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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 (IHTM46050) is provided by IHTA84/S8FE(9). The lost relievable amount is calculated using the following steps:

Step 1   Work out the person’s ‘former allowance’. This is broadly the RNRB that would have been available when the disposal took place, but with some adjustments.

This figure is made up of:

the residential enhancement (IHTM46022) that applied at the date of disposal, plus

any brought-forward allowance (IHTM46040) that would have been available at the date of disposal, plus

if the brought-forward allowance available at the date of death is greater than the brought-forward allowance that would have been due at the date of disposal, the difference between these two values.

The total of these three values is the person’s ‘former allowance’.

If the disposal occurred between 8 July 2015 and 5 April 2017  the figure for the residential enhancement is treated as being £100,000 in accordance with IHTA84/S8FE(6)(a). There would not have been any brought-forward allowance at that time, so this will be nil in accordance with IHTA84/S8FE(6)(b). But any brought-forward allowance available at the date of death is nevertheless added to the residential enhancement (this is illustrated at example 5 at IHTM46063).

Step 2   Express the value of the person’s QFRI (IHTM46053) as a percentage of the person’s ‘former allowance’ (the answer from step 1 above), but this is limited to a maximum of 100%.

Step 3   Express the value of the QRI as a percentage of the person’s allowance on death (this will be the default or adjusted allowance (IHTM46026). Here the value of the QRI is so much of VT (IHTM46012) as is attributable to the QRI. This 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   Multiply the person’s allowance on death (their default or adjusted allowance) by the percentage at step 4. This value is the person’s ‘lost relievable amount’.

Having calculated the lost relievable amount, the next step is to calculate the downsizing addition that is due.