Downsizing - early stages of planning

sololite

Hi there,

we are trying to work out what options are best for us as we approach retirement and wondering what the pros and cons might be of selling our family home now the kids have left.

There is no mortgage on it and the kids have left home and are renting.

If we sold the house and brought a smaller one for us and another one which we rented out to them what are the pros and cons?

If we sold the house and brought a smaller one of us and gave them the remainder to buy their own, what would be the pros and cons?

There are many permutations I am sure, some we've not even thought of but am hoping someone else recognises the situation and can recommend what do or where to get advice/read up on the subject of how capital gains, inheritance tax, stamp duties etc can eat into the pot.

thank you

xylophone

The sale of your PPR will not attract CGT.

You could use the capital to buy another home for yourselves and divide the remainder between your children to enable them to put deposits on their own homes.

These gifts would be potentially exempt transfers for IHT purposes.

https://www.gov.uk/inheritance-tax/overview

See also http://www.rossmartin.co.uk/private-client-a-estate-planning/inheritance-tax-probate/666-iht-transferable-nil-rate-band-records

https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band

Selling your home and using the proceeds to buy a home for yourselves and a home to rent to family members would be a possibility but you would wish to consider the cost in stamp duty - http://www.zoopla.co.uk/discover/buying/q-a-new-3-stamp-duty-surcharges/#KOVIe57oL3K1EAsO.97

There would also be CGT to consider on the sale of the second home.

The rental income would be taxable income and you would have to comply with the rules and regulations relating to landlords.

Renting to family does not always work out well.

sololite

thank you so much for the links and advice

jamesd

If you have enough money after the sale to do it, one of the cleanest and safest ways to handle this is to provide them with a mortgage secured on the property. They then make the mortgage payments to you and you can charge them a lower rate of interest than the free market if you like. This is efficient for taxes as well because their capital gain is not taxable under CGT rules.

That sort of approach is much safer than gifts. Consider say them marrying then dying, their spouse would end up with your money as little as a few weeks after you gave it.

There are also some places offering mortgages that allow deposits to be lent by parents and/or use parents' property or money as security.

If you were instead to become landlords that has the advantage that you could take out a mortgage in your own name and this might allow more valuable properties to be purchased. This is not very tax efficient unless you do it via a company set up for the purpose. This is because only part of your mortgage cost can be deducted from your rental income for income tax purposes. you may end up with an ongoing subsidy to them instead of income from your money. If you don't use a mortgage or only use a small one this will matter less or not at all.

Best route is to downsize first then have a chat with your children and a mortgage broker to sort out which option will work best. The types that I've linked to are probably going to be the ones that offer you the best combination of income from your sale proceeds and property for your children.

atush

I too am currently downsizing, But having paid for university for my 3 (plus law school for one) and them going on to be professionals earning over 40K) one is and the others on their way) I am downsizing and using hte cash to increase my retirement funds.

I still might help with deposits when they are ready to buy, but I considered getting them off to a good life start with degrees (from good universities in good subjects) a far better use of my time and money than just supplying them with cash. In fact, I have even delayed downsizing so each could live at home for a year and save loads of dosh for a deposit. Plus they will inherit any unspent funds plus at least 2 properties when we are done spending our money lol.

So do help them if you like, but do make sure you have more money than you think you need for your retirement first.

Plus getting ready to downsize can be expensive- i am slowly refurbishing the entire house, done one bathroom and bedroom and starting on 1.5 bathrooms soon. Already have bought most of the materials.

So hold back enough cash to do this to your own property, if like us your house was done last time, 20 years ago.

SteveG787

You don't mention any numbers but if you haven't already you really need to look closely at the value of your house and the cost of a smaller one.

My wife and I are in a similar position and were looking at downsizing to free up some money, we live in a large 5 bedroom Edwardian terrace. We were thinking of moving to a 2 bedroom bungalow but when we costed this out fully based on an actual bungalow we liked, the price difference was very small.

After the cost of putting our house in order and the cost of the move itself we would free up at most £30k. We reckon this is caused by a combination of more demand for bungalows than terraces and bungalows tend to be in more sought after locations.

I just couldn't bring myself to move into a house that is a third the size for that amount of change so here we stay.

atush

Well in my case a 3 bed bungalow is worth Less than half my current home. So yes, you do need to know about prices where you want to move to.

Steve, have you considered a 2/3 bed terrace instead?

SteveG787

atush - No not really, there's multiple reasons to go for a bungalow, garden & lack of stairs being the main ones. We like where we are but looking fowards a three storey house will be difficult. For now I'm finding all the obvious savings and staying put, we'll probably revisit the idea in six or seven years.

atush

3 story? I was talking 2, but I can see it sure.

Another option is to buy a fixer upper and redo it (while you are still spritely lol).

greenglide

Having lived in a bungalow all of our married life I can certainly recommend them!

I am not convinced that a move from a 5 bedroom house to a 2 bedroom bungalow will be an easy move though. Bungalows tend to have less storage space (no stairs for a cupboard there) and the rooms can be smaller as often they try very hard to get them into the same footprint as a house to bring the cost down.

Where we live the bungalow premium isn't that great but it still exists. Strangely virtually all of the bungalows around us are occupied by people under the age of 65.

SteveG787

Thanks for the suggestions guys but I think we're moving off topic a bit. What I was trying to point out to the OP and others was to fully cost out the downsize by finding a particular property that would be suitable and costing the move to that.
I, and I suspect many others, who are preparing for retirement read articles suggesting downsizing to free up funds and assumed that was the way to go. Looking back none of these articles was ever really costed out, when I did that properly it didn't work at all. Now that may well be my particular circumstances but I think not.
To elaborate somewhat, I live in an inner city area where there are no bunglalow type houses at all and where property prices are not particularly strong. I made a list of the attributes I would require if this was to be my last move ever, so near shops, near public transport both local, national, international, near to family, no stairs, garden, off road parking, built to modern standards so cheap to run etc. etc.
By the time you find a property that hits those targets you realise many other people are looking for the same thing and that the law of supply and demand rules. Add that to builders trying to maximise the bedrooms per acre to boost their profits and the whole downsizing thing becomes a lot less attractive financially than at first appears.

Having said all that I'll still move to a bungalow eventually but I no longer expect to free up much capital doing it.