Relying on a home sale to fund your retirement? 6 pros and cons to consider

If you are retired or approaching retirement and still live in your family home, you could consider downsizing and using any equity you receive to help fund your later life.

Here at Kellands, we’ve seen this strategy employed by a number of clients in the past, and understandably so.

Property prices have soared in the last 30 years, meaning that it’s likely you would turn a significant profit when selling a home today that you bought 20 years ago. The Office for National Statistics (ONS) says that the UK’s average house price nearly doubled between January 2005 and December 2023, rising from £150,633 to £284,691.

What’s more, both the cost of living and the price of later-life care are going up too. The Pensions and Lifetime Savings Association (PLSA) says that a comfortable retirement for a couple now costs £59,000 a year. Plus, Age UK reports it costs an average of £800 a week for a place in a care home, or £1,078 for a residential nursing home, for those who are required to fund their own care.

With all this to think about, selling either your main residence or a second home to help fund your retirement seems like a good idea.

But before you action this strategy, it’s important to weigh up the pros and cons first.

Here are three cons and three pros to consider if you’re relying on a home sale to fund your retirement.

Con 1: The ever-changing housing market

While house prices have risen substantially in the last 30 years, there have been fluctuations along the way.

So, relying on the successful sale of your home within a specific time frame poses somewhat of a risk to your plans. It’s never easy to tell how long a home will take to sell or how the market might change and have an impact on the final sale price.

For example, Zoopla reports that while house prices rose by 1.4% in the first seven months of 2024, 1 in 5 homes listed on their site have had their asking price cut by an average of 5%. What’s more, it takes an average of 28 days to sell a home with no price reduction, but 73 days if the seller cuts its asking price.

So, it may be wise to plan ahead to avoid disappointment or financial stress if your home does not sell for the price you intended or within the time frame you desire.

Con 2: Leaving less to your children and grandchildren when you pass away

If you own a large home and sell it, using the equity to pay for your retirement lifestyle and later-life care, remember that this could have an effect on how much your beneficiaries inherit.

In some cases, this may be positive: reducing the value of your estate could help your family avoid a large Inheritance Tax (IHT) bill.

But if your loved ones are relying on a substantial inheritance for their own life progression, it may be wise to have an open conversation about these expectations to ensure they align with what you can afford to leave behind when you pass away.

Con 3: You may pay Capital Gains Tax on the sale of properties that aren’t your main home

If you own buy-to-let properties or a second home in the UK, you could pay Capital Gains Tax (CGT) on the profits you earn from a sale – especially if the value of the home has risen in recent years.

CGT could also be due if you’ve used your main home to run a business, or if it has large amounts of land attached to it.

As of the 2024/25 tax year, CGT on residential property is charged at a rate of:

• 18% for basic-rate taxpayers
• 24% for higher- or additional-rate taxpayers.

Remember that you’ll only pay CGT on profits you earn from a sale.

It’s also important to note here that the CGT Annual Exempt Amount has been reduced substantially in recent years. While it used to stand at £12,300 in the 2022/23 tax year, the CGT Annual Exempt Amount is now just £3,000 as of 2024/25. So, you can now only earn £3,000 a year in capital gains before paying tax.

With CGT bills rising, if you want to use the funds from the sale of a residential property that isn’t your main home, ensure you have discussed the potential CGT bill with a financial planner first.

Pro 1: Releasing tax-efficient capital

Now, onto the positives of selling a home to fund your retirement.

First up, you will likely pay no tax on selling your home if:

• The property is your primary residence that you have lived in since you bought it
• You have not let part of it out (this doesn’t include having a lodger)
• You’ve not used part or all of your home as the primary residence for a business (this doesn’t include working from a home office)
• The grounds of your home, including all buildings, are less than 5,000 square metres
• You didn’t buy the home just to make a gain from it later.

If none of these criteria apply, you are likely to receive an automatic tax break called Private Residence Relief.

So, selling your home may give you access to a pot of wealth that you could save or invest in a way that provides you with a steady income in retirement – for instance, investing it tax-efficiently in an Individual Savings Account (ISA) or buying an annuity.

Pro 2: A smaller home might suit you better

Selling a family home in which you raised your children is bound to be a nostalgic, perhaps even emotionally challenging decision. Yet the idea of having a more manageable home environment with lower ongoing costs could be appealing to you.

Primarily, if you still have a mortgage on your existing home, it may be possible to clear this debt and start with a clean slate in your new, smaller home. On top of this, it’s likely that maintenance costs, energy bills, and Council Tax will be more affordable.

Looking ahead to your very old age, your new home could suit your changing health needs. If your mobility and overall health deteriorate over time, it could be easier to navigate a smaller space.

Pro 3: Reducing the value of your estate for Inheritance Tax purposes

As you read about earlier, downsizing your home and using the equity to fund part of your retirement could mean you leave less to your beneficiaries when you die.

Although a smaller inheritance could leave some family members disappointed, when it comes to IHT, your family might benefit from your choice to downsize your home.

By passing down a property to your direct descendants, you are likely entitling them to the residence nil-rate band, an IHT allowance worth up to £175,000. This is combined with the standard nil-rate band of up to £325,000, giving your beneficiaries the opportunity to inherit up to £500,000 IHT-free – or £1 million if you combine your nil-rate bands with that of your spouse or civil partner.

But if the property you pass down is worth, say, £400,000 rather than £800,000, this still leaves your children plenty of wealth without needing to pay a rate of 40% IHT on a very large portion of their inheritance.

Partner with a Kellands financial planner to form a robust retirement plan

Ultimately, your retirement plans are unique to you. The goals you have formed alongside your family are important and should be treated seriously – which is why forming a robust, data-driven plan is so vital.

Whether you’re planning to sell your main or second home, liquidate shares, sell a business, purchase an annuity, or take one of countless other retirement routes, we’re here to support you.

Your Kellands financial planner will listen carefully to your retirement priorities then get to work forming a plan tailored specifically for your family’s needs.

We’ll keep you in the loop every step of the way, giving you total control over the decisions made around your wealth. Every year you’ll get the chance to meet one-on-one with your financial planner who will ensure your plan still functions as planned and make any tweaks needed.

Interested in working with independent, award-winning financial planners? Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

The Financial Conduct Authority does not regulate buy-to-let (pure) and commercial mortgages.

Think carefully before securing other debts against your home.

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