In a feature for Accountancy, Blick Rothenberg partner Nimesh Shah described the RNRB as ‘a complex solution to what should have been a relatively straightforward problem for the government to address’.

When someone has sold, given away or downsized to a less valuable home before they die, their estate may be able to get an extra IHT threshold, known as a downsizing addition, provided three conditions apply.

These are that 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 additional threshold if they had kept it until they died; and their direct descendants inherit at least some of the estate.

The amount of the downsizing addition will usually be the same as the additional threshold that has been lost when the former home is no longer in the estate.

It will also depend on the value of the other assets left to direct descendants. However, the downsizing addition cannot be more than the maximum amount of additional threshold that would have been available if the sale or downsizing had not happened.

The estate’s personal representative must make a claim for the downsizing addition within two years of the end of the month that the person dies. 

HMRC’s guidance covers the five steps involved in calculating how much additional threshold has been lost. It also covers situations where there may be some lost additional threshold when someone downsizes to a less valuable home but still has a home in their estate when they die. This will only happen when the value of the new home is less than the maximum additional threshold available to the estate.

HMRC provides a number of worked examples to explain the processes involved, including circumstances where only part of the home in the estate is left to direct descendants, which may also have implications in downsizing situations.

Where the downsizing occurs before 6 April 2017, the maximum available additional threshold available at that time is treated as £100,000.

If someone downsized but had never lived in the less valuable property, that property is not a home for additional threshold purpose. This means that the position is the same as if the former home had been sold or given away.

When someone sells or gives away a former home so that there is no longer any home in their estate when they die, the additional threshold for the estate will be equal to the downsizing addition for the former home.

Calculating the downsizing allowance in these situations is slightly different, HMRC explains, because there is no home in the estate that could qualify for any additional threshold.

When an additional threshold is transferred following the death of a husband, wife or civil partner, the downsizing allowance is calculated in the usual way. The difference is that the maximum additional threshold available at both the date someone dies and the date they sell or give away their home is increased to include the amount of the transferred additional threshold.

Trusts

The guidance also covers situations where a home is left in a trust. When a home is held in such a trust, the trustees might be able to dispose of it or they may change it to a less valuable one. This is treated the same as if the person that died had downsized, sold or gave away the home themselves. Where a person’s right to occupy a home held in a trust stops, for example on re-marriage, this is also treated as a disposal for the purposes of the downsizing rules.

A person can have more than one interest in the same home. For example, they may own half of a house outright while the other half is held in a trust for their benefit. These would be two separate interests in the same home.

If a person sells or gives away more than one interest in a single home at the same time, for example, because they sell the whole house, all those interests can be taken into account for downsizing purposes. But, if a person disposes of different interests at different times, the estate’s personal representative can only nominate one of those disposals to be taken into account to work out any downsizing addition.

HMRC states: ‘The downsizing rules are complicated.

‘This guide explains the basic rules, but it can’t cover the more complex situations, for example, where trusts are involved. You might want to get professional advice about how to work out the additional threshold in these situations.’

HMRC has also updated two other existing guidance publications to reflect the way IHT RNRB regulations impact on trust arrangements.

In its comments on the new guidance, the ICAEW tax faculty described it as ‘only slightly less impenetrable than the legislation.’

In its submission to the original consultation on the RNRB and downsizing, ICAEW said: ‘The policy design is extremely complex and will force many lay executors to engage professional help in what should have been a simple estate passing to the children.’

Blick Rothenberg’s Shah added: ‘Given higher property prices and a basic nil rate band which has been frozen at £325,000 for over eight years, advisers will want to be mindful of their clients being able to benefit from the RNRB, where appropriate. However, the complexity associated with RNRB has naturally made estate planning and drafting wills more difficult.’

Guidance: How downsizing, selling or gifting a home affects the additional Inheritance Tax threshold is here.

Guidance: Trusts and Inheritance Tax is here.

Guidance: Inheritance Tax: transferring unused tax-free thresholds is here.

Nimesh Shah’s article on RNRB can be read here.