The financial benefits of downsizing your home

Jun 28, 2021 | Expenses

There are a multitude of reasons why people downsize to a new home. It can offer a simpler lifestyle, bring you closer to family or take you to new pastures. Cosier, with fewer things to maintain and rooms to clean, it can be ideal.

For some, however, downsizing is less of a choice and more of a necessity to improve their financial situation and quality of life. After all, a big house is only a pleasure if you can afford to pay for the heating and have money left over to enjoy life. 

If downsizing feels like an interesting option, you need to factor in the impact it might have on your inheritance tax planning to make sure you reap the most out of the benefits on offer.

Asset rich, cash poor

In 1985 the average UK house cost £35,436. The same home today would set you back £211,541 – a huge increase of more than 500%.

Meanwhile, few individuals’ income has increased at the same rate.

As a result, we see many people who purchased their home a long time ago who have become ‘asset rich’ but ‘cash poor’. In other words, a lot of their personal wealth is tied up in their property.

If you’re sitting on a potential goldmine, downsizing offers an opportunity to release equity to put towards your pension, the inheritance you pass to your loved ones, or just to fund a more luxurious lifestyle. And, at the same time, moving to a more intimate home that’s easier and cheaper to maintain.

It also means you can acquire your new home as a cash buyer, offering more options, a quicker-moving chain and the ability to live mortgage free at the end of it all.

Downsizing also lends itself to a lower cost of living. You’ll probably have lower utility bills, as well as fewer things around the property to fix, mend and restore.

Inheritance tax and the residence nil-rate band

What we’ve touched on so far are the more well known financial implications of downsizing, but you also need to consider what moving to a less valuable home could mean for your estate when it comes to inheritance tax.

On top of the £325,000 tax-free allowance for inheritance tax is another allowance for property owners, which is capped at £175,000.

This is called the residence nil-rate band (RNRB) and can be pooled together with your partner or spouse’s allowance resulting in property worth up to £1 million being classified as tax free upon your death.

You can only benefit from the RNRB under certain circumstances, and might lose it if you don’t pass on your property to your direct descendants, if you never actually lived in it or, critically, if you downsized.

Downsizing and the residence nil-rate band

It’s not that downsizers instantly lose the RNRB on their original home if they downsize.

You’d be forgiven for assuming that, or that a person must own a property at the time of their death to benefit from the RNRB.

It can reclaimed upon death as a ‘downsizing addition’ as long as the following conditions are met:

  • The mover downsized to a less valuable home on or after 8 July 2015
  • The former home would have qualified for the RNRB if the mover had kept it until they died
  • Their direct descendants inherit at least some of the estate.

There are five steps to work out how much downsizing addition can be claimed, which is dependent on many factors, including the value of any other assets left to direct descendants and the use of property trusts

If it sounds complicated, that’s because it is – but that’s where Roebuck comes in. 

If you have any queries or questions about downsizing and the financial benefits, feel free to call us on 0208 8192407 or 07961 797978. Alternatively, you can fill out an online query form here.

Reach out to us and talk downsizing.