When someone’s sold, given away or downsized to a less valuable home before they die, their estate may be able to get an extra inheritance Tax threshold. This is known as a downsizing addition, and 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 additional threshold if they’d kept it until they died
- their direct descendants inherit at least some of the estate
The amount of the downsizing addition will usually be the same as the additional threshold that’s been lost when the former home is no longer in the estate.
It will also depend on the value of the other assets left to direct descendants. But the downsizing addition can’t be more than the maximum amount of additional threshold that would have been available if the sale or downsizing hadn’t happened.
The estate’s personal representative must make a claim for the downsizing addition within 2 years of the end of the month that the person dies. HM Revenue and Customs (HMRC) can extend this time limit in some circumstances.
There’s no requirement to tell HMRC when the downsizing move, sale or gift of the former home happens. The estate’s personal representative makes a claim for the additional threshold and any downsizing addition when filling in the Inheritance Tax returns. But, 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.
Only one move, sale or other disposal of a former home can be taken 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.
Working out the lost additional threshold
There are 5 steps to work out how much additional threshold has been lost:
Step 1. Work out the additional threshold that would have been available when the former home was sold or given away or when the move happened. This figure is made up of the maximum additional threshold due at that date (or £100,000 if it was before 6 April 2017) and any transferred additional threshold available when the person dies.
Step 2. Divide the value of the former home at the date of the move or when it was sold or given away by the figure in step 1, and multiply the result by 100 to get a percentage. If the value of the former home is greater than the figure in step 1 the percentage will be limited to 100%. If the value of the home sold is less than the figure in step 1, the percentage will be between 0% and 100%.
Step 3. If there’s a home in the estate, divide the value of the home by the additional threshold that would be available at the date the person dies (including any transferred additional threshold). Multiply the result by 100 to get a percentage (again this percentage can’t be more than 100%). If there’s no home in the estate at the time the person dies this percentage will be 0%.
Step 4. Deduct the percentage in step 3 from the percentage in step 2.
Step 5. Multiply the additional threshold that would be available at the time the person died by the figure from step 4. This gives the amount of the lost additional threshold.
HMRC does provide examples within its online guidance but those are caveated with “The downsizing rules are complicated. This guide explains the basic rules, but it can’t cover the more complex situations, for example, where trusts are involved. You might want to get professional advice about how to work out the additional threshold in these situations.”
The Bedrock team are able to advise on IHT matters should you need advice on the implications for your situation.