Residence Nil Rate Band Downsizing UK (2026): The Downsizing Addition Explained — IHTA 1984 s.8FA

The Residence Nil Rate Band (RNRB) was introduced in April 2017 under IHTA 1984 ss.8D-8M. It is an additional NRB (currently £175,000 for 2025-26) available when a qualifying residential property is left to direct descendants: (1) THE BASIC RNRB RULE — IHTA 1984 s.8D: the RNRB is available when: (a) the deceased owned a qualifying residential property at death; (b) the property was at some point their residence (not a buy-to-let they never lived in); (c) the property is 'closely inherited' — left to a direct descendant (child; grandchild; stepchild; adopted child; or their lineal descendants). The property can be left in a trust for direct descendants (e.g. an IPDI life interest trust for a child); (2) THE TAPERING THRESHOLD — IHTA 1984 s.8G: the RNRB is tapered at a rate of £1 for every £2 by which the estate exceeds £2,000,000. On an estate of £2,350,000, the RNRB is fully withdrawn; (3) WHEN THE RNRB IS LOST THROUGH DOWNSIZING: the RNRB is only available in respect of property actually owned at death. If the deceased: (a) sold their home and moved into rented accommodation (no property at death); (b) moved into a care home or assisted living and sold the property; (c) downsized to a smaller, cheaper home (smaller property = smaller RNRB); (d) moved to a jointly-owned property where the deceased's share is modest; ...the RNRB may be reduced or lost entirely. WITHOUT the downsizing addition, a person who downsized from a £800,000 house to a £400,000 flat would lose £400,000 of the residence element — potentially reducing or eliminating the RNRB; (4) THE SOLUTION — THE DOWNSIZING ADDITION (s.8FA): IHTA 1984 s.8FA (inserted by Finance Act 2016) introduced the 'downsizing addition' to address this problem. The downsizing addition effectively preserves the RNRB in respect of the 'lost' property element, provided certain conditions are met.

The downsizing addition under IHTA 1984 s.8FA provides an additional RNRB equivalent to the RNRB that would have been available on the former (more valuable) property: (1) THE TRIGGERING CONDITIONS — s.8FA(2): the downsizing addition is available when: (a) the deceased disposed of ('former dwelling-house') a qualifying residential property on or after 8 July 2015 (the date the RNRB was announced); (b) at the date of death, the deceased owns either no qualifying residential property, or a qualifying residential property of lower value than the former dwelling-house; (c) the will (or intestacy rules) leave assets of at least equivalent value to the downsizing addition to direct descendants. This 'closely inherited assets' condition is critical — the downsizing addition is lost if insufficient assets are left to direct descendants; (2) THE CALCULATION — STEP BY STEP: (a) STEP 1: calculate the 'default allowance' — the RNRB that would have been available if the deceased still owned the former higher-value property at death. This is based on the RNRB rate applicable in the year of death (£175,000 in 2025-26), capped at the value of the former property; (b) STEP 2: calculate the 'residential enhancement' — the RNRB actually available for any property the deceased does own at death. If no property at death, this is nil; (c) STEP 3: the downsizing addition = default allowance minus residential enhancement. This is the additional RNRB available through s.8FA; (d) STEP 4: apply the tapering threshold — the estate taper at £2,000,000 applies to the total of RNRB + downsizing addition; (3) EXAMPLE: (a) Former home sold in 2020 for £600,000; deceased moved into rented flat; no property at death. RNRB rate: £175,000. Default allowance = £175,000 (capped at RNRB rate — former home value is much higher). Residential enhancement = nil. Downsizing addition = £175,000. Full RNRB of £175,000 available through the downsizing addition, provided sufficient assets pass to direct descendants; (4) THE CLOSELY INHERITED ASSETS CONDITION: the downsizing addition is available only if the will (or intestacy) includes sufficient directly inherited assets. If the will leaves everything to a surviving spouse (exempt from IHT) and nothing to children, the downsizing addition is not available — there are no closely inherited assets to set it against. Planning point: if the will leaves the entire estate to a spouse, consider whether the children should receive some assets directly (or through a trust for them) to allow the downsizing addition to be claimed.

The term 'downsizing' is used informally to describe all the scenarios that trigger the s.8FA addition — but the technical rule is broader: (1) SCENARIO 1 — SOLD MAIN HOME AND MOVED INTO RENTED ACCOMMODATION: the most common scenario. The deceased sold their main home (perhaps to fund care home fees) and lived in rented accommodation until death. No qualifying residential property at death. Full downsizing addition available up to £175,000 (plus transferable RNRB), provided the will leaves sufficient assets to direct descendants; (2) SCENARIO 2 — SOLD MAIN HOME AND DOWNSIZED TO A SMALLER PROPERTY: deceased sold a £700,000 house and bought a £350,000 flat. Both properties qualify as residential property. Default allowance = £175,000 (limited by RNRB rate). Residential enhancement = £175,000 (limited by RNRB rate — the flat is worth more than £175,000). Downsizing addition = nil (the flat value exceeds the RNRB, so no addition is needed). If the flat were worth £100,000: residential enhancement = £100,000; downsizing addition = £175,000 - £100,000 = £75,000 additional RNRB; (3) SCENARIO 3 — MOVED INTO CARE HOME, PROPERTY SOLD BY POWER OF ATTORNEY: the deceased's property was sold by their attorneys under an LPA to fund care. The deceased was no longer resident in the property when sold. The disposal still triggers the downsizing addition — it is not limited to sales made while the deceased was of full capacity or living independently; (4) SCENARIO 4 — MOVED TO A SMALLER SHARE OF JOINTLY OWNED PROPERTY: if the deceased previously owned a large property alone but gave away most of their share (e.g. to a family member) while retaining a small interest, the disposal of the larger interest may trigger the downsizing addition for the element given away; (5) WHAT DOES NOT TRIGGER s.8FA: (a) disposals before 8 July 2015 — the downsizing addition only applies to disposals on or after that date; (b) properties that never qualified as a residence (investment properties; buy-to-lets never occupied by the deceased); (c) non-residential property disposals.

The RNRB is fully transferable between spouses or civil partners — any unused RNRB on the first death is transferred to the second estate: (1) TRANSFERABLE RNRB — IHTA 1984 s.8H: when a spouse or civil partner dies without using all of their RNRB (for example, because they left everything to the surviving spouse and not to direct descendants, so no RNRB was used), the unused proportion of the RNRB is transferred to the second estate. On the second death, the estate can claim up to 100% additional RNRB in addition to its own RNRB — effectively doubling the available RNRB to £350,000 on the second death (at 2025-26 rates); (2) INTERACTION WITH DOWNSIZING: the transferable RNRB also transfers unused downsizing addition amounts from the first death. If the first spouse died owning no property and used the downsizing addition on their death, the unused portion can be transferred. Conversely, if the first death used no RNRB and no downsizing addition (e.g. all assets passed to the surviving spouse exempt), the full transferable RNRB and transferable downsizing addition are available on the second death; (3) THE PRACTICAL PLANNING POINT: for a couple where one or both have sold their main residence (for care fees or for any other reason), careful will drafting should ensure: (a) at least some assets pass to direct descendants (not just to the surviving spouse) to allow the downsizing addition to be used at each death; (b) the transferable RNRB claim is made on the second death by filing IHT436 with the IHT account; (4) CLAIMING THE DOWNSIZING ADDITION: the personal representatives claim the downsizing addition on the IHT400 (or the simplified form for qualifying estates). HMRC Form IHT435 is completed to claim the RNRB and IHT436 for the transferable RNRB. Evidence of the former property's disposal and value will be required; (5) THE TAPER — EFFECT ON LARGE ESTATES: both the RNRB and the downsizing addition are subject to the £2,000,000 taper. On a £2,175,000 estate, the available RNRB + downsizing addition is reduced by £87,500. On a £2,350,000 estate, the RNRB and downsizing addition are fully tapered away.

Failing to draft the will correctly is the most common reason the RNRB and downsizing addition are lost: (1) THE CLOSELY INHERITED ASSETS REQUIREMENT: both the RNRB and the downsizing addition require that sufficient assets pass directly to direct descendants. If a will leaves the ENTIRE estate to a surviving spouse (and nothing to children on the first death), no RNRB is used on the first death. The transferable RNRB is available on the second death — but only if there is no property on the second death either, and the will on second death leaves assets to direct descendants; (2) THE RISK OF 'EVERYTHING TO THE SPOUSE' WILLS: mirror wills that leave everything to the surviving spouse and then to children are the standard pattern. However, if the surviving spouse then dies leaving no residential property, the downsizing addition must be claimed on the second death — and the will must leave sufficient assets to children/grandchildren for the addition to operate; (3) SPECIFIC LEGACIES TO DIRECT DESCENDANTS ON FIRST DEATH: if the estate is large enough, leaving a specific legacy equal to the downsizing addition amount to children on the first death ensures the downsizing addition is used on the first death and does not need to be transferred. This may be more efficient where the surviving spouse has a large independent estate; (4) IPDI TRUST FOR DIRECT DESCENDANTS: leaving the residential property on an IPDI life interest trust for a direct descendant (a child) preserves the closely inherited status — the property is treated as 'closely inherited' for RNRB purposes even though it is in trust. However, for the downsizing addition, the relevant 'closely inherited assets' must be the estate assets left to descendants — not just the property; (5) REGULAR REVIEW: the RNRB rules, taper thresholds, and downsizing addition calculations are affected by: (a) the RNRB rate (currently frozen until at least 2028); (b) changes in estate composition after downsizing; (c) remarriage or new civil partnership. Wills should be reviewed whenever a residential property is sold and at regular intervals for estates near the £2,000,000 taper threshold.