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?
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.
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”