RNRBWillsResidence Nil Rate Band and Downsizing

When the Residence Nil Rate Band (RNRB) was introduced, the government wished to avoid either disincentivising downsizing or worsen the inheritance tax position of those who do downsize. Provisions were therefore put in place to ensure that a person who downsizes to a lower value house or stops owning a house at all are not left in a worse inheritance tax position by that decision. These rules are known as the Additional RNRB or the downsizing provisions.

The downsizing provisions are simple in brief but complex in detail. This article will only cover an overview of the downsizing provisions.

An overview of the downsizing provisions

The downsizing provisions will apply where part or all RNRB could be lost as:

• The deceased moved to a lower value residence during their lifetime; or
• The deceased ceased to own a Qualifying Residential Interest (QRI) during their lifetime.

In such a case, RNRB may still be available up to the value of their previous home as long as other assets in the estate are closely inherited. Any RNRB claimed due to the downsizing provisions is known as the ‘additional’ RNRB.

Additional RNRB is also subject to the Taper Threshold.

It is important to distinguish between the two different situations the downsizing provisions cover, as the exact rules do differ.

Downsizing provisions where there is a lower value home

Where a person has downsized to a lower value home, the following conditions must be satisfied.

1. The estate must include a QRI but either:

• Full RNRB cannot be claimed as not enough of the interest is closely inherited; or
• The value of the interest is not enough to use the full available RNRB.

2. The deceased must have previously had an interest in a property that would have been considered as a QRI which was disposed of after 8th July 2015, known as the Qualifying Former Residential Interest (QFRI). This previous interest in property must have been of greater value than their current property. If there are multiple potential QFRIs, the Person Representatives (PRs) must nominate one.
3. A percentage of the QRI, along with other assets in the estate, must be closely inherited.

Downsizing provisions where there is no home

Where a person no longer owns a home at death, the rules are similar but have some variants.

1. Immediately before the deceased’s death, the estate must not include a QRI.
2. The value of the chargeable estate is larger than nil.
3. The deceased previously owned a QFRI. If there are multiple potential QFRIs, the PRs must nominate one.
4. Other assets in the estate must be closely inherited.

Calculating the additional RNRB due to downsizing

The exact formula for calculating the additional RNRB is complex, in simple terms it is a four-step process:

1. Calculate the value of the QFRI as a percentage of the RNRB available at the time of disposal (including any transferable RNRB). If the value of the QFRI is higher than available RNRB, this percentage will be 100%.
2. Calculate the value of the QRI as a percentage of the RNRB available at the time of death (including any transferable RNRB). If there is no QRI in the estate at death, this percentage is 0%.
3. Deduct the percentage in 2 from the percentage in 1.
4. Apply the resulting percentage to the value of the current RNRB.

The result at the end of this will be the additional RNRB, capped at the value of other assets in the estate closely inherited.

Example 1

Joseph, who has never been married, sells his home worth £100,000 in October 2018 and moves into a home worth £70,000. Joseph dies in August 2019, and his house is worth £75,000 at death. His Will leaves his estate to his daughter Emma.

Step 1: Value of QFRI (£100,000) as a percentage of RNRB available at disposal (£125,000) = 80%

Step 2: Value of QRI (£75,000) as a percentage of RNRB available at death (£150,000) = 50%

Step 3: 80% – 50% = 30%

Step 4: 30% of £150,000 = £45,000

The additional RNRB due to downsizing would therefore be £45,000.

Ordinary RNRB would first be applied to the property, using up £75,000. The additional RNRB of £45,000 would be applied to other assets that pass to Emma. The remaining £30,000 RNRB could not be used.

Example 2

Yasmin divorces from her husband. As part of the settlement, her husband purchases her 50% share of the marital home for £70,000. This occurs in August 2018. Yasmin decides goes to live with her sister Sophie in a house that Sophie owns solely. Yasmin dies in December 2020 and her estate passes by Intestacy to her children.

Step 1: Value of QFRI (£70,000) as a percentage of RNRB available at disposal (£125,000) = 56%

Step 2: Value of QRI (£0) as a percentage of RNRB available at death (£175,000) = 0%

Step 3: 56% – 0% = 56%

Step 4: 56% of £175,000 = £98,000

The additional RNRB due to downsizing would therefore be £98,000.