 is £175,000.

There is no entitlement to any transferred RNRB on Maurice’s death.

Step 1 – Maurice’s ‘former allowance’ equals the value of the residential enhancement at the date of disposal, £125,000,

Step 2 - Maurice’s QFRI was valued at £500,000. His former allowance is £125,000. Expressed as a percentage £500,000 ÷ £125,000 is 400%, but this is limited to 100%.

Step 3 - The QRI expressed as a percentage of Maurice’s allowance on death is £105,000 ÷ £175,000 × 100 = 60%.

Step 4 - Subtract the percentage at step 3 from the percentage at step 2. Therefore 100% − 60% = 40%.

Step 5 – Maurice’s default allowance is £175,000. This is multiplied by the percentage at step 4, 40%, to give a total lost relievable amount of £70,000

The actual amount of the downsizing addition depends on the value of other assets (the remainder) which are left to his children. As more than £70,000 of the remainder is left to Maurice’s daughters, the downsizing addition of £70,000 is added to the RNRB due in respect of the flat of £105,000 left to his son, to give a total RNRB for the estate of £175,000.

If instead Maurice had left the flat to his son, some assets worth £50,000 to his daughters and the rest of his estate to his wife, the downsizing addition would be restricted to £50,000 because that is the value of other assets left to his daughters. The total RNRB in that case would be £155,000 (£105,000 + £50,000).

Example: When a downsizing addition wouldn’t be due.

Linda downsizes in 2018 from a house worth £450,000 to a bungalow, which is worth £200,000 when she dies in 2020-21. She leaves an estate of £800,000, of which £600,000, but not her bungalow, is left to her children.

The residential enhancement in 2018-19 is £125,000.

The residential enhancement in 2020-21 is £175,000.

There is no entitlement to any transferred RNRB on Linda’s death.

Step 1 – Linda’s ‘former allowance’ equals the value of the residential enhancement at the date of disposal, £125,000,

Step 2 - Linda’s QFRI was valued at £450,000. Her former allowance is £125,000. Expressed as a percentage £450,000 ÷ £125,000 = 360%, but this is capped at 100%.

Step 3 - The QRI expressed as a percentage of Linda’s allowance on death is £200,000 ÷ £175,000 = 114.286%. Again this is limited to 100%.

Step 4 - Subtract the percentage at step 3 from the percentage at step 2. Therefore 100% − 100% = 0%

Step 5 - The lost relievable amount is 0% of Linda’s default allowance (£175,000), which is Nil.

As the percentage at step 5 is 0%, there is no lost RNRB, and there can be no downsizing allowance.

Example: The downsizing addition and RNRB where only a part of the home is left to direct descendants.

If only part of the residence in the estate is left to direct descendants, the RNRB is calculated on the basis of that proportion. This may affect the total RNRB for the estate in downsizing situations.

Norman downsized in February 2019 from a large house worth £400,000 to a small, less valuable,  bungalow. On Norman’s death in September 2020 he left the bungalow, which was valued at £105,000, in equal shares to his wife and son. He left the other assets in his estate, worth £150,000, to his daughter.  

The residential enhancement in 2018-19 is £125,000.

The residential enhancement in 2020-21 is £175,000.

There is no entitlement to transferred RNRB on Norman’s death.

Step 1 – Norman’s ‘former allowance’ equals the value of the residential enhancement at the date of disposal, £125,000,

Step 2 - The value of Norman’s QFRI is £400,000. His former allowance is £125,000. Expressed as a percentage £400,000 ÷ £125,000 = 320%, and is therefore limited to 100%.

Step 3 - The QRI expressed as a percentage of Norman’s allowance on death is £105,000 ÷ £175,000 = 60%

Step 4 - Subtract the step 3 percentage from the step 2 percentage. Therefore 100% − 60% = 40%.

Step 5 - The residential enhancement at death, £175,000, is multiplied by the percentage at step 4, 40%, to give a lost RNRB of £70,000.

Only half of the bungalow is left to Norman’s son so the RNRB due in respect of that residence is reduced to 50% of £105,000, i.e. £52,500. As other assets of £150,000 are left to Norman’s daughter, the downsizing addition is £70,000 (the lower of the lost relievable amount of £70,000 and £150,000). This is added to the RNRB due in respect of the bungalow of £52,500, to give a total RNRB of £122,500 (£52,500 + £70,000).

As Norman’s estate had a default allowance of £175,000, but is only able to use £122,500, there is unused RNRB of £52,500 available to be transferred to the estate of Norman’s wife.

If the value of the assets left to Norman’s daughter was only £20,000, the downsizing addition would be restricted to £20,000. The total RNRB for the estate would be £72,500 (£52,500 + £20,000) and there would therefore be unused RNRB of £102,500 available to transfer.

Example: Downsizing addition where downsizing occurs before 6 April 2017.

Where the downsizing occurs between 8 July 2015 and 6 April 2017 the maximum RNRB that is treated as being available is £100,000.

Mr & Mrs Clarke downsized in March 2016 from a large house which they owned jointly, worth £300,000, to a less valuable apartment. When Mrs Clarke died in December 2019 she left her half share of the apartment, valued at £105,000, to her husband and other assets in her estate worth £80,000 to her step-daughter.

The residential enhancement in March 2016 is treated as being £100,000.

The residential enhancement in 2019-20 is £150,000.

There is no entitlement to brought-forward allowance on Mrs Clarke’s death.

Step 1 – Mrs Clarke’s ‘former allowance’ equals the value of the residential enhancement at the date of disposal, which is treated as being £100,000,

Step 2 - The value of Mrs Clarke’s QFRI is £150,000. Her former allowance is treated as being £100,000. Expressed as a percentage £150,000 ÷ £100,000 = 150%, and is therefore limited to 100%.

Step 3 - The QRI expressed as a percentage of Mrs Clarke’s allowance on death is £105,000 ÷ £150,000 = 70%

Step 4 - Subtract the step 3 percentage from the step 2 percentage. Therefore 100% − 70% = 30%.

Step 5 – Mrs Clarke’s default allowance, £150,000, is multiplied by the percentage at step 3, 30%, to give a lost relievable amount of £45,000.

Because the apartment was left to Mrs Clarke’s husband there’s no RNRB due for the share in that home.

The downsizing addition is the lower of the lost relievable amount (£45,000) or the amount of other assets left to the step-daughter (£80,000). So the downsizing addition is £45,000 in this case.

The total RNRB for the estate is therefore £45,000 due to the downsizing addition.

Mrs Clarke’s estate had a default allowance of £150,000, but it can only use £45,000. So there’s unused RNRB of £105,000 available to be transferred to Mr Clarke’s estate.

If the value of the assets left to the daughter had only been £10,000, the downsizing addition would be reduced to £10,000. So the total RNRB for the estate would be £10,000. In that case the unused RNRB available for transfer would be £140,000.