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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) plus any transferred RNRB (TRNRB) at the date of disposal, plus the difference between the TRNRB at the date of death and the TRNRB that would have been available at the date of disposal. This is the person’s ‘former allowance’.

If the disposal occurred between 8 July 2015 and 5 April 2017 (IHTM46021) the figure for the residential enhancement is treated as being £100,000. TRNRB would not have been available at the date of disposal (as RNRB did not exist between these dates), but any unused TRNRB at the date of death is added to the residential enhancement (see example 3 below).

Step 2 - Express the value of the person’s QFRI (IHTM46053) as a percentage of the person’s ‘former allowance’ (the value from Step 1 above). This percentage is capped at 100% if it would otherwise be higher.

Step 3 - Multiply the person’s default or adjusted allowance at the date of death by the percentage at step 2. This value is the person’s ‘lost relievable amount’

The actual downsizing addition is the lower of the person’s ‘lost relievable amount’ from Step 3 and the value of the property or assets which are closely inherited.

Example 1: 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 2: 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.

Example 3: The downsizing addition where there is TRNRB but the property disposal took place between 8 July 2015 and 5 April 2017.

Rob survived his wife who died in May 2009. He sold his home for £180,000 in September 2015 to move in with his son. He died in October 2017 with an estate worth £380,000. He left the whole of his estate to his son.

The residential enhancement in September 2015 is nil, but is treated as being £100,000 by IHTA84/S8FE(6)(a)

The residential enhancement in October 2017 is £100,000

There was no transferable RNRB available in September 2015 as the RNRB legislation was not in force.

There is transferred RNRB of £100,000 on Rob’s death.

Step 1- Rob’s former allowance equals the residential enhancement at the date of disposal (£100,000), plus the difference between the TRNRB at death (£100,000) and disposal (nil). This is £100,000 + (£100,000 - £0) = £200,000.

Step 2 – The value of the QFRI (the sold property) is £180,000. Rob’s former allowance is £200,000. Expressing this as a percentage £180,000 ÷ £200,000 = 90%.

Step 3 – Rob’s default allowance is £200,000. This is multiplied by the percentage in step 2 to give a lost relievable amount of £200,000 x 90% = £180,000.

The actual amount of the downsizing addition is the lower of the lost relievable amount (£180,000) and the value of other assets which are left to direct descendants. As £380,000 of other assets are left to Rob’s son, a downsizing addition of £180,000 is due.

Example 4: The downsizing addition where there is TRNRB but the property disposal took place after 5 April 2017.

Sam’s husband left his estate to her on his death in July 2017.  She sold her home for £104,000 in July 2019 and moved in to residential care. She died in December 2020 with an estate worth £800,000, and left half to her daughter, and the other half to a friend.

The residential enhancement in July 2019 is £150,000

The residential enhancement in December 2020 is £175,000

Sam’s husband had not used any RNRB, so there was 100% transferred RNRB available to Sam. At the date of disposal in July 2019 the transferred RNRB available was £150,000

There is transferred RNRB of £175,000 on Sam’s death

Step 1 – Sam’s former allowance equals the residential enhancement at the date of disposal (£150,000), plus the TRNRB at disposal (£150,000), plus the difference between the TRNRB at death and at disposal (£175,000 - £150,000). This is £150,000 + £150,000 + £25,000 = £325,000.

Step 2 – The value of the QFRI (the sold property) is £104,000. Sam’s ‘former allowance’ is £325,000. Expressed as a percentage £104,000 ÷ £325,000 = 32%.

Step 3 – Sam’s default allowance is £350,000. This is multiplied by the percentage in step 2 to give a lost relievable amount of £350,000 x 32% = £112,000.

The actual amount of the downsizing addition is the lower of the lost relievable amount (£112,000) and the value of other assets which are left to direct descendants. As £400,000 of other assets are left to Sam’s daughter, a downsizing addition of £112,000 is due.