Downsizing and the Residence Nil-Rate Band
Many people assume that selling the family home, downsizing to a smaller property, or moving into care means giving up the residence nil-rate band (RNRB). That is usually a costly mistake. A relief called the downsizing addition protects the allowance when you dispose of a home on or after 8 July 2015, even if you own nothing worth claiming it against at death.
The RNRB in Brief
The RNRB is an extra inheritance tax allowance available when the family home passes to direct descendants, such as children, stepchildren, adopted children or grandchildren. It is currently worth up to £175,000 per person, or £350,000 for a married couple or civil partners combining their allowances. Alongside the £325,000 nil-rate band, that gives a couple a potential tax-free threshold of £1 million.
The RNRB is tapered: for estates worth more than £2 million, it is reduced by £1 for every £2 over the threshold. No RNRB remains once an individual estate reaches £2.35 million, or £2.7 million for a couple.
For the full picture of how the allowance works, see our guide to inheritance tax for individuals.
Why Selling or Downsizing Can Lose the RNRB
The RNRB can only be applied against a qualifying residential interest that is in the estate at death and passes to direct descendants. So on its face, if you have sold your home and own only savings at death, the allowance has nothing to attach to. If you downsized to a smaller flat worth less than the allowance, part of the RNRB would otherwise be wasted.
The downsizing addition fixes this. Where you disposed of a home on or after 8 July 2015, your estate can claim the RNRB it would have had against the old home, provided assets of equivalent value pass to direct descendants.
How the Downsizing Addition Works
Three conditions must be met:
- You owned a home that would have qualified for the RNRB at some point on or after 8 July 2015
- At death, the residential interest in your estate is worth less than the maximum RNRB (because you sold, downsized, gifted the home, or owned no property at all)
- Other assets of at least equivalent value pass to direct descendants
When all three are met, the RNRB is applied against those other assets (savings, shares, investments) instead of against a property. In effect, the allowance is preserved even though the qualifying home is no longer in the estate.
Example: Moving to a Smaller Home
A couple sell their £600,000 family home and buy a flat worth £200,000, leaving £400,000 in savings. On the second death, the flat passes to their children along with the savings. The flat is worth more than the combined RNRB of £350,000, so the allowance is applied in full against the flat and the estate, and nothing is lost.
Example: Moving into Care
A widow sells her home to pay for care home fees and dies owning only £180,000 of investments. She has no qualifying home at death. Because she sold the home on or after 8 July 2015 and left the investments to her children, her executors can claim the full £175,000 RNRB against those investments, saving up to £70,000 in inheritance tax (£175,000 at 40%).
Example: Gifting the Home
A parent gives their home to their children and moves out completely, so there is no reservation of benefit. The home leaves the estate, but the downsizing addition can preserve the RNRB, provided the children inherit assets of equivalent value.
Claiming the Allowance
The downsizing addition is not automatic. Executors must claim it on form IHT435, alongside the standard RNRB claim. Where the allowance is also being transferred from a late spouse or civil partner, that claim is made on form IHT436. Executors will need:
- Evidence of the sale, gift or downsizing and its date
- The value of the old home and the new home
- Details of how the proceeds were used or invested
- Proof that assets of equivalent value passed to direct descendants
The relief is often missed because executors do not know the deceased ever owned a larger qualifying home. If a parent or grandparent downsized in later life, it is worth checking whether the estate qualifies.
What Does Not Reduce the RNRB
A few common situations cause confusion:
- Moving from a larger home to a cheaper one does not lose the RNRB. The allowance is preserved up to the value of the current home, with the downsizing addition bridging any gap.
- Selling to pay for care does not lose it, provided equivalent assets pass to direct descendants.
- Giving the home away entirely does not lose it, as long as the gift is not a reservation of benefit and the estate still passes equivalent value to descendants.
When the RNRB Is Genuinely Lost
The allowance is lost when the estate does not pass assets to direct descendants. If the will leaves everything to a sibling, a friend, a charity or an unmarried partner, neither the RNRB nor the downsizing addition is available, because the assets are not closely inherited. This is one reason why a will that leaves the home to children, rather than to a wider family circle, is so valuable for inheritance tax.
The Taper Still Applies