As the baby boomer generation enjoyed a period of unprecedented wealth they were able to afford sizeable houses. Now, as that generation enters retirement, an increasing number are finding it difficult to maintain their house and are therefore considering downsizing.
Research from equity release advisory firm Key Retirement found that a third of homeowners over the age of 65 are considering moving to a smaller home but have found there are limited options. The knock-on effect has meant that young families are unable to purchase homes large enough and the price of the available stock is being pushed up.
Despite the pressing need for homes purpose built for retirement only 7,000 were built in 2017, meaning it is the most undersupplied sector in the housing market. In contrast, Demos have suggested that 30,000 homes need to be built to meet the current demand, and that this could have a positive effect on the rest of the housing chain. The lack of available stock in the senior sector will only be exacerbated as more people enter retirement.
Downsizing can work for over 65s looking to release equity, perhaps to gift to their children or simply to enjoy life with. Many over 65s want to enjoy their retirement and visit places they did not have the time to go to when they were working, but many cannot because their equity is tied up in their home. Downsizing can free up available funds so that they can travel the world if they so wish. It could also be the case that the home they are occupying is simply too large to maintain now and moving into something more manageable would mean they are free to pursue other interests and hobbies. According to Demos, polling in 2017 revealed that an older person estimated they could release as much as £80,000 in equity if they were to downsize.
Many choose to downsize and gift capital to their children or other family members instead of it being hoovered up by inheritance tax. According to GOV.UK, there is normally no inheritance tax to be paid if someone gifts their home to their children and goes on to live for another 7 years. If the person gifting the house wishes to still reside in it, they would need to pay market rent. However, if the house is too large and unmanageable, some perhaps would choose to gift it to their children, release money from their pension and rent somewhere smaller that is easier to upkeep.
People can also give away up to £3,000 a year in gifts without them being added to the value of their estate when assessing its liability to inheritance tax upon the individual’s death. Gifts most not exceed £250 for each individual recipient. Individuals can also give away money for certain events without it counting towards taxable capital upon death. For weddings and civil partnerships individuals can gift up to £5,000 for their child, or £1,000 for any other individual.
Those aged 55 or over can access their pension pot. For those who are considering their options and the ability to gift the family home to their children and live off a pension pot, they will need to be aware of how much they can withdraw without being subject to tax. It can be up to 25% as a lump sum, which they can use for renting another property, and reinvest the remaining money elsewhere or convert it into taxable income.
Aside from the financial rewards of downsizing, there are also many overlooked benefits. Retirement homes are specifically designed with an elderly resident in mind. This means that stairlifts, wider corridors and even surfaces are used to minimise the possibility of falls or accidents. 85% over 55s living in retirement villages and homes felt a sense of community, compared with just 49% of those still living in their own home, as per research conducted by Demos. Regular activities held in retirement homes such as wine tasting, fine dining and days out to visit the local area really held cultivate a sense of community. Perhaps one of the most beneficial aspects of retirement communities is that it relieves pressure on the National Health Service and frees up hospital beds. After urgent hospital visits, retirement property already has the necessary adaptations to more readily accept patients back once they have been treated, as opposed to a residential home which may require additional facilities to ensure proper care of the patient.
Due to the lack of options available for over 65s, existing accommodation is extremely sought after. Excellent occupancy rates have had a positive effect on the rental yields that can be achieved – up to 10% in some cases.
These investment options are located where there are high numbers of over 65s, for example in the south west of England or rural parts of the north west and north east. This is strategically important because a) the elderly may not want to move too far from where they had lived as they may have family or an existing network of friends close by and b) to ensure a healthy demand for accommodation.
Such examples of luxury retirement homes in the UK include Arbour. Located in the Snowdonia region in Wales, UK; the development will include an onsite private cinema, spa facilities and a health and beauty salon. Personal chefs will prepare fresh food every day, and there is also the opportunity to partake in wine tasting and fine dining events. As it is in Snowdonia, there will also be plenty of opportunities to explore the National Park.
Suites in Arbour start from £85,950 and a 10% return is guaranteed for ten years. As the developer puts a management company in place, this investment is completely hands-off and therefore suitable for the busy investor who would not be able to oversee the running of it. There are multiple buy-back options from year 5 at 110% all the way to year 10 at 125%, in case investors wish to place their capital elsewhere.
This is an excellent opportunity to help relieve the downsizing pressure in the UK, whilst also making excellent returns. Could this be another avenue to explore?
Download the retirement home investment guide to find out more about this newly emerging asset class.
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