Downsizing provision vs PET

Hi - I’m trying understand how the downsizing provisions work with intention of preserving RNRB, and how this interplays with PET provisions.

Married elderly lady jointly owns house with husband who dies, and she moves into rented accommodation. House is then sold for £900k, (plus other savings is £100k). 2 X NRB plus 2 X RNRB mean that her children should inherit the full £1m without IHT to pay.

  1. Is there a time limit whereby the RNRB can no longer be deployed using downsizing provisions if she lives in rented for, say, another 5 or 6 years after selling? (I know claims must be made within 2 years, but I can see no other time constraints).

  2. Assuming no time limit, what happens if she then gifts a substantial part of the property proceeds - say £600k - to her three children before death? If that gift occurred today, for example, and death occurred in say 5 years time - would the full £1m, including the previously gifted £600k, still be covered by the RNRB and therefore no IHT to pay when the time comes? Or would that transfer it no longer qualify, and instead by treated as any other lifetime gift, and subject to PET taper relief?

  3. In this scenario, is it the case that the representative of the estate could choose to either invoke the downsizing provision and claim the 2 X RNRB, or else PET provisions on this £600k transfer, depending on which was most advantageous at the time?

Thanks in advance for any help.

  1. No, save the home must have been sold or gifted away after 8 July 2015.

  2. The gift of £600K is a PET. In this case it is covered by the NRB and TNRB, assuming no other gifts have been made. The RNRB and TRNRB can still be used against whatever else is left in the estate assuming this passes to direct descendants. There is £400K in the estate, so £350K can be covered via the downsizing provisions and £50K by the NRB.

  3. No, see above. A PET cannot be covered by the RNRB. If the gift to the children was £700K and the donor died within 7 years, there would be a tax liability on her death in respect of the PET. The remainder of the estate (£300K) would be covered by the RNRB and TRNRB assuming downsizing is claimed.

Ihsan Ali
I Will Solicitors Ltd

Thank you.
So an early gift of up to £700k would be a PET and still covered by the NRB + TNRB, but not the RNRB or TRNRB - is that right?

Though I confess I’m still confused, because in your bullet point 2 you seem to indicate that the family manage to escape IHT. But in 3 you indicate they wouldn’t. What am I missing…?

My ultimate question is, would it be less tax efficient to pass on a substantial part of the house sale proceeds to direct dependents some years ahead of death?
Just seems counterintuitive that early gifts encounter more tax than later gifts….

  1. No time limit restricting use of RNRB. If surviving spouse dies without owning a residence at date of death, then downsizing provisions possibly applicable assuming sale/disposal occurs on or after 8 July 2015.

  2. If the surviving spouse survives 7 years after making 600k gift of cash (a PET) no IHT arises on this gift at surviving spouse’s death. There is 400k cash in the estate at death. If 350k or more is left to children/g’children an RNRB/TRNRB of 350k will be available with the balancing 50k offset by NRB.

If, however, the surviving spouse does not survive the 7 year period the gift/PET of 600k is chargeable on death but will be covered by the surviving spouse’s available NRB/TNRB [650k] leaving 50k unused. The RNRB/TRNRB cannot be offset against this chargeable IHT amount. The remaining 400k cash is then covered by the 350k RNRB and 50k unused NRB/TNRB.

Note, the RNRB/TRNRB can only be offset against IHT arising on death (not against IHT arising on a PET or additional IHT arising on a lifetime chargeable transfer). Of course, any residence or other estate assets must be left to the deceased’s lineal descendants.

  1. No. The RNRB applies automatically if the relevant conditions are satisfied. If death occurs within 7 years of a PET IHT is chargeable.

Malcolm Finney

In point 3 I was suggesting that if £700k was gifted (not £600k) then there would be a tax liability if the widow did not survive seven years. Therefore, I would suggest the gift is kept to within the NRB and TNRB to avoid a potential tax liability on the PET.

Kind regards

Ihsan Ali
I Will Solicitors Ltd

In principle, the sooner gifts are made the better ie a lifetime gift by parent to children qualifies as a PET which falls outside any charge to IHT if the donor survives 7 years and, even if death occurs within the 7 years, taper relief may reduce the IHT charged.

If a lifetime gift of property which has not been the donor’s principle private residence for CGT during the whole of the period of ownership which might then precipitate a significant CGT charge on disposal (sale or gift) it could be preferable to gift th property by will giving a CGT free uplift. It would also be necessary to ascertain the IHT consequences of the property forming part of the estate on death (RNRB/TRNRB?).

Malcolm Finney