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Residence nil rate band keeps on helping – even after downsizing

In addition to the standard nil rate band (£325,000), from 6 April 2017 each person is entitled to a residence nil rate band (RNRB) to use against the value of their home if it is left to direct descendants on death.  Currently the rate is set at £100,000, to increase by £25,000 each year until it reaches £175,000 in April 2020.

You might think that in order to benefit from the RNRB, a person must own a property at the time of their death.

However, the rules take into account that individuals who downsize to a smaller and less valuable property or dispose of their property and move into rented or residential care, and in the process lose some or all of their RNRB. As a consequence those who have downsized or disposed of their property before their death will, if certain conditions are met, be compensated for lost RNRB with a ‘downsizing addition’.

The following key points must apply:

  • The property must have been owned by the person and it would have qualified for the RNRB had they retained it.
  • The person must have sold, given away or downsized to a less valuable home, on or after 8 July 2015 and lost out on all or part of the RNRB as a result.
  • Assets of an equivalent value must be inherited by their direct descendants on death.

So, if you are dealing with a client’s estate where you know they sold their property in, say, May 2019 and bought a less valuable home, how do you calculate what RNRB the estate is entitled to?

Case Study 1
  • Henry, a single man, sells his house for £100,000 in May 2019 and downsizes.
  • When he dies in July 2020 the new house is worth £85,000
  • On death his estate is below £2 million

There are 5 steps to work out how much RNRB has been lost:

Step 1 – Calculate the RNRB that would have been available when the former home was sold.  The RNRB available at the time the house is sold (May 2019) is £150,000.

Step 2 – Divide the value of the former home, when it was sold, by the figure in step 1, and multiply the result by 100 to get a percentage.

(£100,000 / £150,000) x 100% = 66.67%

Step 3 – On Henry’s death, as there is a house in his estate you next need to calculate the percentage of the RNRB that has been used.  So, you divide the value of the house, at the date of death, by the RNRB available (£175,000), and multiply the result by 100.

(£85,000 / £175,000) x 100% = 48.57%

Step 4 – Deduct the percentage in step 3 from the percentage in step 2.

66.67% – 48.57% = 18.1%

Step 5 – Multiply the RNRB available at the time of Henry’s death by the figure from step 4, to give the amount of the lost RNRB.

£175,000 x 18.1% = £31,675

So on Henry’s death £31,675 of other assets can be passed to direct descendants, which is within the RNRB.

Case Study 2
  • Henry, a widower, sells his house for £250,000 in May 2019 and buys a new house
  • His wife, Sheila, had died in 2014 leaving all her estate to him
  • When Henry dies in July 2020 the new house is worth £200,000
  • On death both Sheila’s and Henry’s estates were worth less than £2 million.

Step 1 – Calculate the RNRB that would have been available when the former home was sold.  This figure is made up of the RNRB available when the former home was sold and any transferable additional threshold available when Henry died.

The RNRB available at the time the house is sold is £150,000. On Henry’s death, his estate is entitled to 100% transferable RNRB, which is £175,000. So the available RNRB is £325,000 (£175,000 + £150,000).

Step 2 – Divide the value of the former home when it was sold by the figure in step 1, and multiply the result by 100 to get a percentage.

(£250,000 / £325,000) x 100% = 76.92%

Step 3 – On Henry’s death, as there is a house in his estate you next need to calculate the percentage of the RNRB that has been used. So, you divide the value of the house, at the date of death, by the RNRB available, which is £350,000 (£175,000 plus 100% transferable RNRB), and multiply the result by 100.

(£200,000 / £350,000) x 100% = 57.14%

Step 4 – Deduct the percentage in step 3 from the percentage in step 2.

76.92% – 57.14% = 19.78%

Step 5 – Multiply the RNRB available at the time of Henry’s death by the figure from step 4, to give the amount of the lost RNRB.

£350,000 x 19.78% = £69,230

So on Henry’s death £69,230 of other assets can be passed to direct descendants, which is within the RNRB.

Conclusion

The downsizing rules are complicated and a claim needs to be made in a similar way to a claim for transferring unused RNRB.

Remember that the downsizing RNRB addition is applied together with the available RNRB, but the total of the two would still be capped so that they would not exceed the limit of the total available RNRB for a particular year. The downsizing RNRB also tapers away in the same way as the RNRB for estates above £2 million.

Kim Jarvis, Technical manager, Canada Life. Kim has worked in the life industry for over 20 years.

You can read more about Canada Life’s investment solutions on its adviser page.


About Canada Life:

Canada Life is part of a group of companies controlled by Great-West Lifeco Inc., a diversified financial services holding company headquartered in Winnipeg, Canada. Through its subsidiary companies, Lifeco has operations in Canada, the United States, and Europe. Great-West Lifeco and its insurance subsidiaries have received strong ratings from major rating agencies.

Canada Life Limited, a wholly owned subsidiary of Great-West Lifeco, began operations in the United Kingdom in 1903 and looks after the retirement, investment and protection needs of individuals and companies alike. As well as providing stability and security through its individual contracts, Canada Life Limited has grown to become the leading provider of competitively priced group insurance solutions.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority. Canada Life International Assurance Limited and Canada Life International Assurance (Ireland) DAC are authorised and regulated by the Central Bank of Ireland.

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