"I am working with a client who is looking to sell their home and move into rented retirement accommodation. They need their two residential nil rate bands (RNRBs) to reduce the value of their estate so that they do not have an inheritance tax (IHT) liability. So, they asked me if they can still get the RNRB if they sell their home?
In addition to the standard nil rate band, from 6 April 2017, each person is entitled to a residence nil rate band (RNRB) to use against the value of their home if it is left to direct descendants on death.
The HMRC rules state: 'When someone has sold, given away or downsized to a less valuable home before they die, their estate may still be able to get 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 (children or lineal descendants) inherit at least some of the estate
The amount of the downsizing addition will usually be the same as the RNRB lost when the former home is no longer in the estate. The rules can be quite complicated, so it is worth checking with a professional.
In my client's case, their home would have met the criteria above and therefore they should qualify for downsizing allowance to the amount of RNRB that they would have received if they stayed in their home and therefore, they should have no inheritance tax liability. Of course, we will keep this under review as their situation and the value of their other assets change.
They don't have to take any action to claim this allowance at the moment. Their estate’s personal representative will need to a claim for RNRB and the downsizing addition when filling in the inheritance tax returns, within 2 years from the end of the month after they have passed away. In the meantime, I will recommend that they keep the details of the house sale so that their estate’s personal representative can easily use that information when they make the claim."
Charlie Rigg, Chartered Financial Planner at FMB
Source: GOV.UK, 2021 https://www.gov.uk/guidance/how-downsizing-selling-or-gifting-a-home-affects-the-additional-inheritance-tax-threshold