Downsizing can be good for your cash flow - David Alexander

Rushi Sunak enjoyed a long honeymoon after he was appointed Chancellor of the Exchequer just over two years ago in February 2020.

Thrown in at the deep end when covid struck soon afterward, his furlough scheme was recognised as more or less saving the British economy. The Chancellor’s high-water mark may, in retrospect, have been the summer of 2020 when he was filmed and photographed actively serving diners in a restaurant to publicise the highly-popular “eat out to help out” scheme which offered government-subsidised meals for a tenner.

But then covid reappeared in a different form and a further lockdown ensued, followed by the end of furlough. Sunak hasn’t had it so easy since then and last week’s Spring Statement – generally not-well received even by the Tory press – has not helped his reputation. Rather than “dishy Rishi”, some Tories are now talking about “ditching Rishi”.

There was nothing in the Spring Statement that directly impacted the property sector; indirectly, however, I was interested in not so much what he did say but what he didn’t say.

In particular these relate to his decision to – mostly - let the market decide the level of energy prices, which as the world and its wife knows are about to rise to new record highs. And the decision to stick to his guns and not make any significant changes to the Inheritance Tax (IHT) regime until at least 2025.

Energy costs have always been one factor in favour of downsizing one’s property but the forthcoming huge rise in bills will make the case even greater. Couples or widowed individuals whose children have long left a big family residence may see the current situation as final justification for making move to a smaller, more energy-efficient home (especially if the property being given up is one of those late-Victorian or Edwardian piles which have a reputation for struggling to stay warm).

Energy apart, comfort has also been a motivator as the “big house” is not always easy to maintain or keep clean, especially for elderly people or those in late middle-age. Rather than move to a smaller detached version of what they had before downsizers from larger properties will often choose flats, which are partly geared for this market. These properties will have fairly spacious interiors which to some extent replicate what their new owners will have left behind – but with all the energy and other cost-saving factors that part-communal living has to offer. And as the “neighbours” are likely to be of a similar age with similar lifestyles, there is less chance of disputes – e.g. over children playing or loud music at night.

As for Sunak’s decision to keep freezing IHT thresholds being another good reason to downsize, the bigger the house and the better the location the more likely it becomes that one’s estate (and, by implication surviving loved ones) will be subject to this whinging 40 per cent tax.

Rising residential property values are drawing thousands upon thousands of people who still do not consider themselves to be “rich” into the IHT trap, with the average UK house price now said to be just £51,000 below this particular tax threshold of £325,000 (to cover all assets).

Downsizing can help avoid this trap. Scandalously, people are allowed to give away no more than £3,000 per annum tax-free to one or all of their children, even if this comes out of income that has already been taxed (my italics). However, anything above that will only be subject to 40pc tax if the giver dies within three years; after year three any tax owning will be reduced to 32pc and, in stages, to zero if he or she is still alive after seven years.

Downsizing can release cash in this way but obviously the option will not be possible if the value of all or most of one’s “assets” remain locked in property. However even if no financial incentive exists, comfort, convenience and safety are often good enough reasons on their own to downsize.

David Alexander is managing director of DJ Alexander