HMRC guidance on the IHT residence nil rate band and downsizing

HMRC has published one piece of new guidance on the inheritance tax (IHT) residence nil rate band, and updated two other pieces of guidance.


The residence nil rate band (RNRB) is an extra nil rate band available on estates for deaths after 5 April 2017 where there is a qualifying residence that is ‘closely inherited’. This means inherited by a lineal descendant or their spouse/civil partner or widow/widower who has not remarried. Descendants include stepchildren, foster children and their descendants.


The relief is £100,000 in the first year the relief was introduced, increasing by £25,000 tranches to £175,000 for deaths after 5 April 2020 and thereafter by the Consumer Prices Index. It can be transferred to the surviving spouse after the first death.


The ‘downsizing’ provisions which form part of this relief were introduced so as not to discourage people from moving to a smaller home or selling to raise a capital sum (eg, to fund care home fees). If the qualifying residence was disposed of on or after 8 July 2015 the RNRB can be calculated based on the higher value of a previously-owned residence.


HMRC has recently published guidance to the downsizing provisions for the RNRB: How downsizing, selling or gifting a home affects the additional Inheritance Tax threshold


The two updated pieces of guidance are:


  • Trusts and inheritance tax – updated to include guidance on how trusts affect the availability of the RNRB. If the home is held in a bare trust or an interest in possession trust with the right to use or occupy the property, it is included in the estate of the deceased and is potentially eligible for the RNRB. If the home is held in a discretionary trust it would not generally be included in a beneficiary’s estate and so would not be eligible for the RNRB.
  • Inheritance Tax: transferring unused tax-free thresholds – information about how to transfer the RNRB has been added to this guide.


We commented on the consultation on the RNRB and downsizing in TAXREP 42/15 and TAXREP 57/15. In both representations we expressed our concern at the complexity of the legislation, making the following points:


“The policy design is extremely complex and will force many lay executors to engage professional help in what should have been a simple estate passing to the children.


Will extra resources be provided to HMRC to enable them to assist executors to claim the maximum nil rate bands available?”


The downsizing guidance just published by HMRC includes the following statements:


“The downsizing rules are complicated. … This guide explains the basic rules, but it can’t cover the more complex situations, for example, where trusts are involved. You might want to get professional advice about how to work out the additional threshold in these situations.”


So clearly no extra resources being provided by HMRC.


Working through the examples, the real life complications of estates with a value in excess of £2m and the nil rate band and the transferable nil rate band are ignored. In some of the examples the value of the estate is probably covered by the nil rate band and the unused transferable nil rate band – so no need to trouble the brain with a downsizing calculation!


The guidance is only slightly less impenetrable than the legislation. We published articles in TAXline in December 2016 (explanation of the RNRB) and January 2017 (downsizing) – available to Tax Faculty members – which should clear some of the fog for you.