Posted by Tax Innovations on 19 Jan 2018

Inheritance Tax Relief When Downsizing Your Home

From 6 April 2017, taxpayers have been entitled to an additional nil-rate inheritance tax (IHT) band, which applies to residences that are ‘closely inherited’ on the death of the donor. Subsequent changes have extended the scope of this relief to a surprisingly far-reaching extent.

The Residence Nil-Rate Band

The Residence Nil-Rate Band (RNRB) is an additional IHT Nil-Rate Band (NRB) that applies only when a person dies and a property that has been their residence is ‘closely inherited’ (by children, grandchildren etc. and their spouses).

The RNRB is currently £100k and is set to increase by £25k per year up to a maximum of £175k from 6 April 2020. The RNRB (but not the ordinary NRB) is tapered by £1 for every £2 of value in your estate over £2m, and unused allowance can be transferred to your spouse or civil partner, as with the main £325k NRB.

This taper means that care needs to be taken when deciding to leave your estate to your spouse – if this means your combined estate is over £2m then it may be worth considering other options, rather than your spouse losing their (and your transferred) RNRB.

Downsizing Relief

Soon after being announced, it was realised that the RNRB would be a disincentive for homeowners to downsize and free up their house for the next generation, contrary to Government policy. The final RNRB legislation therefore includes a “downsizing relief” to cover situations whereby a residence is disposed of and the new, smaller property is eventually closely inherited, together with assets representing the proceeds of the downsizing.

This downsizing relief has been further extended, so that relief is available even where you do not purchase a new property at all, as long as the residence was sold on or after 8 July 2015 and assets representing the proceeds of the sale of that residence are closely inherited.

This change broadens the scope of the RNRB to effectively apply it as a full NRB (i.e. applicable to any assets) for anyone who has owned a residence on or after 8 July 2015, leading one to wonder whether this convoluted relief could not have been more easily achieved by just increasing the normal nil rate band.

Tax Innovations is happy to assist with any inheritance tax or estate planning queries that you may have.

If you would like any advice regarding inheritance tax relief when downsizing your home, inheritance tax in general or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com

 

See also…

Inheritance Tax: Planning for the Future

Wills and Inheritance Tax

HMRC to Force Accelerated Payment of Inheritance Tax

Inheritance Tax for Couples with “Mixed” Domiciles

Inheritance Tax on Holiday Lets

Inheritance Tax Overpayments

Inheritance Tax Wastage