What to do with the cash wind­fall from down­siz­ing

What­ever your rea­sons for mov­ing to a smaller prop­erty, how can you best in­vest the pro­ceeds to pro­vide a ro­bust in­come in re­tire­ment?

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There are a great many rea­sons that peo­ple choose to down­size their house: reducing run­ning costs, feel­ing that the fam­ily home is now too big and, very of­ten, to free up vi­tal funds for re­tire­ment.

The av­er­age UK house price grew by 4.2% to £224,144 in the year to March, ac­cord­ing to the Of­fice for Na­tional Sta­tis­tics. Re­search by SunLife re­veals that the av­er­age per­son aged 55 or over has lived in their cur­rent home for 24 years and are likely to have seen its value triple in that time.

WHAT COULD YOU MAKE FROM DOWN­SIZ­ING?

In­deed, data from Na­tion­wide, shows the typ­i­cal UK home has more than tripled over the past two decades from £62,903 in 1998 to £211,792 to­day. Many home­own­ers who have en­joyed such as­tro­nomic gains are now look­ing to make use of that extra cash to help fund their re­tire­ment and down­siz­ing is of­ten the first step. But it’s of­ten not as easy – or as lu­cra­tive – as you may think.

Fig­ures from on­line prop­erty por­tal Right­move show the typ­i­cal four-bed­room de­tached home in the UK (ex­clud­ing London) is £478,176, while the av­er­age two-bed semi-de­tached house is £183,748.

Some­one mak­ing the move from a large fam­ily home to a smaller prop­erty could then po­ten­tially free up a chunky sum of £294,428.

Of course, you won’t walk away with the full amount. Stamp duty on the semi-de­tached home will be £1,174 and, af­ter mover’s costs and solic­i­tor’s fees, it is es­ti­mated that mov­ing house costs around £9,000.

TAX IM­PLI­CA­TIONS

If the house you’re sell­ing is a sec­ond home or buy-to-let prop­erty you may also have to pay cap­i­tal gains tax on the profit you have made since pur­chas­ing it. Cap­i­tal gains tax is 20% for ba­sic rate pay­ers and 28% for higher rate pay­ers. That means if you had en­joyed the £148,889 of gains in the ex­am­ple above you could have a hefty tax bill of £38,608 af­ter tak­ing into ac­count your cap­i­tal gains tax (CGT) al­lowance of £11,000.

Some home­own­ers may be tempted to in­vest the money they have freed up from the house sale in a buy-to-let prop­erty. This can be an ap­peal­ing in­vest­ment propo­si­tion be­cause it can pro­vide a reg­u­lar in­come from the rent re­ceived as well as the po­ten­tial gains if house prices rise.

Jonathan Clark, mort­gage part­ner at Chad­ney Bulgin, warns that pur­chas­ing a buy-to-let means pay­ing an ad­di­tional 3% in stamp duty as well as CGT when you come to sell the prop­erty.

“Some­one mak­ing the move from a large fam­ily home to a smaller prop­erty could then po­ten­tially free up a chunky sum of £294,428”

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