“As always tax should be considered, if the funds are not sheltered correctly much of the return can be lost.
“We would always recommend taking advice when investing surplus funds to make sure the investment strategy is directly aligned to your objectives,” said Mr Cook.
Now read: Tax calculator: how much you will pay on savings (and easy ways to cut it)
Should I use the cash to help family members and avoid inheritance tax?
Another option for your funds once you downsize is to use the cash to help younger family members.
This can be through a cash lump sum as a gift, which may help minimise inheritance tax further down the line. If you go down this route you need to be aware of the annual gifting limit to make sure you are not caught out.
Each tax year you can give up to £3,000 individually or £6,000 as a couple, free of inheritance tax. You can give more, but there may be IHT to pay if you die within seven years of giving the gift.
You can carry any unused annual exemption forward to the next tax year – but only for one tax year. For example, if you and your partner did not use your gifting allowance in the previous tax year, you could gift as much as £12,000 between this tax year from the property proceeds and can then gift a further £6,000 from April 6.
Alternatively, if you are thinking of starting a savings pot for them to use later on, such as on as a deposit for a home, a Junior Isa may be a better way to go.
Junior Isas have a £9,000 annual allowance, but it cannot be carried over. Anyone can pay into these accounts, not just those with parental responsibility. This means that grandparents can contribute, as long as the total stays under the allowance.
What is downsizing tax relief?
One small carve out in the inheritance tax rules relates to passing on property.
If you leave the home to another person in your will, it counts towards the value of the estate, but you increase your nil band rate by £175,000 – reducing the taxable portion of the inheritance.
There may be a concern that by downsizing your property your beneficiaries will lose more to inheritance tax by missing out on the nil increase.
However, most families don’t realise that by using “downsizing relief” the value of a previously owned home can be used to offset IHT. The catch is that the total value of your estate cannot be more than £2.7m.
Now read: The little-used ‘downsizing loophole’ that cuts inheritance tax
Other things to consider when downsizing
Stamp duty
As with any house move, downsizing incurs other costs. Stamp duty will need to be paid on the property you are buying if it is worth over £250,000, and more if you own more than one property.
Buyers who own another residential property will be charged an additional 3pc on top of their base stamp duty rate. However, you do not pay the additional rate if the house you are buying is replacing your main residence that has already been sold.
