The achilles heel

 In Tax, Trusts

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Is the residence nil rate band and downsizing relief a vulnerable area?

Gill Steel explains the calculations by way of a practical example.

NB: This article first appeared in Taxation on 29 November 2018 and reproduced by kind permission

The Readers’ Forum question and replies to ‘Trust in me’ (see Taxation, 27 September 2018, page 23), made me think that the downsizing rules for the inheritance tax residence nil rate band (RNRB) really are the achilles heel of advisers. Everyone is bored by the subject matter, but the rules are complex and it is easy to overlook how they operate. If tax practitioners are not careful, they may continue to provide advice as before without reference to the new rules. This is worrisome because they may then find themselves the subject of a negligence claim.

The goal of the modestly wealthy is to minimise their potential inheritance tax liability as simply as possible. Across the joint estates of married couples or civil partners it is possible to claim a ‘full house’ of allowances – if they qualify for the use of the nil rate band (NRB) and the RNRB. This will amount to £1m by the time the RNRB has risen to its maximum of £175,000 by 2020-21. But, to achieve this goal, the finer workings of the RNRB need careful consideration.

All legislative references in this article are to IHTA 1984 unless specified otherwise.

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Interaction of NRB and RNRB

With an NRB of £325,000 and a potential RNRB of £100,000 rising to £175,000 by 2020-21, thought must be given to how the rules for each allowance work and the order in which they are applied.

The NRB can apply to both lifetime gifts and the final transfer of value on death in chronological order to any type of asset. By contrast, the RNRB can apply only to a qualifying property interest held in the estate on death (s 8J(2)). There are other points to note on the RNRB.

  • It can never be set against lifetime gifts nor can it be used to relieve an estate that does not contain a qualifying property interest unless downsizing applies.
  • If the RNRB applies, it takes priority over the NRB.
  • The RNRB may be enhanced by a brought-forward allowance if the deceased’s spouse or civil partner did not use their entitlement. This can be up to 100% of the previously unused amount.
  • As for the transferable NRB (TNRB), only a combination of brought-forward allowances adding up to 100% of the allowance can be transferred between spouses or civil partners, irrespective of how long ago the earlier spouse or civil partner died.
  • Equally, both the RNRB and any brought-forward allowance are adjusted if the value of the estate on death exceeds the taper threshold (£2m). Taper applies to both the estate on death and the estate that is generating a brought-forward allowance.

Key points

  • The nil rate band applies to lifetime gifts as well as on death.
  • The residence nil rate band will apply in estate calculations only .
  • Downsizing relief will be available if a home has been sold before death.
  • The downsizing addition will depend on six conditions being satisfied.
  • The calculation of the lost relievable amount.

The example of Adam and Eve illustrates the basic operation of the transfer of unused NRB and RNRB.

Adam and Eve

Adam and Eve were married until Adam’s died on 30 April 2017. They co-owned the family home as tenants in common in equal shares. Adam left the whole of his estate on discretionary trust and his half-share in the property was therefore included in the trust. The trust benefits Eve and their children and grandchildren.

Adam made no lifetime gifts, so the whole of his unused NRB would be available to be set against his estate on death. This is valued at £300,000 comprising his half-share of the house (£275,000) and investments (£25,000), which means it is wholly covered by his NRB of £325,000.

Because Adam left his entire estate to a discretionary trust his qualifying property interest in the family home was not closely inherited (s 8J(3)). There are some exceptions for specific settlements that can benefit from the RNRB, but these must fit within the conditions in either s 8J(4) or s 8J(5), neither of which apply here.

Of the NRB, £25,000 is unused, representing 7.692% of the full entitlement on Adam’s death. This percentage of unused allowance is transferable to his surviving spouse, Eve.

Therefore, Adam’s estate bore no inheritance tax and he did not use his RNRB. Strange as it may seem, given he owned a property interest on death, because Adam did not use the RNRB (because it was left to a discretionary trust in his will and therefore was not closely inherited ) it is available for transfer to his widow (s 8G). A brought-forward allowance must be claimed by the personal representatives within two years of the surviving spouse’s death (s 8L).

The downsizing addition

If, before their death, the deceased had moved from one qualifying property to a less expensive one – or indeed to a property that they did not own – a ‘downsizing’ addition may be available equivalent to the lost relievable amount.

The lost relievable amount is calculated as a percentage difference that the qualifying former residential interest represents of the allowance applicable at the time of completion of the downsizing event; and the amount that the actual qualifying residential interest (if any) represents of the allowance on death; as applied to the allowance on death.

If there is a TRNRB after a spouse or civil partner dies, the downsizing allowance is calculated by including the TRNRB available at the dates of downsizing and death.

Six conditions must be met to make a downsizing claim for a property that was disposed of after 8 July 2015. They are set out in s 8FA (2)-(7) as conditions A to F.

  • Condition A. One or other of the following circumstances applies, either:
  1. the person’s estate includes a qualifying residential interest (QRI) and the value of the QRI which is closely inherited is less than the default or adjusted allowance (see below); or
  2. the person’s estate includes a QRI that is not closely inherited, but the value of that QRI is less than the default allowance.
  • Condition B. Not all the value transferred by the chargeable transfer on death is attributable to the person’s QRI; in other words, there must be other chargeable property on the death apart from the QRI.
  • Condition C. There is a qualifying former residential interest linked to that person.
  • Condition D. The value of the qualifying former residential interest must be greater than the value transferred by the chargeable transfer on death that is attributable to that person’s QRI.
  • Condition E. At least some of the remainder of the person’s estate on death other than the QRI is closely inherited.
  • Condition F. A claim is made for the addition in accordance with s 8L(1)-(3). The personal representatives or other persons liable to pay the tax chargeable must make a claim for downsizing to apply.

If conditions A to F above are met, the lost relievable amount is calculated in accordance with the steps set out in s 8FE.

  • Step 1. Work out the RNRB that would have been available when the former home was disposed of. This comprises the maximum RNRB due at that date for the deceased and any TRNRB available (a person’s ‘default allowance’). Bear in mind that, if the move was made after 8 July 2015 but before 6 April 2017, the figure for the RNRB will be a maximum of £100,000.
  • Step 2. Take the value of the former home at the date of downsizing and divide it by the figure in step 1. Multiply the result by 100 to make a percentage. The percentage cannot be greater than 100% nor less than 0%. If it exceeds 100%, it is capped at that 100%. If it appears to be negative, it is limited to 0%.
  • Step 3. The calculation must take into account two separate scenarios:
  1. that the individual did downsize before their death and replaced their original property with another of lower value (s 8FA); or
  2. that they had no residential property interest on death but did at one time own a property that was sold before death and not replaced (s 8FB).

If there is a home in the estate, divide its value by the RNRB that would be available at the date of death (including any TRNRB). Multiply the result by 100 to make a percentage, which cannot be more than 100%. If there is no home in the estate at the date of death the percentage will be 0%.

  • Step 4. Deduct the percentage in step 3 from the percentage in step 2.
  • Step 5. Multiply the RNRB that would be available on death by the percentage obtained in step 4. The result is the ‘lost relievable RNRB amount’, which can be used to relieve any closely inherited property – such as cash or stocks and shares – not just real property.

The downsizing addition will be the lower of:

  • the amount of RNRB that has been lost as a result of the downsizing move; in other words, the lost relievable RNRB amount; and
  • the value of the other assets in the estate left to lineal descendants.

This is illustrated by Eve’s Allowance.

Eve’s Allowance

After Adam died, Eve sold the family home in 2018-19 and her half-share of the proceeds were paid into her bank account – she has therefore ‘downsized’. She moved to an annex at her daughter’s house. Eve’s estate now comprises no qualifying property interest, only a formerly qualifying property interest that was her interest in the family home.

Eve dies in 2020-21 and her estate is valued at £500,000, having made no lifetime gifts. She has her own NRB plus 7.692% of the current NRB transferred from Adam. Further, Eve’s personal representative could claim a downsizing addition for her interest in the formerly qualifying property as well as including Adam’s TRNRB.

If we now apply the downsizing rules, the effect is as follows.

  • Step 1. The maximum RNRB at the date of sale (2018-19) is £125,000. Adam’s TRNRB is 100% of the amount available at Eve’s death – £175,000. The total default allowance is £300,000.
  • Step 2. The house sold for £530,000. Eve’s half-share was £265,000 so the percentage it represents of the default allowance is £265,000/£300,000 x 100 = 88.333%.
  • Step 3. There is no residential interest in Eve’s estate, so the percentage is 0%.
  • Step 4. Deduct the percentage in step 3 from the percentage in step 2. The result is 88.333%.
  • Step 5. The maximum RNRB when Eve dies is £175,000. There is also Adam’s TRNRB of £175,000, so the maximum for Eve’s estate is £350,000. Multiply £350,000 x 88.333% to give the lost relievable RNRB amount of £309,166.

In Eve’s allowance, we can see that the amount of the downsizing addition is the lower of the value of the other assets left to Eve’s lineal descendants and the lost relievable RNRB amount. If she had left the whole of her estate to her children, Eve’s estate will be due a downsizing addition of £309,166 because this is less than the value of her estate. Thus, her total nil rate band would be:

Allowance                                                     £

Eve’s NRB                                           325,000

Adam’s TNRB                                        25,000


Eve and Adam’s RNRB                     309,166

Total                                                      659,166

On current figures, this exceeds the value of her estate, so no inheritance tax would be due.

Breaking the trust

The original Readers’ Forum question also asked whether it would have been better for Adam’s personal representatives and trustees to break up his discretionary will trust. This could be done within two years of his death and the effect, under s 144, would be to read back the ultimate division of his estate to his will.

Thus, Adam would use his RNRB first if his qualifying property interest were left to his lineal descendants directly and some of his NRB would be used to the extent that his qualifying property interest exceeded the RNRB.

The calculation at his death would be as follows:                 £

Adam’s qualifying property interest on death             275,000

Less: RNRB (2017-18)                                                   100,000

Balance                                                                             175,000

Plus investments                                                               25,000


Less: NRB                                                                         325,000

Unused NRB                                                                    125,000

Thus, 61.538% of Adam’s NRB is used, leaving 38.462% to transfer to Eve; but there would be no TRNRB.

On Eve’s death there would be only her NRB and now 38.462% of Adam’s TNRB to set against her estate as well as the downsizing addition in relation only to Eve because Adam’s own RNRB would have been used.

Thus, the total nil rate bands available to set against Eve’s estate on her death would be as follows.

Allowance                                                                            £

Eve’s NRB                                                                   325,000

Adam’s TNRB (£325,000 x 38.462%)                   125,000


Eve’s RNRB (lost relievable amount)

(£175,000 x 88.333% =                                            154,583

Total                                                                            604,583

We are told that Eve’s total estate was valued at £500,000 so it is still covered by the nil rate bands. However, it is apparent from these calculations that, had the estate been more valuable, it would be best not to re-organise the discretionary trust from an inheritance point of view because the figures in Eve’s Allowance show there would be a greater level of overall relief if it was retained. Of course, we must always take a holistic view when tax planning and there may be other family reasons for closing the discretionary trust within two years of Adam’s death, but for inheritance tax it is better to retain it.

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