Cash Clinic: My home’s half empty – should I downsize and pass on proceeds?

Q: Should I downsize? I am in my late sixties, retired and live on my own. I heard recently about a report suggesting that over-60s should be exempt from paying stamp duty to free up under-occupied family homes.

It said half of all properties owned by single pensioners have three spare bedrooms or more. I have two spare rooms that are very rarely used. One is used when my son and his wife come to stay, which is normally once a year at Christmas.

They are struggling to find affordable housing as prices are so high, so maybe I could downsize to a flat and give them some money from the sale of my property. MK, Edinburgh

Answer from Glen Gilson

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Giving over-60s incentives to downsize is only a suggestion at present. The Intergenerational Foundation said that offering tax incentives could encourage older people to downsize.

While younger families are increasingly squeezed into small flats and under-sized houses, older people are often rattling around in big houses with many bedrooms standing empty, often for years. They are not urging the government to force older people to move, but they are suggesting changes to the tax system to encourage the downsizing process.

However, there are many emotional, legal and financial aspects to be considered before you downsize and give some money to your son, some of which are listed below.

Can you afford to do this? You may need the funds in the future. There may be, for example, future property expenses in your new property. It is expensive to move: there are legal fees, stamp duty, moving expenses and other costs to be taken into account.

In addition, if you give your son a sum of money this would be considered a gift for inheritance tax (IHT) purposes, depending on the amount you are considering.

There is an annual exemption – each individual has an allowance for IHT of £3,000 (increased to up to £6,000 if the annual allowance for the previous year was not utilised) but I assume you are thinking of a larger sum.

If the amount you gave him was more than the annual exemption, then that would be a “gift” for IHT purposes. If you survived for seven years after making the gift, it is unlikely to be counted as part of your estate for IHT. IHT is not only charged at 40 per cent on your assets over the nil rate band (currently £325,000) on death, but some lifetime gifts are also taken into account and many people do not realise this.

If your son used the money to buy a matrimonial home and he and his wife later divorced, it would be taken into account for the purposes of calculating their assets.

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Making gifts during your lifetime, however, can be a way of reducing your IHT liability.

It is also important that you consider putting a will and power of attorney in place if you do not have these already, or updating them, if you do.

• Glen Gilson is a partner and head of private client & financial Services at HBJ Gateley.