Residence nil rate band when no residence?

Your father recently died having spent the last two years in care. Last year you sold his home to help pay the nursing home fees. When preparing the inheritance tax forms, are you entitled to claim the residence nil rate band?  Tax Partner Brona MacDougall discusses.

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, stepdaughter, grandchild, etc. The RNRB is reduced by £1 for every £2 that the estate exceeds £2 million. There are other conditions.

When devising the rules for the RNRB the government realised it would be unfair to preclude the relief for estates where the deceased had sold their home for any reason, e.g. to fund care home costs, and all or part of the proceeds remained 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.

EXAMPLE
David and Mary sold their home in December 2019 for £500,000 and downsized to a smaller property. When David dies in April 2024 the smaller house is worth £300,000. For IHT purposes his share is £150,000, which he leaves to his daughter. His estate is clearly entitled to a RNRB of ½ of the value of his current home, being £150,000. However, the downsizing rules apply in this instance to allow his executors to claim the full £175,000 on the basis of the value of his original home – his share of which exceeded £175,000.

If the deceased sold their home without buying another or moved into a less valuable property, the residence nil rate band (RNRB) can still apply. You’ll need to be able to identify how much of the estate relates to the sale proceeds so you can quantify how much relief can be claimed. Plus, the usual conditions for the RNRB apply, e.g. the inheritance must go to one or more direct descendants of the deceased.