Maximising your Assets – Downsizing

One of the lasting effects of the ‘credit crunch’ has been a long term contraction in the mortgage market. From this, we have seen the rise of renting, as a whole generation without the cash or credit to purchase are stuck in property ladder limbo.

Increasingly, the bank of mum and dad is coming to the rescue; the equity rich ‘baby boomer’ generation releasing their own funds to help their struggling children own a home of their own. Savills has suggested recently that intergenerational loans have increased from £8bn five years ago to more than £18bn now.

Country Property - Surveyed by a member of
Members of the older generation with properties like this are increasingly looking to downsize

Most parents don’t have the thousands of pounds required for a property deposit burning a whole in their pockets, so raising that much money typically means realising some of the equity in their own home and downsizing. Unlocking wealth that has built up through price inflation over decades can be extremely lucrative, one Director of Savills commenting:

“A four-bedroom property owner could release on average more than £200,000 by moving into a two-bedroom home. This is likely to be achieved much more regularly in London and the South East, though there are identifiable hot spots in most other regional markets.”

Downsizing isn’t always a necessity, however, and can be an excellent, and tax efficient, way of passing your wealth onto your loved ones.

Traditionally, inheritance is passed on upon death in accordance with the Will of the deceased. Any such inheritance is subject to a substantial inheritance tax of 40% on all monies above the threshold level of £325,000 (in place from 2010 to 2015 and applying to each single person). For those with a large estate (including money, property and investments) this is a substantial loss.

As a result, those of an older generation with large properties are starting to look at downsizing as an option that can maximise the amount of money they leave to their loved ones, with the added benefit of being around to see them enjoy it. Action in this regard must be timely and carefully managed however, to avoid paying the tax anyway under the rules concerning gifts.

Downsizing and releasing money to assist your child in purchasing a property is considered a ‘potentially exempt transfer’ (PET). This means that, should you survive seven years after making the transfer, your gift will be exempt from inheritance tax. If you were to die during the seven years but after the first three years had passed, you would still receive a ‘tapered relief’ of up to 80% of the tax otherwise due.

Careful timing and navigation of the rules could therefore save thousands in tax and make sure your loved ones benefit fully from your hard work.

If you are dealing with probate matters, qualified Chartered Surveyors can provide accurate, independent valuations for property assets that can satisfy the District Valuer (to whom HMRC defers on valuations of property for taxation). Contact your local surveyor with to find out how he or she can help.  


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