HMRC has issued new guidance on how those who have downsized their home later in life or have had to sell it, can still benefit from the Main Residence Nil Rate band announced in the Summer Budget.
On 8th July 2015 the Budget introduced the Main Residence Nil Rate Band (MRNRB) which from 2017 will provide an additional NRB making it easier to pass on the family home to direct descendants without a tax charge.
The government intended that the MRNRB should not be introduced in such a way to disincentivise an individual from downsizing or selling their property so also announced that they would consult on special rules which would protect the MRNRB in these circumstances - provided that certain qualifying conditions are met.
Views are sought on whether the proposals in this latest guidance need further clarification and what (if any) practical difficulties are envisaged.
So how will the MRNRB benefit someone who has sold their family home?
The intention is that an estate would be eligible for the proportion of the MRNRB that is forgone as a result of the downsizing or disposal of the property as an addition to the MRNRB that can be used on death.
It is of benefit to someone who has…
- downsized to a less valuable residence and that residence, together with assets of an equivalent value to the ‘lost’ MRNRB, has been left to direct descendants
- sold their only residence and the sale proceeds, or other assets of an equivalent value, have been left to direct descendants
- otherwise ceased to own their only residence, and other assets of an equivalent value, have been left to direct descendants
The qualifying conditions are:
- Individual dies on or after 6 April 2017
- Property disposed of must have been owned by the individual and it would have qualified for the MRNRB had the individual retained it
- Less valuable property or other assets of equivalent value, if the property has been disposed of, are in the deceased’s estate
- Less valuable property and any other assets of equivalent value, are inherited by the individuals direct descendants on that person’s death
- The downsizing or the disposal of the property occurs after 8 July 2015
- No time limit on the period in which downsizing or disposal took place before death
- No limit to the number of downsizing moves between 8 July 2015 and death
- Downsizing also includes disposing of part of a property or a share in it
- Where property is gifted rather than sold assets of equivalent value to the property at the time of the gift must be left to direct descendants
- Value of property is net value i.e. after deducting any mortgage or other debts charged on the property
- The MRNRB will taper away if the entire estate at death is above £2m
- The same overall limits apply to the downsized property and assets as they do for the Main Residence
Mrs Smith, a widow sells her home in early 2020 worth £400,000 she then buys a smaller property for £210,000. At the time of sale her available MRNRB was £350,000 as she was able to claim her late husband’s allowance (2 * £175,000).
By downsizing she has potentially lost the chance to use £140,000 of her available MRNRB or 40% (£140,000 / £350,000) as her new home is only valued at £210,000. However as the legislation allows for downsizing this will be preserved.
When Mrs Smith dies in October 2020, her new home is worth £225,000 and is left to her children together with £500,000 of other assets. The estate can therefore use £225,000 of the MRNRB against the property.
The remaining £500,000 of assets is taxed as follows,
A further 40% of the MRNRB, (£350,000*40%) £140,000, is available however, there is a limit of £350,000 for the MRNRB. As £225,000 was used against the property only £125,000 is available for the rest of the estate when left to direct descendants.
The estate then has the standard NRB as well as any unused NRB from her late husband available, 2* £325,000 potentially, giving an overall NRB of £775,000. This covers the full estate so no IHT due.
Disposing or gifting home:
Mr Jones, a widower gives away his home worth £400,000 to his children in May 2020 and moves into rented accommodation. At the time of the gift the available Main Residence NRB is £350,000 (2* £175,000). He has therefore potentially lost the chance to use £350,000 or 100% of the available MRNRB.
When Mr Jones dies in February 2021, his estate is worth £600,000 and is split between his four children. Although there is no qualifying Main Residence in his estate, the executors can still use the MRNRB up to a maximum of 100% of the available NRB at his death, £350,000 from his previous home.
As the gift of the home failed (less than 7 years passed) this is considered first. As the MRNRB only applies to the assets in the estate it is not available for failed PETs so the £400,000 uses his standard NRB of £650,000 (£325,000 inherited from spouse). The balance of £250,000 remains available to be used against the rest of his estate.
The additional residence NRB is then used against the £600,000 estate, leaving £250,000. This is the amount outstanding from the standard band so no tax to pay on death.