How Does Downsizing Affect the Residence Nil-Rate Band?

When you sell your family home, downsize to a cheaper property, or give your home away before you die, you don't automatically lose the valuable residence nil-rate band (RNRB) for inheritance tax purposes. Special "downsizing relief" rules mean your estate may still be able to claim some or all of...

What is the residence nil-rate band?

The residence nil-rate band is an additional inheritance tax allowance available when you pass on your home to your children, grandchildren, or other direct descendants. It sits on top of the standard nil-rate band and can significantly reduce the inheritance tax bill on your estate.

When does downsizing relief apply?

Your estate can claim a "downsizing addition" to preserve some or all of the RNRB you would have lost by selling, gifting, or downsizing your home. Three conditions must all be met:

You sold, gave away, or downsized to a less valuable home on or after 8 July 2015
Your former home would have qualified for the RNRB if you'd kept it until you died
Your direct descendants (children, grandchildren, step-children, or foster children) inherit at least some of your estate

If you downsized or sold more than one home between 8 July 2015 and your death, your personal representative (the person administering your estate) can choose which property to use when calculating the downsizing addition.

How the downsizing addition works

The downsizing addition aims to give your estate back the RNRB lost when you no longer owned the original home. However, the amount you can claim depends on how much of your remaining estate goes to direct descendants.

The downsizing addition cannot exceed the maximum RNRB that would have been available if you hadn't sold or downsized. It will usually be the lower of:

The amount of RNRB lost as a result of the sale or downsizing
The value of other assets in your estate left to direct descendants

Calculating the lost RNRB

Working out how much RNRB was lost involves a five-step calculation:

Step 1: Calculate the total RNRB that would have been available when you sold, gave away, or downsized the home. This includes the maximum RNRB at that date (or £100,000 if it was before 6 April 2017) plus any transferred RNRB from a deceased spouse or civil partner.

Step 2: Divide the value of your former home at the date of the move or sale by the figure from step 1, then multiply by 100 to get a percentage. This percentage is capped at 100%.

Step 3: If you still own a home when you die, divide its value by the RNRB available at death (including any transferred RNRB), then multiply by 100. If there's no home in your estate, this percentage is 0%.

Step 4: Subtract the step 3 percentage from the step 2 percentage.

Step 5: Multiply the RNRB available when you die by the percentage from step 4. This gives the amount of lost RNRB.

Practical example: selling your home entirely

A widow sold her home for £195,000 in June 2018. The maximum RNRB for the 2018 to 2019 tax year was £125,000. She died in August 2020 with no home in her estate. The maximum RNRB for 2020 to 2021 was £175,000. Her estate was entitled to a transferred RNRB of £175,000 from her late husband.

The calculation:

1. Total RNRB when sold: £125,000 + £175,000 = £300,000

2. Home value as percentage: £195,000 ÷ £300,000 = 65%

3. No home at death = 0%

4. 65% - 0% = 65%

5. Lost RNRB: 65% of £350,000 (£175,000 + £175,000 transferred) = £227,500

The downsizing addition available would be £227,500, provided she left at least that much in other assets to her direct descendants.

When downsizing doesn't result in lost RNRB

If you downsize but your new home is still worth the same as or more than the maximum RNRB available when you die, there's no loss of RNRB and no downsizing addition applies.

Similarly, if you leave your replacement home to someone other than a direct descendant, the downsizing rules won't help because the RNRB wouldn't have been available anyway.

How to claim downsizing relief

You don't need to notify HMRC when you sell, gift, or downsize your home. Your personal representative claims the downsizing addition when completing the inheritance tax returns after your death.

The claim must be made within two years of the end of the month in which you die, though HMRC can extend this deadline in some circumstances.

You should keep records of any property transactions (sale price, date, property valuations) so your personal representative has the information needed to make the claim.

Getting professional advice

The downsizing rules can become complex, particularly when trusts are involved or when working out which property transaction to use for the calculation. The calculations require accurate property valuations at specific dates and knowledge of what RNRB rates applied in previous tax years.

Given the potential tax savings involved—the maximum RNRB in 2025/26 is £175,000 per person, meaning up to £70,000 in tax savings—it's worth seeking professional advice to ensure your estate claims all the relief it's entitled to.

Sources

How downsizing, selling or gifting a home affects the residence nil rate band

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.