Earlier today, HMRC confirmed where all or part of the residence nil-rate band being introduced from 6 April 2017 might have been lost because the deceased had downsized to a less valuable residence, or had ceased to own a residence, the lost RNRB will now 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.
There will be no time limit on the period in which the downsizing or the disposals took place before death and there could be any number of downsizing moves between 8 July 2015 and the date of death of the individual downsizing.
Under the HMRC rules, 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.
Andrea Rozario, chief corporate officer of Bower Retirement Services, said any developments that help older people have more choices in later life are a welcome addition.
She said that to help older people downsize and still be able to pass on wealth to beneficiaries will encourage people to consider this option, but added there is still much more that needs to be done to enable the older generation move to suitable housing later in life.
Ms Rozario said there were other obstacles, such as a lack of said housing and the deterrent of stamp duty, which will mean this HMRC rule change may fail to ignite the downsizing market.
“Considering there is estimated to be over a trillion pounds of housing equity tied up in the bricks and mortar of those aged 55 and above and the equity release market was just under 1.4 billion in 2014, the scope for growth is huge and these latest rules on downsizing and inheritance tax are not likely to have any real impact on the growth of equity release.”
Dean Mirfin, technical director at Key Retirement, said the rule change will mean new things to discuss with elderly clients contemplating their retirement income and estate planning options.
“The fact that the new rules allow the new IHT benefits to be retained are great, but do not change one fundamental point.
“That point is that clients who look at equity release, or downsizing as an alternative, are not downsizing or releasing equity and retaining funds for inheritance purposes; they are releasing funds to spend in their retirement.
“The benefit of the new rules apply to the actual inheritance that is ultimately made, i.e. any money realised from the downsize which is spent and therefore not inherited becomes irrelevant as it has gone. Therefore in principle, they will neither encourage or discourage those looking to raise funds to spend themselves.”
Stuart Wilson, channel marketing director of More 2 Life, said the RNRB rules will not affect the balance of those who do or do not choose to downsize - that is a decision that goes beyond merely financial reasoning. “It will often mean a complete change of property type, even a brand new area altogether, and that is often an emotional as much as a financial decision,” he added.
emma.hughes@ft.com
