Protecting the value of a home from IHT

What is the RNRB?

Naturally, people want their beneficiaries to receive as much of their estate as possible. Inheritance tax (IHT) planning can play an important part in this. Making sure that an estate qualifies for the IHT residence nil rate band (RNRB) is a significant factor. When the RNRB was introduced it could shelter up to £100,000 of an estate from IHT but is now a whopping £175,000. This is in addition to the standard £325,000 nil rate band, so in theory a married couple or civil partnership could shelter up to £1 million between them.

When can the RNRB be claimed?

The RNRB is allowed if an estate includes a home and it is inherited by one or more of the owner's direct descendants, e.g. child, grandchild, great grandchild, or their spouse, civil partner and their lineal descendants. It also applies where a home isn’t inherited by a descendant, but they receive all or part of its value. For example, where the executors sell the property and pass the proceeds on to direct descendants. Plus, it can be claimed even if the owners sell one home and move into a less expensive one before they die. HMRC calls this the “downsizing allowance”.

The downsizing allowance applies even if the individual sold or transferred the home and doesn’t buy another, say where they move in with a family member or live in rented accommodation.

Downsizing

To obtain the downsizing allowance, whoever administers the estate must claim it using Form IHT435. They can make a claim if any of the following applies to the estate:

• the deceased downsized on or after 8 July 2015
• the deceased gave part of their home away
• the deceased owned all or part of their home, and it would have qualified for the RNRB if they had not sold/transferred it.

Example. Rod and Delyth sold their jointly owned home in September 2018 for £300,000 and moved into rented accommodation. Rod died in May 2020. His estate is valued at £200,000 for IHT purposes. He left £100,000 to his daughter and the remainder to Delyth. His executors can claim the RNRB of £100,000; it’s capped at the lesser of the value of his half-share of the home, i.e. £150,000, and the amount inherited by his direct descendants, i.e. £100,000.

Unused downsizing allowance

The transfer of £100,000 of Rod’s estate to Delyth doesn’t qualify for the RNRB because transfers to spouses are exempt from IHT. But as Rod’s estate only used 80% (£100,000/£125,000) of the maximum RNRB available, when Delyth dies her estate can claim the difference of 20%. This means that if Delyth dies while the maximum RNRB remains as £175,000, her estate can claim £35,000 (£175,000 x 20%) of the downsizing allowance not used by Rod’s estate - assuming the RNRB conditions are met (see The next step ).

Because no one knows what the future brings, whatever yan individual's age and health if they downsize or cease to own a home, it’s important to keep a record of the value of the property they moved from. They should keep the record somewhere that their executors will find it otherwise they might not be aware that the downsizing allowance applies.