Heather Rogers:Find out how to ask her a tax question in the box below
My mother's estate including her flat is more than £325,000 and less than £500,000.
She is moving into a home and will need to sell her flat. Does she lose her full house allowance of £175,000 on the day of completion?
Heather Rogers replies: I am sorry to hear that your mother is moving into a care home and needs to sell her flat.
She will not necessarily lose her full 'own home allowance' - which is technically known as the residence nil rate band - for inheritance tax.
However, some calculations will need to be done when she dies to establish the amount of inheritance tax owed by her estate.
How much is inheritance tax and what are the basic rules to follow?
Inheritance tax of 40 per cent is typically levied on a deceased person's assets worth over and above £325,000, which is called the nil rate band.
Many people are allowed to leave a further £175,000 worth of assets without them becoming liable for inheritance tax, if their home forms part of their estate and they leave it to direct descendants.
That means children, including adopted, step or fostered, and those children's linear descendants.
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This extra sum is what is called the residence nil rate band, and it is available to claim on deaths on or after 6 April 2017.
Both protected amounts or 'bands', adding up to £500,000 per person, can be transferred to a surviving spouse or civil partner if unused on the death of the first spouse.
The residence nil rate band can be claimed if the surviving spouse dies on or after 6 April 2017, regardless of when the first spouse passed away. This is called a brought forward allowance.
If you are part of a couple who own a home and leave your estate to your direct descendants, you can normally pass on at least £1million free of inheritance tax. However, on estates worth in excess of £2million, the residence nil rate band starts to be reduced.
There are various ways to minimise your inheritance tax bill but that is a separate topic.
What happens if someone dies and has sold their home to go into care?
10 ways to avoid inheritance tax legally
Read a This is Money guide here, explaining how to stop HMRC grabbing some of your estate from your loved ones.
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When someone has sold, given away or downsized to a less valuable home before they die, the RNRB might still be applied to their estate if they qualify for a downsizing addition.
You may hear this described as a 'qualifying former residential interest'.
To qualify, ALL these conditions must apply:
- The person sold, gave away or downsized to a less valuable home, on or after 8 July 2015
- The former home would have qualified for the RNRB if they'd kept it until they died
- Their direct descendants inherit at least some of the estate - this is crucially important.
The amount of the downsizing addition will usually be the same as the RNRB lost when the former home is no longer in the estate.
But, and importantly, it will also depend on the value of the other assets left to direct descendants.
The downsizing addition cannot be more than the maximum amount of RNRB available if the sale or downsizing had not happened.
The estate's personal representative - normally, this would be the executor named in the will - must make a claim for the downsizing addition within two years of the end of the month that the person dies.
Moving home later in life: What happens to the 'own home' allowance for inheritance tax when someone goes into care?
HMRC can extend this time limit in some circ*mstances.
Also, the brought forward allowance for a claim for RNRB from the previous spouse, if available, must be claimed within two years of the end of the month in which the surviving spouse dies.
What do you need to tell HMRC and when?
You do not have to tell HMRC when the downsizing move, sale or gift of the former home happens.
The estate's personal representative makes a claim for RNRB (and any downsizing addition) when filling in the inheritance tax returns.
You should keep the details of the move, gift or sale so that the estate's personal representative can get that information when they make the claim.
A copy of the completion statement from the conveyancing solicitor is ideal.
If you are the personal representative of an estate where inheritance tax is due, you might be able to calculate it and fill in the forms yourself.
The Government has guidance on how to work out and apply the RNRB for inheritance tax here.
However, should it get complicated or if the estate is large, you might consider hiring an accountant or lawyer to help you.
Rules to remember on RNRB and the downsizing addition
1. You can only take one move, sale or other disposal of a former home into account for the downsizing addition.
If the person that died downsized more than once, or sold or gave away more than one home between 8 July 2015 and the date they died, the estate's personal representative can choose which to use to calculate the downsizing addition.
2. When there is no home in the estate, the downsizing addition will be the lower of:
- The amount of RNRB lost as a result of the sale
- The value of the other assets in the estate that the direct descendants inherit.
3. Take care if both direct and non-direct descendants will be beneficiaries because for homes sold for care during 2022/23, if only £100,000 is left to direct descendants, and £200,000 left to non-direct descendants, the RNRB is restricted to the £100,000.
If was the other way round, the full £175,000 would qualify.
4. If the value of the home in the person's estate was less than the maximum RNRB when they sold or gave it away, the lost RNRB is worked out as a percentage of that maximum RNRB.
You then apply that percentage when the person dies, which usually limits the RNRB to the value of the house sold, provided enough is left to the direct descendants.
5. If you have a brought forward allowance, then when transferring RNRB following the death of a husband, wife or civil partner, you calculate the downsizing allowance in the same way.
The difference is that the maximum RNRB available is increased to include the amount of the transferred RNRB from the former spouse, which currently would be an additional £175,000.
6. The RNRB is currently £175,000 but if someone downsized between 6 April 2017 and 5 April a lower amount will apply, as below.
6 April 2020 5 April 2026 £175,000
6 April 2019 5 April 2020 £150,000
6 April 2018 5 April 2019 £125,000
6 April 2017 5 April 2018 £100,000
Ask Heather Rogers a tax question
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist.She is ready to answer your questions on any tax topic - tax codes, inheritance tax, income tax, capital gains tax, and much more.
If you would like to ask Heather a question about tax, email her at experts@thisismoney.co.uk. Please put TAX QUESTION in the subject line.
Heather will do her best to reply to your message in a forthcoming monthly column, but she won't be able to answer everyone or correspond privately with readers.Nothing in her replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes.
If Heather is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on financial matters to the public. It can be found hereand its number is 0800 011 3797.
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