Claiming relief when family home has been sold

May 5th 2023

Mrs Smith’s mother has recently died. During her final years she lived in a care home and sold her property to pay the fees. Mrs Smith believes she has lost the right to claim the residence nil rate band as a result. What is advised? Head of Tax, Christiaan Hansen advises.

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.

To qualify for the RNRB the property must be left to a direct descendant, e.g. son, daughter, stepson, grandchild, etc. The RNRB is reduced by £1 for every £2 that the estate exceeds £2 million. There are other conditions.

In order to avoid unfairness in situations like Mrs Smith’s, the government included provisions to ensure the RNRB can still be claimed where a property is sold and all or part of the proceeds remain in the estate at the time of death.

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.
To ensure the 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, they could do this by placing the proceeds from the sale of the qualifying residence in a separate bank account or other investments.

Transferrable relief
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.

In the right circumstances, up to £1 million can pass with no IHT charge using combined RNRBs and the regular nil rate bands too. It is crucial to be alert to situations it may be available.

There may be additional relief due if Mrs Smith’s mother still had some of the funds from the sale at the time of her death. If this can be identified, it can qualify for the residence nil rate band as long as certain other conditions are met, including that the relevant part of the inheritance must be left to one or more direct descendants.

Inheritance Tax can be complicated and each case unique, our team would be happy to assist with any queries you may have.

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