- Churchill Tax
INHERITANCE TAX: Residence Nil Rate Band When There’s No Residence
You mother recently died having spent the last couple of years in care. Last year you sold her home to help pay the nursing home fees. When preparing the inheritance tax forms are you.
Residence nil rate band
The inheritance tax (IHT) residence nil rate band (RNRB) was introduced in 2017. It followed pressure on the government to protect estates which had fallen into the IHT bracket simply because of spiralling house prices. In effect the RNRB results in a 0% IHT charge on that part of a deceased person’s estate which relates to the value of their home, up to a maximum of £175,000.
TRAP
To qualify for the RNRB the property must be left to a direct descendant, e.g. son, stepdaughter, grandchild, etc. The RNRB is reduced by £1 for every £2 that the estate exceeds £2 million. There are other conditions.
No home
When devising the rules for the RNRB the government realised it would be unfair to preclude the relief for estates where the deceased had sold their home for any reason, e.g. to fund care home costs, and all or part of the proceeds remained in the estate at the time of death.
TIP:
The RNRB can also apply where the deceased moved home from one worth more than the RNRB to one which was worth less and, again, some of the proceeds were in their estate when they died.
Example
Boris and Carrie sold their home in December 2019 for £500,000 and downsized to a smaller property. When Boris dies in April 2024 it’s worth £300,000. For IHT purposes his share is £150,000, which he leaves to his daughter. His estate is entitled to RNRB of £150,000. Had they kept the original home until Boris died his estate would have included his share of the home worth £250,000. The estate could therefore have claimed the maximum £175,000. By downsizing Boris’s estate missed out on £25,000 of RNRB. The downsizing rules prevent this.
No home at time of death
As we’ve already mentioned, the RNRB can apply even if the estate doesn’t include a home at the time of the deceased’s death.
TIP:
To ensure your estate is in a position to claim the RNRB where it doesn’t include a home, or the deceased downsized, it’s important that you can identify how much of the estate has been derived from the home that was sold. For example, you could do this by placing the proceeds from the sale of the qualifying residence in a separate bank account or other investments.
Transfer the RNRB
Where the conditions are met but the RNRB is not used it can be transferred. This applies if one spouse or civil partner passes their share of their home when they die to their surviving spouse/partner. Their estate won’t use the RNRB because the transfer to their spouse/partner is exempt meaning there’s no IHT which the RNRB can apply to. Instead, the unused RNRB is available to the estate by the surviving spouse/partner’s estate when they die and pass on their home or value from it and the RNRB conditions are met.
Conclusion
If the deceased sold their home without buying another or moved into a less valuable property, the residence nil rate band (RNRB) can still apply. You’ll need to be able to identify how much of the estate relates to the sale proceeds so you can quantify how much relief can be claimed. Plus, the usual conditions for the RNRB apply, e.g. the inheritance must go to one or more direct descendants of the deceased.