HMRC clarifies downsizing and inheritance tax rules

In the Summer Budget, the government announced it will phase in a new residence nil-rate band from 6 April 2017, when a residence is passed on death to a direct descendant.

It will be £100,000 in 2017 to 2018, £125,000 in 2018 to 2019, £150,000 in 2019 to 2020, £175,000 in 2020 to 2021 and then increase in line with the Consumer Price Index from 2021 to 2022.

Consequently, where part or all of the RNRB might be lost because the deceased had downsized to a less valuable residence, or had ceased to own a residence, the lost RNRB will still be available - provided that the qualifying conditions were met.

Two-and-a-half months after the RNRB was announced, HMRC has now clarified how this would apply where the residence is sold (or is no longer owned) on or after 8 July 2015.

Essentially additional RNRB will be created by downsizing.

The qualifying conditions for the additional RNRB would be broadly the same as those for the RNRB, that is if the individual dies on or after 6 April 2017, property disposed of must have been owned by the individual and it would have qualified for the RNRB had the individual retained it and less valuable property, or other assets of an equivalent value if the property has been disposed of, are in the deceased’s estate.

To qualify less valuable property, and any other assets of an equivalent value are inherited by the individual’s direct descendants on that person’s death - direct descendants are the same as those in relation to the RNRB.

In addition, the following conditions would also apply;

* The downsizing or the disposal of the property occurs after 8 July 2015.

* Subject to the condition above, there would be no time limit on the period in which the downsizing or the disposals took place before death.

* There could be any number of downsizing moves between 8 July 2015 and the date of death of the individual downsizing would also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it.

* Where a property is given away, assets of an equivalent value to the value of the property when the gift was made must be left to direct descendants.

* The value of the property would be the net value, i.e. after deducting any mortgage or other debts charged on the property.

* The additional RNRB would be tapered away in the same way as the RNRB if the value of the estate at death is greater than £2m.

The additional RNRB would be applied together with the available RNRB but the total for the two would still be capped so that they would not exceed the limit of the total available RNRB for a particular year, HMRC stated.

A claim would have to be made for the additional RNRB in a similar way that a claim is made to transfer any unused RNRB to the estate of a surviving spouse or civil partner, the tax office added.

To learn more about this subject, and earn CPD, read FTAdviser’s Guide to the Summer Budget.

emma.hughes@ft.com