The Telegraph looked at the potential benefits to be gained from downsizing your property at the moment.
The Current Economic Climate:
- House Prices & Mortgage Rates: Even though house prices are falling and mortgage rates are increasing, there’s more to the picture.
- Interest Rates: They are rising. This means:
- Banks are offering better interest rates on savings.
- Bonds, including government bonds (gilts), are becoming attractive again.
Why Consider Downsizing?
- Releasing Funds: If you downsize, you free up money. This can be invested elsewhere for potentially better returns.
- Helping the Family: If you’re considering helping younger family members buy a house or invest, gifting now might reduce inheritance tax later.
The Big Picture on Downsizing:
- UK Statistics: Over 50s in the UK own more than three million 4+ bedroom homes. That’s about £4.8 trillion in property wealth!
- Too Big: Many of these homes are too large and expensive to maintain, especially after kids move out.
- Emotional Challenges: Selling the family home can be emotionally difficult.
- Market Demand: Smaller properties are in high demand, so their prices are dropping more slowly than larger homes.
Expert Opinion:
Ian Cook advises not to get too hung up on the timing of the market. Downsizing can offer a tax-free sum for retirement since there’s no capital gains tax when selling your main residence. But, he warns against seeing your home solely as a retirement fund.
What to Do with the Profits?
- High Savings: If you’re not buying immediately, consider placing your money in a high-yield savings account.
- Pensions & Investments: Investing in pensions or investment trusts can boost your savings.
- ISAs: Both cash and stocks and shares ISAs offer tax-efficient ways to grow your money.
- Gilts: These government bonds have become attractive again due to rising interest rates.
Finding the right smaller property can be challenging, as downsizers often have a list of specific requirements. Smaller properties, such as terraced houses and flats, are in high demand and are falling at a slower rate than larger homes. Despite falling house prices overall, demand for smaller properties is keeping their prices relatively stable.
Once homeowners have decided to downsize and sell their property, they have several options for the proceeds of the sale. If they are not in a hurry to buy a new property, they can place the funds in a high-yielding savings account to cover their living expenses until they find a suitable home. They can also consider putting the funds into a pension fund or investment vehicles such as funds or investment trusts to generate a steady income. Cash ISAs and stocks and shares ISAs offer tax-efficient ways to invest the funds. Government bonds, known as gilts, have also become attractive due to rising interest rates. Proper consideration must be given to tax implications when investing surplus funds.
Another option is to use the funds to help family members, which may further reduce inheritance tax liabilities. Homeowners can gift cash lump sums to family members, with the annual gifting limit being £3,000 individually or £6,000 as a couple. There may be inheritance tax to pay if the homeowner dies within seven years of making the gift. Alternatively, homeowners can start savings pots for family members, such as Junior ISAs. This allows grandparents to contribute to the account as well, as long as the total contributions stay under the annual allowance of £9,000.
When downsizing, homeowners should also be aware of other costs, such as stamp duty, estate agent fees, conveyancing fees, and moving costs. It is also important to ensure that helping family members financially does not negatively impact one’s own financial security. Rising living costs and the uncertain future of later-life care mean that pension pots may not stretch as far as expected. Consulting a financial planner before making any major decisions is advised to ensure that retirement goals are still achievable.