Downsizing is again — and could also be extra enticing than ever | USAEMALL.com

In June, David and Charlotte, who are both 50, put their nine-bedroom Hertfordshire home on the market for £6mn. The sale will leave them mortgage free, with enough left over for deposits on homes for their three children, aged 19, 23 and 27.

All three still live at home despite two working in London; their own homes will provide a springboard to greater independence. But downsizing from their home of the past 10 years will also mean greater freedom for David and Charlotte (who declined to give their real names) — financially and practically, as they will be released from the responsibilities of running and maintaining a large house.

“Time is finite: we’ve done this adventure. Now the time required [to maintain the family home] is eroding what we have for leisure,” says David, a serial entrepreneur who is reorganising his businesses to free up more time. “[After the sale] we’ll be mortgage free and able to pursue our travels, hobbies and other careers.”

After several years of decline, downsizing has surged recently. There were 133,400 purchases by those moving to smaller homes in the year to April, up 37 per cent on the previous 12 months.

A significant driver is financial. Falling mortgage rates give downsizers more confidence that they can get a good price for their home.

At the same time, recent changes to inheritance tax and non-dom laws have increased the focus on the value of people’s estates — and the size of the liability they could leave behind when they die. 

With the family home typically the largest asset, downsizing to a smaller one may be more attractive than ever. But does it always make sense?

Older people, and others, have many reasons to stay in large homes, including proximity to friends, emotional attachment, the benefits of space and the difficulty of finding a suitable smaller one — plus any purchase will result in hefty fees and taxes. Faced with these competing forces, many are asking: should I stay or should I go?

The recent resurgence of downsizing reverses earlier steady falls. After peaking in the 2021-22 tax year, homes bought by those downsizing slipped to just 97,353 in the year to April 2024, according to Savills.

The past year provided the stronger market conditions many downsizers were waiting for: the average rate on a two-year fix was 4.93 per cent on August 1, down from 5.58 per cent one year earlier.

For couples whose estate value exceeds the combined £1mn IHT threshold, the planned extension of the tax to pensions in April 2027 and to business and agricultural property next April has increased the appeal of selling high-value homes and gifting some of the proceeds (such gifts, if the giver lives for seven years more years are exempt from IHT) or passing the proceeds into trust.

“With these looming IHT charges, I’m seeing more inquiries [from clients] about how they can unlock the equity contained in their primary home,” says Iain McLeod, head of private clients at St James’s Place.

He says downsizing choices will be driven mainly by the desire to move nearer family, including to support them with childcare, as well as releasing money to help children or grandchildren get on to or up the property ladder, or with private school fees. “But the proposed IHT changes are the trigger,” he says.

Rising rents — and mortgage rates that remain significantly higher than the period between 2008 and 2022 — make downsizing a popular way for the older generation to help children or grandchildren with a property purchase. But it also means more cash for downsizers to enjoy later life. After accounting for the cost of the new home, downsizers released £21.8bn of equity in the year to April, according to Savills, typically a third of the value of the home they sold.

Besides helping their two adult sons on to the property ladder, John and Deborah Webb’s decision to sell their seven-bedroom house in Cobham, Surrey, meant greater financial freedom in later life. John, who was then 69, had retired from his job as the chief executive of a shipping company and was keen to spend more time playing golf. Deborah, then 60, who would soon retire as a teacher, was looking forward to more travel. “The boys had flown the nest, we didn’t need a big family home any more,” she says.

While there are many good reasons to downsize today, financial and practical factors may just as often block a downsizing move as initiate it. For high value homes, where gains have not matched the rest of the market in recent years, stamp duty continues to be an impediment, according to Andrew Groocock, chief operating officer of estate agency at Knight Frank. “When prices are increasing, it’s easier to suck up the stamp duty charge since you feel you will get it back [in the home’s value],” he says. “But when they’re not, it feels to [downsizers] like they are giving money away.”

Downsizers who intend to gift the proceeds of their sale to reduce their IHT liability then face a risk. They need to live for seven years to ensure that the gift falls outside of their estate for IHT purposes.

The benefit from downsizing is therefore uncertain and distant; the stamp duty bill is both certain and immediate.

“And remember it’s not their gain,” says Groocock, “it’s for those who will inherit.”

Bill Russell, 88, and his wife Joser, have lived for 43 years in a two-storey house on The Park, a private estate in Nottingham. Selling the home would let him gift money to his children and nine grandchildren, but that would leave the couple financially exposed in his old age.

“I horrify my financial advisers by saying: it’s [my estate] not me, who will have to pay the IHT,” he says. “My greatest fear is the cost of care homes: if one or both of us gets ill, you’re talking £100,000 per year each. My priority is to look after my wife and myself.”

The house provides an income, too: for 40 of the 43 years they have rented out the upper floor, raising income that has been particularly useful in their retirement. They have been reluctant to sell the upstairs flat separately since local estate agents tell them the home’s value, currently around £1.75mn, would be lower if sold as two separate units. Few smaller homes come up for sale on the estate, and moving elsewhere would mean leaving behind most of the couple’s friends.

Besides leaving friends, the emotional disruption caused by leaving a home in which a family has been raised and many years have passed, may discourage a move.

“All those lovely memories, it is a real emotional wrench,” says Joanna Cocking, head of private office at Hamptons estate agency.

Selling a home at this stage typically means a great deal of work, meanwhile. Her clients’ homes are typically priced around £4mn; most are in the countryside — where demand for high-value homes is lower than in London — and have been occupied for between 20 and 30 years (one client has been in place for 50 years).

Besides the wear and tear of long occupancy, the tastes and layouts preferred by current owners — who are typically in their late 60s — are very different from the needs of prospective buyers. The latter are typically between 35 and 45 with two young children and busy jobs — meaning they favour homes that do not require big renovations.

“That imposing library study that was once a playroom won’t look terribly appealing to the buyer you’re trying to attract,” explains Cocking. “Really, to get a home to the best place to sell, you need to start three to four years before you go to market.”

Meanwhile, the growing range of mortgage products aimed at older borrowers means that many who don’t want to downsize, don’t have to.

In 2022, £5.6bn of new lending was issued in the form of lifetime mortgages — an equity release product for over-55s with no monthly repayments required until they die or move into long-term care. “The best rates are currently around 6 per cent, and in most cases, borrowers have the option to make voluntary payments of up to 10 per cent of capital each year,” says Ray Boulger of mortgage broker John Charcol, adding that many lenders now also extend the maximum age for conventional mortgage products to 90 or 100.

Back in their Hertfordshire village, David and Charlotte’s planned move indicates the fragility of the current recovery in numbers of downsizers. In recent weeks, the couple have decided to buy their next, smaller home in London. But they are in no rush to move. David is keen to realise the returns on the investment he has made in the Grade II*-listed 18th-century home, which has included significant renovations. These, and the increase in house prices over the period, will, he estimates, net him roughly a fifth more than he paid for the home 10 years ago, including the cost of renovations and stamp duty.

Last week’s Bank of England interest rate cut should help fuel buyer interest. Following the announcement, the average two-year mortgage rate fell below 5 per cent on Wednesday for the first time since former prime minister Liz Truss’s “mini” Budget in September 2022, according to data provider Moneyfacts. The average property price in the UK rose by 2.4 per cent in the year to July, according to Nationwide. 

But if willing buyers don’t materialise, David is reluctant to cut his sale price. “We’re in no rush,” he says. “I’m happy for it to take two or three years to sell.”

FT senior editor Leila Boulton and the FT’s chief political commentator Robert Shrimsley will be discussing everything they wished they knew before downsizing at the FT Weekend Festival on September 6 at Kenwood House in London. Book now at FT.com/festival