Downsizing your property can bring various financial benefits, as well as making your life easier. With careful planning you could unlock retirement funds and potentially tax-efficient income, while still leaving your family and heirs a lasting legacy.
Southern Europe continues to attract British retirees with its exceptional property opportunities and stunning surroundings. It’s no surprise that many choose to settle and buy a home here, drawn by the sunshine, relaxed lifestyle and welcoming communities.
Larger homes offer ample space for visiting family and friends, generating many precious memories, and a pool is a welcome luxury during the hot summer months. However, as the years go by, you may find that your property begins to feel too large or demanding to maintain. You might find you no longer need all the rooms, the garden requires more upkeep than you’d like, or stairs become less convenient. When that happens, downsizing to a more manageable property can be a smart and liberating next step.
For many, property is one of their most valuable assets, especially when owning more than one. Over time, it can deliver a significant return on investment and often serves as a meaningful legacy to support the financial future of children and grandchildren.
However, there are also risks in relying on bricks and mortar for your wealth. After all, you cannot fully realise the financial benefits of a property while you are still living in it. Compared to other investments, property can also prove very costly to maintain.
Size does matter
A larger property requires more daily effort to keep it in good shape, which may be more challenging in your later years.
And generally, the larger the property, the more expensive the running costs. Mortgage payments, rates, utility bills, plus building and maintenance expenses can all add up to generate a relatively high ongoing burden. If you are retired with a reduced income, this can be especially draining on your resources, particularly if you own more than one property.
Affording retirement
With today’s increased life expectancy, you may need your existing wealth to stretch another 20, 30 or more years more in retirement. Are your pensions, savings and investments on track to sustain the lifestyle you want for as long as you need? Are they structured to protect you from long-term inflation and provide the increased income you may need in the future as the cost of living rises?
Many people find themselves in an ‘asset rich, cash poor’ situation, owning considerable physical wealth such as property but with substantially less disposable income. Expatriates may hold on to UK property in addition to their overseas home.
While property can be a solid investment, it locks your money away in a highly illiquid way. If you need access to your capital, you may not be able to sell easily, nor for the right price. Also, there is risk in tying your funds up in one asset class; if the value of property drops, so does your investment.
Property offers potential leveraging opportunities – such as freeing up cash through equity release if this is available – but like any debt arrangement, this comes with costs and risks. For retirees looking to shed debt and leave something behind for children and grandchildren, more borrowing is not the answer.
Benefits of reinvesting your capital
Downsizing property can help increase your accessible wealth, while still providing the opportunity for investment growth. By reinvesting in suitable investment funds, for example, you can still invest in real estate if you wish but alongside other assets (equities, bonds etc.) to reduce risk through diversification. And, unlike immoveable property, if you require small amounts of cash, you can just sell the amount you need, not the whole investment.
It is also generally easier to reduce tax liabilities, such as wealth and inheritance taxes, on capital investments than it is on real estate.
A specialist adviser at Blevins Franks can help you explore investment arrangements that suit your particular circumstances, goals and risk appetite while being tax-efficient for your country of residence. You could also unlock other benefits that property cannot offer, such as a regular income and currency flexibility.
Tax considerations
Wherever your home is, charges such as stamp duty and capital gains tax generally increase with the property’s price tag. Higher-value homes can also tip you over the threshold for wealth tax where applicable, as well as increasing the inheritance tax bill for your heirs.
Wealth tax rates seem relatively low, but when applied to property values this can add thousands to your tax bill. By reducing the amount of tax payable, you can make your money go further in your lifetime and maximise the value of your legacy.
Portugal
Portuguese property attracts annual wealth taxes of between 0.4% and 1.5% if valued over €600,000 (€1.2 million if jointly owned), regardless of where you are resident. Portugal’s version of inheritance tax (‘stamp duty’) however, is limited to 10% and spouses, descendants and ascendants are exempt.
When selling a Portuguese main home to reinvest the full proceeds into another main home in Portugal, you are exempt from capital gains tax. Interestingly, if you are retired or aged 65+, you can also avoid Portuguese capital gains tax by reinvesting some or all of the gain from a main home into an eligible insurance contract or pension fund within six months. And if you are downsizing, you can benefit from both reliefs.
For other properties, including worldwide property, only half of the gain is liable to Portuguese tax. Those who still have non-habitual residence (NHR) status do not have to pay Portuguese capital gains tax when selling UK real estate, so bear this in mind before your NHR ends.
With Portugal offering highly beneficial tax opportunities for residents with capital to invest, it is worth reviewing your options with expert guidance.
Spain
In Spain, you may attract progressive wealth taxes of between 0.2% and 3.5% on total worldwide wealth above the allowances, though how much it affects you depends on where you live. A couple of regions have eliminated this tax while some others increased the allowance significantly. Individuals with wealth over €4 million will have to pay some ‘solidarity tax’, Spain’s second wealth tax.
There are generally more opportunities to mitigate wealth tax as well as succession tax on investment capital than with immoveable property. Approved life assurance arrangements, for example, allow you to hold a wide range of investment funds and can provide significant tax advantages in Spain. They also facilitate how your wealth is passed to your heirs.
France
In France, owning real estate assets worth over €1.3 million attracts annual wealth taxes of between 0.5% and 1.5% (over an €800,000 allowance). For French residents, this applies to worldwide real estate. Since it only applies to real estate, capital investments offer a significant tax advantage over property.
France offers investment structures that not only provide access to a broad and well-diversified portfolio, but also offer real tax advantages. They provide estate planning benefits too and make it easier to transfer your wealth on your heirs.
Cyprus
Income from investment capital is often tax free in Cyprus. And while gains made on sale of a Cyprus property is liable to local capital gains tax, if you are selling a UK property you won’t need to pay tax in Cyprus, regardless of how much gain you’ve made.
UK property
If you decide to sell a UK property as a non-resident, you are liable to UK capital gains tax – but only on gains made since 2015 (or 2019 if it is commercial property). Where necessary, the relevant double tax treaty will prevent you paying tax twice.
Remember that UK property will always be liable to UK inheritance tax, regardless of how long you have lived abroad. Once UK pensions become part of your taxable estate in 2027, having both UK property and a UK pension fund could significantly impact your heir’s inheritance. Your overseas home will only be subject to IHT for up to 10 years after leaving the UK.
Weighing your options
Choosing whether to downsize or sell additional properties is a significant decision, shaped by both lifestyle preferences and financial considerations. If you’re at this crossroads, understanding the tax implications can be a valuable part of the decision-making process.
Blevins Franks can guide you through the complexities, comparing the benefits of real estate versus capital investments. We’ll calculate your potential tax liabilities and assess income and growth potential, to help you build a tailored investment and estate planning strategy.
With our expert advice, you can enjoy a secure retirement today while laying the foundation for a lasting legacy for your loved ones
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