PARTNER CONTENT by CANADA LIFE
This content was paid for and produced by CANADA LIFE
You might think that in order to benefit from the RNRB, a person must own a property at the time of their death.
However, the rules take into account that individuals who downsize to a smaller and less valuable property or dispose of their property and move into rented or residential care, and in the process lose some or all of their RNRB. As a consequence those who have downsized or disposed of their property before their death will, if certain conditions are met, be compensated for lost RNRB with a ‘downsizing addition’.
The following key points must apply:
So, if you are dealing with a client’s estate where you know they sold their property in, say, May 2019 and bought a less valuable home, how do you calculate what RNRB the estate is entitled to?
Case Study 1
There are 5 steps to work out how much RNRB has been lost:
Step 1 - Calculate the RNRB that would have been available when the former home was sold. The RNRB available at the time the house is sold (May 2019) is £150,000.
Step 2 - Divide the value of the former home, when it was sold, by the figure in step 1, and multiply the result by 100 to get a percentage.
(£100,000 / £150,000) x 100% = 66.67%
Step 3 – On Henry’s death, as there is a house in his estate you next need to calculate the percentage of the RNRB that has been used. So, you divide the value of the house, at the date of death, by the RNRB available (£175,000), and multiply the result by 100.
(£85,000 / £175,000) x 100% = 48.57%
Step 4 - Deduct the percentage in step 3 from the percentage in step 2.
66.67% - 48.57% = 18.1%
Step 5 - Multiply the RNRB available at the time of Henry’s death by the figure from step 4, to give the amount of the lost RNRB.
£175,000 x 18.1% = £31,675
So on Henry’s death £31,675 of other assets can be passed to direct descendants, which is within the RNRB.
Case Study 2
Step 1 - Calculate the RNRB that would have been available when the former home was sold. This figure is made up of the RNRB available when the former home was sold and any transferable additional threshold available when Henry died.
The RNRB available at the time the house is sold is £150,000. On Henry’s death, his estate is entitled to 100% transferable RNRB, which is £175,000. So the available RNRB is £325,000 (£175,000 + £150,000).
Step 2 - Divide the value of the former home when it was sold by the figure in step 1, and multiply the result by 100 to get a percentage.
(£250,000 / £325,000) x 100% = 76.92%
Step 3 – On Henry’s death, as there is a house in his estate you next need to calculate the percentage of the RNRB that has been used. So, you divide the value of the house, at the date of death, by the RNRB available, which is £350,000 (£175,000 plus 100% transferable RNRB), and multiply the result by 100.
(£200,000 / £350,000) x 100% = 57.14%
Step 4 - Deduct the percentage in step 3 from the percentage in step 2.
76.92% - 57.14% = 19.78%
Step 5 - Multiply the RNRB available at the time of Henry’s death by the figure from step 4, to give the amount of the lost RNRB.
£350,000 x 19.78% = £69,230
So on Henry’s death £69,230 of other assets can be passed to direct descendants, which is within the RNRB.
Conclusion
The downsizing rules are complicated and a claim needs to be made in a similar way to a claim for transferring unused RNRB.
Remember that the downsizing RNRB addition is applied together with the available RNRB, but the total of the two would still be capped so that they would not exceed the limit of the total available RNRB for a particular year. The downsizing RNRB also tapers away in the same way as the RNRB for estates above £2 million.
Kim Jarvis, Technical manager, Canada Life.
Find out more