Downsizing needn’t mean short-changing your heirs

With Portugal offering such favourable property opportunities in outstanding surroundings, it is no surprise that many Britons choose to retire to their own slice of heaven in the Algarve.

Whether you buy your main home here or just somewhere for holidays, your house is most likely your biggest asset. It is usually the most expensive item you will ever buy and has the potential to provide a substantial return on your initial investment. Many also view their home as a lasting legacy to secure the financial future of children and other heirs.

However, there are risks in relying on bricks and mortar as the source of your wealth. After all, you cannot fully realise the financial benefits of a property while you are still living in it. Also, as far as investments go, property can prove very costly to maintain.

Done with careful planning, downsizing your home could find the sweet spot between securing a comfortable retirement today and a sizeable legacy for future generations.

Size does matter

Generally, the larger the property, the more expensive it is to run. In addition to mortgage payments, rates and household bills, more generous estates may require a cleaner and gardener as well as building and pool maintenance. These expenses can add up to a relatively high, ongoing burden, particularly for those owning more than one property. If you are retired with a reduced or limited income, regular property costs can be especially draining on your resources.

On the flipside, larger properties can provide leveraging opportunities. This means you could borrow a greater proportion against the value of the house, for example through equity release. While this can free up extra cash, as with any debt arrangement it comes with costs and risks.

For many retirees – who are looking to shed debt and leave something substantial for their children and grandchildren – more borrowing is not the answer.

Affording retirement

As life expectancy increases, it is sensible to consider the affordability of retirement over the long term. Wherever you retire, you need to make sure your pensions, savings and investments are enough to sustain the lifestyle you want for as long as you need. Will your existing wealth stretch to 10, 20, even 30 years of retirement living?

Many British retirees, however, find themselves in an ‘asset rich, cash poor’ dilemma – owning a considerable amount of ‘physical’ wealth, like property, but with substantially less disposable income. For expatriates, this often includes holding on to UK property in addition to their Portuguese home, whether for sentimental reasons or as part of their investment portfolio.

While bricks and mortar can be a solid investment, your money is locked away in a highly ‘illiquid’ way. This means that when you want to access your capital, you may not be able to sell easily or for an acceptable price. Investment funds, on the other hand, spread risk across a range of different assets that may include property alongside equities, bonds, etc. Here, unlike property, if you require small amounts of cash you can just sell the amount you need, not the whole investment.

Liberating your capital

Downsizing your property can help maintain your existing lifestyle while increasing your accessible wealth. It needn’t be a compromise for space. Many find that once children have flown the nest, a smaller home can suit their needs better – not only when it comes to bills – and still be big enough for the family to visit.

It also needn’t be a compromise when it comes to investment growth. The extra capital released can be reinvested in alternative investment structures that are more tax-efficient for Portugal and offer more flexibility. Ask your adviser, for example, about arrangements that let you take a regular income or hold investments in multiple currencies.

Reducing taxation

Downsizing can also reduce your tax liability. Wherever your home is, you are likely to face some sort of council tax, stamp duty and capital gains tax charges, which generally increase with the property value. Portuguese property, for example, will only attract the new annual wealth tax charge if it is valued at over €600,000 (€1.2 million if jointly owned). Reducing the amount of taxation will make your money go further in your lifetime and maximise the value of your legacy.

Ultimately, when making sure your family are looked after when you are gone, do not forget your own needs. Take personalised, professional advice to achieve a diversified portfolio to suit your unique aims and circumstances. Your home can still be your castle, but a smaller one could make the most of your retirement years and still look after the next generations.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.