Inheritance Tax Reliefs | Downsizing or selling a home to fund care

Before selling the family home, it is important to understand the Residence Nil Rate Band.

For many older homeowners, selling or downsizing their property to help fund later-life care is a practical financial decision. However, concerns often arise over whether moving out of the family home or selling it means losing one of the UK's most valuable inheritance tax (IHT) reliefs - the Residence Nil Rate Band (RNRB).

The good news is that, in many cases, families can still benefit from the allowance even if the original home has been sold, provided the estate has been structured correctly.

What is the Residence Nil Rate Band?

The government provides an additional inheritance tax allowance called the Residence Nil Rate Band which can help many families pass on more of their estate without paying additional inheritance tax.  It is available when a qualifying residence is left to direct descendants such as children, stepchildren, adopted children or grandchildren.

For the 2025/26 tax year, individuals can generally benefit from:

• A standard Nil Rate Band of £325,000.
• A Residence Nil Rate Band of up to £175,000.

Combined, this allows an individual to pass on up to £500,000 free of inheritance tax, while married couples and civil partners may be able to transfer unused allowances, potentially allowing up to £1 million to be passed on before inheritance tax becomes payable, subject to the applicable rules and tapering provisions for larger estates.

Does selling the family home mean losing the relief?

Not necessarily.

Recognising that many older people need to move into smaller properties or residential care, the government introduced the Downsizing Addition.  This provision means that someone who sells or downsizes their home on or after 8 July 2015 may still qualify for some or all of the Residence Nil Rate Band, provided certain conditions are met.

These include:

• The deceased previously owned a qualifying property which was at some stage a residence of the deceased.
• The property was sold, downsized or otherwise disposed of on or after 8 July 2015.
• Assets of equivalent value are left to direct descendants.
• The estate would otherwise have qualified for the Residence Nil Rate Band.
• The personal representatives claim the relief within two years of the month of death. 

This means that even if the family home has been sold years before death, the estate may still receive an equivalent inheritance tax allowance.

Funding care without sacrificing tax relief

The rules are particularly relevant for people entering residential or nursing care.
Many individuals sell their homes to generate funds to pay care home fees or move into sheltered accommodation or a smaller property to reduce maintenance costs.

While the proceeds from the sale become cash rather than property, this does not automatically remove eligibility for the Residence Nil Rate Band.  It is essential that expert legal advice is sought to ensure that estate planning is structured correctly and the assets ultimately pass to qualifying descendants so the downsizing provisions can preserve the tax benefit.

Why a Will matters

A Will plays an important role in determining whether the estate can benefit from the Residence Nil Rate Band.  Something as simple as who inherits the home can affect whether the allowance is available.

It is important for personal representatives to keep detailed evidence of information such as when the original property was sold, it’s value and how the estate has been distributed.  Without adequate documentation, claiming the downsizing additional tax relief can become significantly more complicated.

Professional advice remains important

The Residence Nil Rate Band is subject to detailed legislation and interacts with several other inheritance tax rules, including those affecting estates valued at more than £2 million, where the allowance is gradually reduced.

As a result, individuals considering downsizing or selling a property to fund care are encouraged to review their estate planning regularly.

Seeking specialist legal advice to maximise tax reliefs can be invaluable, particularly for families with valuable property or assets. This can help ensure families do not inadvertently lose valuable tax relief or overlook a legitimate claim.

For more information on inheritance tax issues, please contact Sophie Wales on 01926 491181.