HMRC have published new guidance
covering the downsizing provisions of the Residence Nil Rate Band (RNRB) (click here for a
link to it). This will be of interest to
advisers looking for a relatively straightforward introduction to this aspect
of the RNRB which may be suitable for forwarding on to clients.
Whenever individuals interested
in their IHT planning downsize, gift or sell a property, the impact on the
availability of the RNRB should be considered.
The RNRB offers individuals who
have an estate worth £2,000,000 or less (or who carry out planning in their
lifetime to ensure that their estate falls below this figure on death),
survived by certain family members (lineal descendants only), the opportunity
to transfer a further sum free of Inheritance Tax (IHT) on death, in addition to the IHT Nil Rate Band (NRB).
Currently a fully available RNRB and NRB would allow an individual to
transfer up to £425,000 free of IHT to his heirs on death, although this figure
will rise to £500,000 if death occurs after 6 April 2020. The RNRB must be claimed by the individual’s
personal representatives within two years of the end of the month of death.
The RNRB usually requires lineal
descendants to inherit a qualifying residential property on the individual’s
death. However, all is not necessarily
lost if the individual sells or gives away a residence, or downsizes to a less
valuable residence before they die. All
of the following conditions must apply for the ‘downsizing addition’ to be
available:
- the individual sold, gave away or downsized to a less valuable residence on or after 8 July 2015;
- the former residence would have qualified for the RNRB if it had been retained until death; and
- lineal descendants must inherit at least some of the estate.
The downsizing addition aims to
put individuals in the same position that they would have been in under the
RNRB, if they owned a residence, or a more valuable one, which they disposed of
before their death but after the cut off date of 8 July 2015 (Budget Day).
However, HMRC’s guidance states
that its availability ‘will also depend on the value of the other assets left
to direct descendants’. It’s important
to make sure, therefore, that assets of a value at least equivalent to the
available downsizing addition are left to lineal descendants. If this does not happen, some or all of the
downsizing addition may be lost.
Remember that the downsizing addition can be increased by a transferable
element if the deceased was married.
Particular care is needed if an individual downsizes to a smaller
property and intends to leave it to someone other than a lineal descendant on
death.
It may be possible to use a deed
of variation within two years of a death occurring to ‘rescue’ any downsizing
addition that might otherwise be lost.
However, only adults of full capacity can enter into deeds of variation
so they should not be relied upon as a planning strategy! Ensuring that the Will is correctly drawn to
capture any available downsizing addition is far more preferable.
Worked examples of
downsizing calculations can be found in HMRC’s guidance and in the dedicated
section of their IHT Manual, here. They are helpful but only serve to
demonstrate just how complex the new rules are!