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. 

The paper can be downloaded as a PDF here.

2.1. Conditions

The residential enhancement will be available where:
(a) a person dies on or after 6 April 2017 (IHTA 1984, s. 8D(1)); and
(b) that person’s estate immediately before death included a qualifying residential interest (“QRI”) (IHTA 1984, s. 8E(1)(a));
(c) which is “closely inherited” (IHTA 1984, s. 8E(1)(b)).

2.2. Residential property interest

A residential property interest, in relation to a person, means (IHTA 1984, s. 8H(2)):
(a) an interest in a dwelling-house;
(b) which has been a person’s residence;
(c) at a time when the person’s estate included that, or any other, interest in the dwelling-house.

A dwelling-house:
(a) includes any land occupied or enjoyed with it as its garden or grounds (there being no restriction as to size); but
(b) does not include any trees or underwood in relation to which an election is made for woodlands relief pursuant to IHTA 1984, s. 125.

“Residence” is not defined, but, as a matter of general law, denotes some degree of continuity (Goodwin v Curtis [1998] STC 475) albeit this factor should not be overstated (see Dutton-Forshaw v RCC [2015] UKFTT 478 (TC) where the period of residence was only 7 weeks, but the taxpayer had no other residence during the relevant period, and intended to live at the property on a permanent or continuous basis). HMRC consider that an elderly person who has recently moved into their new home, but has barely finished unpacking, when they are taken ill and have to move into a nursing home, would have established residence. However, someone who just stays in a property for a number of weeks living out of a suitcase would not have done so (IHTM, para. 46031).

The QRI must be comprised in the deceased’s IHT estate on death. This will not be the case if the deceased was non-UK domiciled at death, and the QRI was situated outside the UK, since the QRI will be “excluded property” outside the scope of IHT. However, an interest in an overseas residence, owned by a UK-domiciliary, will qualify. Indeed, an overseas dwelling-house which, when occupied, was owned by a non-UK domiciliary (X) will attract relief if, at the date of X’s death, X is UK-domiciled.

2.3. Qualifying residential interest

Relief is limited to a person’s interests in only one residential property. However, the residence need not have been the individual’s main residence, e.g. for the purposes of CGT principal private residence relief.

Where a person’s estate immediately before death includes residential property interests in just one dwelling-house, that person’s interests in that dwelling-house are a QRI in relation to that person (IHTA 1984, s. 8H(3)).

Jane has an absolute interest in a half share in her home, and a life interest in the other half share.
Both interests comprise a single QRI in one dwelling-house.

2.4. Nomination of QRI

There can only be one QRI, and if there is more than one such interest, the personal representatives must nominate the dwelling-house in which the QRI subsists. There.fore, where:

(a) a person’s estate immediately before death includes residential property interests in each of two or more dwelling-houses; and
(b) the person’s personal representatives nominate one (and only one) of those dwelling-houses
the person’s interests in the nominated dwelling-house are a QRI in relation to that person (IHTA 1984, 8H(4)).
Jane has a half share her London home, and owns the whole beneficial interest in a cottage in the country.

Jane’s personal representatives must nominate either the London home, or the country cottage, as the relevant dwelling-house. They would be advised to nominate the dwelling-house in which the more valuable interest subsists.

2.5. Ownership

The general rule is that the deceased person’s estate immediately before death must include a QRI if the RNRB is to be available (IHTA 1984, s. 8E(1); s. 8F(1)(a), (2)). However:
(a) property subject to which the gifts with a reservation of benefit rules apply is deemed, by Finance Act 1986, s. 102(3), to be included in the estate of the donor for IHT purposes generally, and may be treated as being “inherited” for the purposes of the RNRB (see 3.5 below);
(b) settled property, in which the deceased had a qualifying interest in possession on death, may qualify for the RNRB as, in certain cases, it is deemed to be “inherited” (see 3.9.4 below); and
(c) downsizing relief may apply where the deceased no longer has, but did at some time prior to death have, a qualifying residence at the date of death.

2.6. Timing of residence

It is not a requirement that the deceased resided in the dwelling-house immediately before death. It is sufficient if the deceased owned an interest in the dwelling-house immediately before death, and it was his residence at a time when his estate includ.ed that, or any other interest, in the dwelling-house.

Jack resided at “Homefields” until 2016. He owned the freehold during his period of residence. He ceased to reside at Homefields in 2017, when he granted a lease of Homefields to a third party, and moved into a residential care home. On his death, in 2021, he still owns the freehold reversion of Homefields.

Jack’s interest in Homefields will be a qualifying residential interest on his death even though:

(a) he owned the freehold reversion on his death, whereas he had owned the unencumbered freehold when he resided at Homefields, on the basis that it was his residence at a time when his estate included “any other interest” in Homefields; and

(b) he was living in rented accommodation immediately before his death.