Your mother recently died having spent the last couple of years in care. Last year her home was sold to help pay nursing home fees. When preparing the inheritance tax forms are you entitled to claim the residence nil rate band?
Residence Nil Rate Band
The inheritance tax (IHT) residence nil rate band (RNRB) was introduced in 2017. It followed pressure on the Government to protect estates which had fallen into the IHT bracket simply because of spiralling house prices. In effect the RNRB results in a 0% IHT charge on that part of a deceased person’s estate which relates to the value of their home, up to a maximum of £175,000.
To qualify for the RNRB the property must be left to a direct descendant, e.g. son, stepdaughter, grandchild, etc. The RNRB is reduced by £1 for every £2 that the estate exceeds £2 million. There are other conditions.
No Home
When devising the rules for the RNRB the Government realised it would be unfair to preclude the relief for estates where the deceased had sold their home for any reason, for example to fund care home costs, and all or part of the proceeds remained in the estate at the time of death.
When someone has sold, given away or downsized to a less valuable home before they die, their estate may still be able to get the residence nil rate band (RNRB) if they qualify for a downsizing addition. To qualify, all these conditions must apply:
- the person sold, gave away or downsized to a less valuable home, on or after 8 July 2015
- the former home would have qualified for the RNRB if they’d kept it until they died
- their direct descendants inherit at least some of the estate
The RNRB can also apply where the deceased moved home from one worth more than the RNRB to one which was worth less and, again, some of the proceeds were in their estate when they died.
You can only take one move, sale or other disposal of a former home into account for the downsizing addition. If the person that died downsized more than once, or sold or gave away more than one home between 8 July 2015 and the date they died, the Estate’s personal representative can choose which to use to calculate the downsizing addition.
Here is an example. Bo and Caz sold their home in December 2019 for £500,000 and downsized to a smaller property. When Bo dies in April 2024 the new property is worth £300,000. For IHT purposes his share is £150,000, which he leaves to his daughter. His Estate is entitled to RNRB of £150,000.
Had they kept the original home until Bo died, his estate would have included his share of the home worth £250,000. The estate could therefore have claimed the maximum £175,000. By downsizing Bo’s estate might have missed out on £25,000 of RNRB. The downsizing rules prevent this, and as the Estate can show that all the conditions apply, it can claim the additional RNRB value of £25,000.