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HMRC internal manual

Inheritance Tax Manual

Downsizing Calculations: Where there is no residential property interest in the estate: How to calculate the lost relievable amount

Where the person has disposed of a residential property interest (IHTM46011) in their lifetime and there is no residential property interest in their estate at death the calculation of the lost relievable amount is provided by IHTA84/S8FE(10).

The actual amount of the downsizing addition will be the lower of the lost relievable amount and the value of the assets or property which is closely inherited on the death. As there is no longer any residence in the estate at death, the RNRB will be equal to the downsizing addition.

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’ (calculated in accordance with IHTA84/S8FE(3) referred to above). This is capped at 100% if it would otherwise be higher.

Step 3 - Multiply the default or adjusted allowance by the percentage at step 2.

The downsizing addition cannot exceed the value of the property or assets which are closely inherited.

Example: The downsizing addition if the home is worth the same or more than the person’s former allowance

Jacob sold his home for £285,000 in October 2018 to go into residential care. He died in March 2021 with an estate worth £500,000. He left half his estate to his son, and half to his nephew.

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 Jacob’s death.

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

Step 2 - The value of the QFRI (the property sold) is £285,000. Jacob’s ‘former allowance’ is £125,000. Expressed as a percentage £285,000 ÷ £125,000 = 228%. However, this is limited to 100%

Step 3 - Jacob’s default allowance is £175,000. This is multiplied by the percentage in step 2 to give a lost relievable amount of £175,000 × 100% = £175,000

The value of the residence at the time of the disposal is more than the maximum RNRB at that time so the whole of the RNRB has potentially been lost. Before he downsized, Jacob’s estate could potentially have qualified for the maximum RNRB at that time. The lost relievable amount as a result of the downsizing is therefore £175,000.

The downsizing addition is the lower of the value of other assets which are left to a direct descendant and the lost relievable amount. As £250,000 of other assets are left to Jacob’s son, a downsizing addition of £175,000 is due.

If instead Jacob had only left £100,000 to his son and the rest of his estate to his nephew, the downsizing addition would be restricted to £100,000.

Example: The downsizing addition if the home is worth less than the maximum available RNRB

Jason had a flat which he sold for £90,000 in May 2019 to move in with his daughter. Jason died in January 2021 with an estate worth £600,000, all of which he left to his daughter.

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

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

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

Step 1 – Jason’s former allowance equals the residential enhancement at the date of disposal, £150,000

Step 2 - The value of the QFRI (the property sold) is £90,000. Jason’s ‘former allowance’ is £150,000. Expressed as a percentage £90,000 ÷ £150,000 = 60%.

Step 2 - Jason’s default allowance is £175,000. This is multiplied by the percentage in step 2 to give a lost relievable amount of £175,000 × 60% = £105,000.

The actual amount of the downsizing addition is the lower of the lost relievable amount (£105,000) and the value of other assets which are left to direct descendants. As £600,000 of other assets are left to Jason’s daughter, a downsizing addition of £105,000 is due.