NOTE: This article was published in December 2018 and reflects the law as it stands on the date of publication and not at any later date. 

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6.1. Relief

The general principle is that the deceased’s estate must include a QRI on death which is closely inherited by direct descendants. The consequence is that the RNRB would not be available in the not-uncommon case where an elderly person has sold their residence, and moved into rented accommodation or a nursing home, or down.sized to a less valuable residence which does not make full use of the RNRB.

Downsizing relief is designed to ensure that the RNRB is not lost as a result of such “downsizing”. The relief may apply in two circumstances, in the case of a person (P) dying on or after 6 April 2017, i.e. where on or after 8 July 2015 P disposed of a QRI and:

(a) P’s estate on death includes a less valuable QRI (IHTA 1984, s. 8FA); or
(b) P’s estate does not include a QRI immediately before their death (IHTA 1984, s. 8F(B)).

In short, downsizing relief applies where:

(a) there is a lower value QRI in P’s estate on death than formerly (“low-value death interest in home”); or
(b) there is no QRI in P’s estate on death (“no residential interest at death”).

Without such relief, individuals might be forced to retain a residence which they might otherwise wish to sell, or be discouraged from moving to a less valuable residence, out of fear of losing the whole or part of the RNRB. A “downsizing addition” is, therefore, available to P’s estate so as to, in broad terms, compensate for the loss of any part of the RNRB by reason of such downsizing.

Under both heads of relief, there must have been a qualifying former residential interest (“QFRI”) in relation to P, i.e. one which would have qualified for the RNRB if it had been comprised in P’s estate on death (IHTA 1984, s. 8FA(4) and 8FB(4) applying s. 8H(4A) to (4F) and 8HA to determine whether there is a QFRI).

6.2. Disposal of QFRI

It is first necessary to identify a dwelling-house in which P has disposed of a residential property interest on or after 8 July 2015 and before P’s death (IHTA 1984, s. 8H(4A)(a)). A disposal before 8 July 2015 will not, therefore, be taken into account. If the disposal is under a contract which is completed by a conveyance, the disposal occurs when the interest is conveyed (IHTA 1984, s. 8H(4G)). This means that if P dies, after exchange of contracts but before completion, downsizing relief cannot apply. Nor will the residence form part of P’s estate on death for the purposes of claim.ing the RNRB, since beneficial ownership will have passed on exchange of contracts.

6.2.1. Dwelling house

A dwelling-house includes any land occupied and enjoyed with it as its garden or grounds, but excluding any trees or underwood to which an election applies un.der IHTA 1984, s. 125 (IHTA 1984, s. 8H(5)). The dwelling-house must have been P’s residence at any time when his estate included that, or another, interest in the dwelling-house (IHTA 1984, s. 8(H)(2)). P must, therefore, have resided in the dwell.ing-house at some time when he owned some interest therein, but not necessarily the same interest as at the date of the disposal. P is deemed to reside in a dwelling-house which he intends to occupy as his residence in due course, at a time when he resides in living accommodation which is job-related (IHTA 1984, s. 8H(6)).

6.2.2. Nomination of dwelling house

There can only be one dwelling-house in which there is a QFRI, which must be nominated by P’s personal representatives. Where there has only been one dwell.ing-house, disposed of by P between 8 July 2015 and P’s death, and P’s personal representatives nominate that dwelling-house, that dwelling-house is the nominated dwelling-house. Thus, a nomination must be made even if there was only one such dwelling-house, in respect of that dwelling-house (IHTA 1984, s. 8H(3) and 8H(4A)(b)(i)).

Where there are two or more such dwelling-houses, one and only one such dwelling-house may be nominated (IHTA 1984, s. 8H(4A)(b)(ii)).

P’s personal representatives must make a claim for the downsizing addition (see 6.7 below) and will at the same time nominate the relevant dwelling house.

6.2.3. Relevant QFRI

Having identified the nominated dwelling-house, it is then necessary to identify the relevant QFRI in respect of that dwelling-house. In most cases P will only have made a single disposal of a single interest in the nominated dwelling-house, in which case that interest will be the QFRI. However, P may have disposed of more than one interest in the nominated dwelling-house, either by disposing of two or more interests at the same time, or at different times.

For these purposes, only disposals taking place at a “post-occupation time” can be taken into account, i.e. disposals (IHTA 1984, s. 8H(4F)):

(a) on or after 8 July 2015;
(b) after the nominated dwelling-house first became P’s residence; and
(c) before P dies.

P will, therefore, have made a disposal at a post-occupation time, even if P did not reside there at the date of the disposal, provided that P had resided therein previously. P must, however, have disposed of a residential property interest, which will only be the case if P had, while in residence, some interest in the dwelling-house, even if it was a different interest (IHTA 1984, s. 8H(2)).

6.2.4. More than one residential property interest

If P disposed of one residential property interest in the nominated dwelling-house at a “post-occupation time”, or disposed of two or more such interests at the same post-occupation time, or at post-occupation times on the same day, the interest, or interests, disposed of are a QFRI in relation to P (IHTA 1984, s. 8H(4B)) subject to the proviso that P did not dispose of other residential property interests in the nominated dwelling-house at post-occupation times.

P had a half share in the freehold of her house, “Salcombe”, and also a leasehold interest. In 2016, P disposed of both interests on the same day (whether at the same time or not, it does not matter). P was then residing, and had been residing for some time, at Salcombe. She dies in 2020. Her personal representatives nominate Salcombe as the nominated dwelling house. She did not dispose of any other interests in Salcombe after 8 July 2015.
The QFRI will comprise P’s half share in the freehold, and the leasehold interest.

However, if P disposed of residential property interests in the nominated dwelling-house at post-occupation times on two or more days, P’s personal representatives must nominate one and only one of those days. In that event, the interest or interests disposed of at post-occupation times on the nominated day is, or are, a QFRI in relation to P (IHTA 1984, s. 8H(4C)).

As in the last example, but P disposed of the leasehold interest on 30 December 2015, and her half share in the freehold on 30 June 2016.
The personal representatives must nominate one of those dates (preferably the date of disposal of the more valuable interest).

In short, there can only be one downsizing event, albeit that same-day disposals of more than one interest can be treated as a single disposal of one QFRI.

6.2.5. Deemed disposal by interest in possession beneficiary

P may be treated as having made a disposal of an interest in a dwelling house, for the purposes of determining whether P has disposed of a QFRI, where P had an interest in possession in settled property, and the settled property consists of, or includes, an interest in a dwelling-house (IHTA 1984, s. 8HA(1) and (2)). P’s interest in possession must be one to which P was, in broad terms, deemed to be beneficially entitled for IHT purposes as a result of the operation of IHTA 1984, s. 49(1), i.e:

(a) an interest in possession to which P became beneficially entitled before 22 March 2006, to which IHTA 1984, s. 71A (trusts for bereaved minors) does not apply (IHTA 1984, s. 8HA(7)(a));

(b) an interest in possession to which P became beneficially entitled on or after 22 March 2006, which is an immediate post-death interest (IPDI), a disabled person’s interest (DPI) or a transitional serial interest (TSI) (IHTA 1984, s. 8HA(7)(b)); or

(c) an interest in possession to which P became beneficially entitled on or after 22 March 2006 falling within IHTA 1984, s. 5(1B), i.e. an interest acquired by UK domiciliary pursuant to transaction which was prevented from being a transfer of value by IHTA 1984, s. 10 (IHTA 1984, s. 8HA(8)).

There are two circumstances in which there is a deemed disposal by P of an interest in a dwelling house in which P had an interest in possession (see 6.2.6 and 6.2.7 below).

6.2.6. Disposal by trustees

There is a deemed disposal by P of the interest in the dwelling-house to which P is beneficially entitled as a result of IHTA 1984, s. 49(1) where:

(a) the trustees of a settlement dispose of the interest in the dwelling-house to a person other than P;
(b) P’s interest in possession in the property subsists immediately before the disposal; and
(c) P’s interest in possession is one specified in IHTA 1984, s. 8HA(7) throughout the period beginning with P becoming beneficially entitled to it and ending with the disposal, or falls within IHTA 1984, s. 5(1)(B) (see 6.2.5 above).

Desmond died leaving a half share in his house, “Windward” to trustees upon IPDI trusts (upon trust for Emma for life, then to her children). Emma resided at Windward after Desmond’s death. After 8 July 2015 the trustees sold Windward to a purchaser on the open market, as Emma wished to move into a nursing home. Emma’s IPDI remained intact from Desmond’s death until the date of the disposal.

Emma will be deemed to have disposed of a QFRI, i.e. a half share in Windward. If she owned the other half share absolutely, and sold it on the same day as the disposal by the trustees, her QFRI would extend to the whole beneficial interest (see 6.2.4 above).

6.2.7. Disposal of interest in possession

There is also deemed disposal of an interest in a dwelling house by P where:

a) P disposes of the interest in possession in settled property, or P’s interest in possession in the settled property comes to an end in P’s lifetime;
(b) the interest in the dwelling-house is, or is part of, the settled property immediately before the time when that happens; and
(c) P’s interest in possession is one specified in IHTA 1984, s. 8HA(7) (see 6.2.5 above) throughout the period beginning with P becoming beneficially entitled to it and ending with the disposal, or falls within IHTA 1984, s. 5(1)(B). The disposal by P of the interest in possession, or the termination of P’s interest in possession, as the case may be, will be treated as a disposal by P of the interest.
As in the example in 6.2.6 above, but Emma surrenders after 8 July 2015 her life interest in Desmond’s half share in Windward in favour of her children, or her interest is terminated on a specified date under Desmond’s Will.

Again, Emma will be deemed to have disposed of a half share in Windward.

6.2.8. QFRI and reservation of benefit

A gift with a reservation of benefit is not generally a disposal for these purposes. However, there is a deemed disposal on the cessation of the benefit.

Ronald gave his residence, No. 1 Acacia Avenue, to his son, John, but continued to reserve a benefit therein by continuing to occupy.

Ronald will not be making a disposal of a QFRI, for the purposes of downsizing relief, at the date of the gift (IHTA 1984, s. 8H(4D)(a)). The RNRB will apply in any event as John will be deemed to have inherited the residence (IHTA 1984, s. 8J(6); see 3.5 above).

Ronald moves out of No. 1 Acacia Avenue after the gift to John.

Ronald will be deemed to have made a PET of No. 1 on the cessation of his reservation of benefit (FA 1986, s. 102(4)). He will make a disposal of No. 1, for the purposes of downsizing relief, on that occasion (IHTA 1984, 8H(4D)(b)).

6.3. No residential interest at death: conditions

There are 5 conditions (Conditions G to K) all of which must be satisfied if the estate of a person (P), with no residential interest at death, is to be entitled to the downsizing addition (IHTA 1984, s. 8FB):

Condition G is that P’s estate immediately before death does not include a residential property interest.

P’s estate may not include a residential property interest at death because: (a) P does not own an interest in a dwelling-house at death or (b) P owns such an interest, but it has never been his residence at a time when his estate included that, or any other, interest in the dwelling-house, e.g. a property which has always been a buy-to-let property.

Condition H is that the value transferred by the chargeable transfer on P’s death (VT) is greater than nil.

There is no need for a downsizing addition if the value of the chargeable transfer on death is nil, e.g. because the whole estate is left to a surviving spouse or to charity. No IHT will be payable in any event.

Condition I is that there is a QFRI in relation to P.

See 6.2 above. In essence, P must have owned a residential interest, which was disposed of on or after 8 July 2015, but before P’s death.
Condition J is that at least some of the estate is closely inherited.

At least part of the estate must, therefore, be inherited by direct descendants. Indeed, the amount of the downsizing addition is limited to the value of the property which is closely inherited.

Condition K is that a claim is made for the downsizing addition.

See 6.7 below.

6.4. No residential interest at death: example

Mrs P (a widow whose husband had died before 6 April 2017) sold her flat in 2018/19 for £300,000 and moved into residential care, owning no residential proper.ty interest on her death in 2020/21. Her estate is £1m. She leaves 25% of her estate (£250,000) to her son, with the remainder to her sister. Her personal representatives make a claim for the downsizing addition. On her death Mrs P’s estate is entitled to a default allowance of £350,000, i.e. a residential enhancement of £175,000, and a brought-forward allowance of £175,000 (see 5.4 above).

Conditions G to J are all satisfied. Condition K will be satisfied if a claim is made for downsizing relief. However, if Mrs P left all of her estate to her sister, Condition J would not be satisfied. If she left all of her estate to charity or to a surviving spouse, Conditions H and J would not be satisfied. If she had sold her flat before 8 July 2015, Condition I would not be satisfied.

6.4A. Amount of RNRB

In order to calculate the amount of the RNRB in Mrs P’s estate (see 6.4 above), it is first necessary to calculate the “lost relievable amount” (see 6.8 below) as a result of the disposal of the flat (a QFRI). The value of the QFRI (£300,000) must be deter.mined as a percentage of Mrs P’s “former allowance” (see 6.10 to 6.12 below). Mrs P’s former allowance will be the aggregate of: (a) the residential enhancement at the time of the disposal of the flat in 2018/19 (£125,000); (b) the brought-forward allowance in 2018/19 (£125,000); and (c) the difference between the brought-forward allowance on her death in 2020/21 (£175,000) and that in 2018/19 (£125,000), i.e. £50,000. The former allowance is, therefore, £300,000. The value of the flat, when sold, was £300,000, with the result that the lost relievable amount is 100% of Mrs P’s default allowance on death, i.e. £350,000.

It is then necessary to calculate the value of the “downsizing addition” which will be the lesser of the lost relievable amount and that part of the chargeable estate which is closely inherited (see 6.14 below), i.e. the lesser of £350,000 and £250,000.

As Mrs P’s estate does not include a QRI, the amount of the downsizing addition (£250,000) will determine the amount of the RNRB, or RNRA (see 7.5 below). The RNRA will be £250,000.

6.5. Low-value death interest in home: conditions

Broadly, the deceased (P) must have disposed of a former residential property interest (QFRI) on or after 8 July 2015, and P must have died owning a QRI of lower value at death than the value of the QFRI on disposal. The value of the QRI on death must be less than P’s default or adjusted allowance, so that, without downsizing relief, the RNRB would not otherwise be available in full. The QRI does not need to be closely inherited on death, but there must be some other assets which are closely inherited.

There are 6 specific conditions (Conditions A to F) all of which must be satisfied in such a case, if the estate of P is to be entitled to the downsizing addition (IHTA 1984, s. 8FA):

Condition A is that:
(a) P’s residence nil rate amount is given by IHTA 1984, s. 8E(2) or (4) on the basis that s. 8E(6) and (7) do not apply and any entitlement to the downsizing addition is to be ignored.

This will be the case, in general terms, where the estate includes a QRI, the whole or part of the value of which is closely inherited, but where that value is less than the default or adjusted allowance, ignoring downsizing relief.

(b) Alternatively, P’s estate immediately before death includes a QRI, but none of it is closely inherited, and so much of the value transferred by the charge.able transfer on P’s death (“VT”) or, in the case of a death after 29 October 2018, so much of the value transferred (whether chargeable or exempt) by the transfer of value under IHTA 1984, s. 4 on the person’s death, as is attributable to the QRI is less than P’s default allowance (in the case of an estate less than or equal to £2m) or of P’s adjusted allowance (in the case of an estate greater than £2m).

In short, after 29th October 2018, Condition A is that there is a QRI in the estate on death (whether the whole, part, or none is closely inherited) the value of which is less than the RNRB.

Condition B is that not all of the value transferred by the chargeable transfer on P’s death (VT) is attributable to P’s QRI.

There must, therefore, be some chargeable estate other than the QRI. This Condition would not be satisfied if P left £400,000 in cash to P’s spouse, and a QRI, worth £100,000, to P’s son, S. The chargeable transfer would be limited to the value of the QRI, which already benefits from the RNRB, being closely inherited. There is, therefore, no need for downsizing relief. However, the Condition would apply if P left £30,000 in cash to S.

Condition C is that there is a QFRI in relation to P.

See 6.2 above as to a QFRI. In essence, P must have owned a residential interest which was disposed of on or after 8 July 2015, but before P’s death.
Condition D is that the value of the QFRI exceeds so much of VT or, in the case of a death after 29 October 2018 so much of the value transferred by the transfer of value (whether chargeable or exempt) under IHTA 1984, s. 4 on the person’s death, as is attributable to P’s QRI.

This Condition reflects the notion that P must have “downsized” to a less valuable QRI by the date of death (whether chargeable or exempt after 29 October 2018). The value of the QFRI is ascertained as at the time of the completion of the disposal of the interest, i.e. at the date of conveyance where the disposal is under a contract completed by a conveyance (IHTA 1984, s. 8FE(2), (8)).

Condition E is that at least some of the remainder, i.e. everything included in P’s estate immediately before death other than P’s QRI, is closely inherited.

If, therefore, P’s estate includes a QRI and some investments, some of the investments, at least, must be inherited by a direct descendant.
Condition F is that a claim is made for the addition.

See 6.7 below.

6.6. Low-value death interest in home: example

Mr P (a widower whose wife died before 6 April 2017) sold his flat in 2018/19 for £500,000, and moved into the home of his new wife, Mrs P2, retaining only a country cottage worth £250,000 at the date of his death. He leaves the cottage to his daughter, and the remainder of his estate of £1.25m (subject to a tax free legacy of £50,000 to his daughter) upon life interest trusts for Mrs P2. On his death he is entitled to a default allowance of £350,000, including a brought-forward allowance of £175,000.

Condition A is satisfied as the whole of the cottage is closely inherited, and the value thereof (£250,000) is less than the RNRB of £350,000.

Condition B is satisfied because part of the chargeable transfer on death (£50,000) is not attributable to the cottage. Condition C is satisfied because the flat was sold on or after 8 July 2015, and had been P’s residence. Condition D is satisfied because the value of the cottage on death is less than the value of the flat at the date of its disposal. Condition E is satisfied because part of the estate, other than the cottage, is closely inherited (£50,000 to daughter). Condition F is satisfied if the personal representatives make a claim for downsizing relief.

6.6A. Amount of RNRB

The lost relievable amount in Mr P’s estate (see 6.6 above) will need to be calculated (see 6.13 below). The value of the flat on sale (£500,000) was more than the value of Mr P’s “former allowance” (assume that it is £300,000 see 6.10 below) with the result that the percentage at Step 1 in 6.13 is 100%. The value of the cottage on Mr P’s death (£250,000) represents 71.43% of Mr P’s default allowance on death of £350,000. This percentage is subtracted from 100%, to give a percentage of 28.57%. The lost relievable amount is, therefore, 28.57% of Mr P’s default allowance on death of £350,000, i.e. £99,995.

It is then necessary to calculate the value of the “downsizing addition” (see 6.14 below). This will be the lesser of the lost relievable amount (£99,995) and the value attributable to that part of the estate, other than the QRI, which is closely inherited (£50,000). The downsizing addition will, therefore, be £50,000.

Finally, the residence nil rate amount or RNRA will be calculated in accordance with 7.6.1 below, since the NV/100 (see 7.3 below) of £250,000 (the value of the cottage which is closely inherited) plus the downsizing addition (£50,000) is less than the default allowance of £350,000 in an estate worth less than £2m. The RNRA will be NV/100 (£250,000) plus the downsizing addition (£50,000), i.e. £300,000, or if lower, the value of the chargeable estate (£300,000). The amount of RNRB (the RNRA), is therefore, £300,000.

6.7. Claims for downsizing relief

The downsizing addition must be claimed (IHTA 1984, s. 8FA(7) and 8FB(6)). The claims procedure is in accordance with IHTA 1984, s. 8L(1) to (3) (see 5.8 above). In general terms, the personal representatives should make the claim within the period of 2 years from the end of the month in which the deceased died.

6.8. Lost relievable amount

Having determined whether the conditions for downsizing relief apply (in either of its two forms) it is necessary to determine the “lost relievable amount”. The lost relievable amount is calculated in accordance with IHTA 1984, s. 8FE, and differs depending upon whether it is a low-value death interest, or a no residential interest on death, case.

Once the lost relievable amount has been determined, it is then necessary to determine the amount of the downsizing addition, which is limited to the value of the closely-inherited chargeable estate, if that is less than the lost relievable amount (see 6.14 below). Finally, it is necessary to calculate the residence nil rate amount taking into account the downsizing addition (see 7 below).

6.9. Lost relievable amount: general objective

The general objective is that the lost relievable amount should be equivalent to such part of the RNRB which would have applied, if P had not downsized to a less valu.able home, or if P had not disposed of a QFRI and died with no QRI at death.

Thus, the first step is to calculate the value of P’s QFRI as a percentage of his “former allowance” (see 6.10 below). The former allowance is, subject to one adjust.ment, the aggregate of the residential enhancement and brought-forward allowance to which P’s estate would have been entitled at the date of disposal of the QFRI. This percentage cannot exceed 100%. In many cases, the percentage will be more than 100% – and therefore deemed to be 100% – because the value of the QFRI on disposal will have exceeded the amount of P’s “former allowance”.

In a case where the value of the QFRI equalled or exceeded the value of P’s former allowance, and P’s estate does not include a QRI, 100% of the RNRB has, in effect, been lost. Therefore, the lost relievable amount will be 100% of P’s “allowance” on death, i.e. P’s default allowance (in the case of an estate less than or equal to £2m) and P’s adjusted allowance (in the case of an estate greater than £2m).

The calculation is a little more complex where P has retained a lower-value QRI at death because the RNRB will not have been wholly lost by reason of the disposal of the QFRI. It is necessary to make a percentage deduction if and to the extent that part of the chargeable estate on death is attributable to a QRI which, if left to direct descendants, would itself attract the RNRB. If, therefore, P had in his chargeable estate on death a QRI worth £105,000, and his RNRB on death totalled £350,000, the deductible percentage would be 30%. This percentage must be deducted from the percentage of the former allowance, attributable to the QFRI (say 100%), with the result that the lost relievable amount on death will be 70% of P’s default, or adjusted, allowance, depending upon whether the value of the estate exceeds £2m.

6.10. Former allowance

It is necessary Ð whether in a no residential interest at death, or in a low-value interest at death, case Ð to determine the value of P’s QFRI as a percentage of P’s “former allowance”. The former allowance is defined by IHTA 1984, s. 8FE(3) as be.ing the total of:

(a) the residential enhancement at the time of completion of the disposal of the QFRI (deemed to be £100,000 if completion occurred after 7 July 2015 and before 6 April 2017: s. 8FE(6));
(b) any brought-forward allowance that P would have had if P had died at that time, having regard to the circumstances of P at that time (deemed to be nil in respect of disposals between 7 July 2015 and 6 April 2017: s. 8FE(6)(b)); and
(c) if P’s allowance on death includes an amount of brought-forward allowance which is greater than the amount of brought-forward allowance given by (b), the difference between those two amounts (the brought-forward allowance being reduced by £1 for every £2 above the taper threshold of £2m: s. 8FE(5)).

For the purposes of calculating the brought-forward allowance under (b) above, the provisions relating to the brought-forward allowance in IHTA 1984, s. 8G (see 5 above) apply, but:

(a) as if references to the residential enhancement at the date of P’s death were references to the residential enhancement at the time of the completion of the disposal of the QFRI; and
(b) on the assumption that a claim for brought-forward allowance was made in relation to an amount available for carry-forward from a related person’s death if, on P’s death, a claim was in fact made in relation to the amount (IHTA 1984, s. 8FE(4)(a) and (b)).

6.11. Former allowance: example

P sold his former flat (QFRI) in 2016. P’s former spouse had died in 2010. P dies in 2020-21 with an estate of less than £2m, and a brought-forward allowance of £175,000, which is claimed by P’s personal representatives.
P’s former allowance is the total of:

(a) P’s residential enhancement at the time of completion of the disposal of the QFRI in 2016 (deemed to be £100,000 as the disposal took place before 6 April 2017);
(b) any brought-forward allowance that P would have had if P had died in 2016, assuming that such an allowance was available and claimed in respect of the disposal (deemed to be nil as the disposal took place before 6 April 2017);
(c) the difference between (b) (nil) and the brought-forward allowance on P’s death in 2020-21 of £175,000, i.e. £175,000.
The former allowance is, therefore, £275,000 (£100,000 plus £175,000). If the value of the flat on sale was at least £275,000, then the lost relievable amount will be 100% of the RNRB on P’s death (see 6.12 and 6.13 below).

6.12. Calculation of lost relievable amount: no QRI on death

In a no residential interest at death case, within IHTA 1984, s. 8FB, there are only two steps which need to be taken in order to calculate the lost relievable amount. Those steps are prescribed by IHTA 1984, s. 8FE(10).

Step 1

Express the value of P’s QFRI as a percentage, not exceeding 100%, of P’s former allowance.
The value of the QFRI is ascertained as at the time of the completion of the disposal of the interest, i.e. at the date of conveyance where the disposal is under a contract completed by a conveyance (IHTA 1984, s. 8FE(2), (8)).

P sold a QFRI in 2016 for £250,000. P’s former allowance at the date of disposal is £275,000 (see 6.11 above).

The relevant percentage is, therefore, 72.59%.

Step 2

Calculate that percentage of P’s allowance on death. The result is P’s lost relievable amount.

P died in 2020-21 with an estate of less than £2m. P’s default allowance, including a brought-forward allowance, would have been £350,000. P’s estate was valued at £2m.

P’s lost relievable allowance is 72.59% of £350,000, i.e. £254,065.

6.13. Calculation of lost relievable amount: low-value interest at death

There are 4 steps for calculating the lost relievable amount in P’s estate (IHTA 1984, s. 8FE(9)).

Step 1

Express the value of P’s QFRI as a percentage, not exceeding 100%, of P’s “former allowance”.

The value of the QFRI is ascertained as at the time of the completion of the disposal of the interest, i.e. at the date of conveyance where the disposal is under a contract completed by a conveyance (IHTA 1984, s. 8FE(2), (8)). The value of the QRI is its net value after deduction of liabilities secured thereon.

P sold a QFRI in 2016 for £450,000. P’s former allowance at the date of disposal is £275,000 (see 6.11 above).

The value of the QFRI, therefore, exceeded P’s former allowance, and the relevant percentage, as a result of Step 1, is 100%.

Step 2

Express QRI as a percentage (up to a maximum of 100%) of P’s allowance on death, where QRI is so much of VT or, in the case of a death after 29 October 2019, so much of the value transferred by the transfer of value under IHTA 1984, s. 4 (whether chargeable or exempt) on P’s death, as is attributable to P’s QRI.

P died in 2020-21 with an estate of £1.5m, entitled to a default allowance (residen.tial enhancement plus brought-forward allowance) of £350,000. P owned a QRI at death, after downsizing, worth £200,000. The QRI was left to P’s daughter, thereby forming part of P’s chargeable estate.

The value of the estate attributable to the QRI on death (£200,000) represents 57.14% of P’s default allowance on death (£350,000).

Step 3

Subtract the percentage given by step 2 from the percentage given by step 1, but take the result to be 0% if it would otherwise be negative. The result is P%.

P% is, on the facts contained in this example, 100% – 57.14% = 42.86%.

Step 4

P’s lost relievable amount is equal to P% of the person’s allowance on death.

P’s lost relievable amount is, therefore, 42.86% of P’s default allowance on death (£350,000) = £150,010.

6.14. Amount of downsizing addition

The lost relievable amount is not necessarily equal to the downsizing addition. The amount of the downsizing addition is equal to the lost relievable amount if the lost relievable amount is less than so much of the value transferred by the deemed chargeable transfer on death after exemptions (VT), as is attributable to so much of the estate (excluding any QRI in a low-value interest at death case) that is closely inherited (VTC); and is equal to VTC, if VTC is equal or greater than the lost relievable amount (IHTA 1984, s. 8FA(8) and 8FB(7)); and it is also subject to a reduction in certain cases involving conditional exemption by virtue of IHTA 1984, s. 8M(2G).

The downsizing addition can, therefore, never exceed, in a low value interest in death case, the value of the chargeable estate, other than the QRI, which is closely inherited, or the value of the chargeable estate which is closely inherited in a no residential interest at death case. If none of the estate so passes, there will be no downsizing addition.

P dies without owning a QRI, but with a lost relievable amount of 100% of P’s default allowance on death (£350,000). P’s estate of £600,000 is divided as to: (a) £100,000 to charity; (b) £200,000 to P’s children (closely inherited); and (c) £300,000 to P’s partner.

The downsizing addition will be limited to the £200,000, which is chargeable and closely inherited, even though the lost relievable amount is £350,000.

6.15. Downsizing addition and RNRB

Having calculated the downsizing addition, it is then necessary to determine its effect on P’s residence nil-rate amount (“RNRA”), i.e. the amount of the RNRB. The effect depends upon whether P’s estate on death includes a QRI which is closely inherited; or, on the other hand, whether P’s estate does not include a QRI, or none which is closely inherited (see 7 below).

Where P’s estate on death includes a QRI which is closely inherited IHTA 1984, s. 8E applies, with modifications to take into account the downsizing addition (IHTA 1984, s. 8FC). The amounts prescribed by s. 8E as the RNRA, and the amount available for carry-forward, have effect as if each reference to NV/100 were a reference to NV/100 plus the downsizing addition (IHTA 1984, s. 8FC(2)). NV/100 represents the percentage of the estate which is attributable to the QRI (IHTA 1984, s. 8E(1)) (see 7.3 below). In short, the downsizing addition operates as an addition to the RNRB.

If, however, P’s estate does not include a QRI, or none which is closely inherited, the RNRA would, but for the downsizing addition, be nil (IHTA 1984, s. 8F(2)). In such a case, the RNRA will be equal to the downsizing addition (IHTA 1984, s. 8FD(3)). The downsizing addition will be all that there is to contribute to the RNRA.

If the downsizing addition is less than the default allowance or adjusted allowance (in a case of an estate exceeding £2m) an amount equal to the difference is avail.able for carry-forward (IHTA 1984, s. 8FD(5) and (6)).