Downsizing your property can bring various financial benefits. With careful planning, you could unlock retirement funds and potentially tax-efficient income, while still leaving your family and heirs a lasting legacy.
European countries such as France, Portugal, Spain, Cyprus and Malta offer fantastic property opportunities in outstanding surroundings, so it is unsurprising that many Britons choose to retire to their own place in the sun.
Why consider downsizing your property?
Whether you buy your main home abroad or just for somewhere to holiday, property may be your biggest asset, with the potential to provide a substantial return on your initial investment over time. For many, their home is also a legacy to help secure the financial future of children and other heirs.
However, there are 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.
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 or limited income, this can be especially draining on your resources, particularly if you own more than one property. Downsizing your property can help you sustain the lifestyle you’re accustomed to.
With today’s increased life expectancy, you may need your existing wealth to stretch to ten, twenty, or even thirty plus years 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 in particular tend to hold on to UK property in addition to their home overseas.
While property can be a solid investment, it locks your money away in a highly illiquid way. If you want 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, but it needn’t be a compromise when it comes to investment growth. By reinvesting in suitable investment funds, for example, you can still invest in real estate 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.
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.
The tax benefits of downsizing your property
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 increase the inheritance tax bill for your heirs.
There are tax benefits to downsizing your home, which vary depending on where you are:
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, including UK property. Since 2018, wealth tax no longer applies to capital investments, which is a considerable tax advantage over property.
When it comes to estate planning too, there are more opportunities to reduce French succession tax for your heirs on investment capital than with real estate.
Income from investment income is often tax-free in Cyprus. And while gains made on the sale of a Cyprus property are 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.
In Spain, you usually attract progressive wealth taxes of between 0.2% and 3.5% (depending on the region) if the combined value of your Spanish property and other assets exceeds €700,000. Although Spanish residents can receive an additional €300,000 main home allowance, worldwide assets – including UK property – would be counted to assess liability. There are generally more opportunities to reduce wealth tax on capital investments than on immoveable property – and the same applies to Spanish succession tax as well.
When it comes to estate planning too, there are more opportunities to reduce succession tax for your heirs on investment capital than with real estate.
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. There is no wealth tax on investment capital.
Expatriates living in Portugal can benefit from tax exemptions on the sale of UK property.
When it comes to capital gains tax, if you have qualified for ‘non-habitual resident’ (NHR), you can sell UK property without attracting capital gains tax here for your first ten years. For other Portuguese residents, only half the gain is liable at the income tax scale rates up to 48%. However, if you sell your Portuguese main home and 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.
Personalised advice can help you downsize your property
Wealth tax rates, where applicable, may 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.
Ultimately, while you want to make sure your family are looked after when you are gone, do not forget your own needs. Take personalised, cross-border advice from Blevins Franks to establish an investment and estate planning strategy that can provide a secure retirement for you in your country of residence today, and a lasting legacy for future heirs.
Contact us today to find out more.