Downsizing the family home, now the kids have left?

Downsizing Facts and Figures

Now the kids have left, are you thinking to let of go your family home and move to something smaller, or settle in your dream location?

Dealing With ‘Empty Nest Syndrome’ or Considering Downsizing Your Home?

If so, it’s worth trying to understand how the new Inheritance tax downsizing rules work so you can still benefit from the new Residential Nil Rate Band threshold before selling up the family home.

The Backdrop

Ex-Chancellor, George Osborne, announced new additional residential nil rate bands to make good a headline-grabbing manifesto promise to allow couples to pass up to £1m from the value of their main home to their children when they die. For more details of the additional RNRB see our last edition of Asian H&H.

 However, to avoid this new policy deterring people from downsizing or disposing their property before their death, the government announced that no family will lose out if they sell an expensive property to downsize provided that the part of the estate is left to direct descendants. 

How Does This Work in Practice?

An additional inheritance tax allowance becomes available if someone has sold, given away or downsized to a less valuable home before they die. This is known as an Additional Threshold and all the following conditions must apply for the Additional Threshold allowance to hold:

  • The individual has sold, given away or downsized to a less valuable home on or after 8 July 2015;
  • The former home would have qualified for the Additional Threshold if they’d kept it until they died;
  • and The direct descendants inherit at least some of the estate;

If someone dies on or after 6 April 2017 and their estate is above the basic Inheritance Tax threshold (currently £325,000) but below £2m, the estate may be entitled to an Additional Threshold before any inheritance tax is due. The Additional Threshold bands are listed below:

Tax Year Threshold (£)
Additional Threshold (£)
Total Nil Rate Band Including £325k IHT threshold (£)

However, it is worth noting that the Additional Threshold doesn’t apply to any gifts of assets (lifetime transfers) prior to death. It can only be applied against the estate on death.

Calculating the Additional Threshold

As per HMRC guidance, when someone downsizes and still has a home when they died, the additional threshold for the estate will be made up of both:

  • the additional threshold on the home included in the estate; and
  • any downsizing addition due for the former home.

The downsizing addition will usually be the lower of:

  • the amount of additional threshold that’s been lost as a result of the downsizing move; and
  • the value of the other assets in the estate left to direct descendants.

I really wanted to prepare a worked example but as you have read from the above it will involve several steps and probably not something you want to read over your afternoon chai.

Final Thoughts

These rules are complex and not for the faint hearted, even HMRC’s own guidance states, “The downsizing rules are complicated!” The good news though is that if you decide to downsize to a care home you would qualify for the downsizing relief and it is a transferable relief to your surviving spouse.

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