For many families, the family home is their largest asset. But what happens if that home is sold — perhaps to fund care fees in later life? Does the family lose valuable inheritance tax protection? Thankfully, the rules include something called downsizing protection that ensures families aren’t penalised for making difficult decisions.
Understanding the Residence Nil Rate Band
Inheritance Tax (IHT) currently allows each person:
- £325,000 Nil Rate Band (NRB), and
- £175,000 Residence Nil Rate Band (RNRB) if a qualifying residence is passed to direct descendants.
Together, a couple could potentially pass £1 million free of IHT, provided the estate is under the £2 million taper threshold.
The Downsizing Dilemma
Life isn’t always straightforward. Families often:
- Sell their home to release funds for care,
- Move into smaller, more manageable accommodation, or
- Choose to rent in later life.
At first glance, selling or gifting away the family home looks like it wipes out the RNRB, leaving the estate with a bigger tax bill.
The Good News: Downsizing Protection
The government recognised this problem and introduced the downsizing addition.
- If a person ever owned a qualifying residence and later downsized or sold it, their estate can still claim the equivalent value of the RNRB.
- Instead of being tied to property, the allowance transfers to other assets in the estate (cash, investments, savings).
- The condition? These assets must still be left to direct descendants — children, grandchildren, stepchildren, or adopted children.
A Simple Example
Mr & Mrs Smith sold their £300,000 home in 2025 to fund care, moving into rented accommodation.
When they die in 2029, they leave behind £600,000 in investments.
Without downsizing protection, their children could lose out on the RNRB, exposing the estate to more IHT.
With downsizing protection, the executors can claim the full £175,000 RNRB each, reducing the estate’s tax bill significantly.
Key Conditions to Protect the Relief
To secure downsizing protection, the following must apply:
- The deceased must have owned a home after 7 July 2015.
- The home was their residence (not a buy-to-let).
- The sale, downsizing, or gift happened on/after 8 July 2015.
- On death, the estate is left to direct descendants.
- Executors must complete forms IHT435/IHT436 to claim.
Planning Tips for Families
- Keep records: Executors need proof of the property sold and its value.
- Review wills: Make sure assets are clearly left to children or grandchildren.
- Mind the taper: RNRB reduces for estates above £2m — lifetime gifting may help.
- Think ahead: Downsizing protection won’t help if assets are left elsewhere (e.g., to friends, unrelated trusts).
Why It Matters
Downsizing is often an emotional and financial necessity. Families shouldn’t be punished for it. The downsizing addition ensures the same level of IHT protection applies, even when the family home has gone.
With careful planning, families can honour their loved one’s wishes, reduce unnecessary tax, and protect wealth for the next generation.
👉 At the Academy of Life Planning, we help families understand and apply these rules in practice. Whether through Planning My Life (DIY planning tools) or Financial Life Coach (personal guidance), you don’t have to navigate these complexities alone.
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