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Downsizing The Family Home

22 October 2015

Q: My partner and I are looking to retire in the next few years and are currently downsizing from our family home. With the finances released from the move, coupled with some savings, we hope to purchase a small flat in London with a view to renting this out as a source of income for our retirement. What are the main implications of this town and country split that we should be aware of – both financially and with regards to responsibilities as future landlords?

A: As you near retirement, downsizing can be a sensible way to free up equity that you can then reinvest to provide for your retirement. Downsizing will also reduce your bills, simultaneously increasing your income while creating an opportunity to invest in a buy to let property that provides a reliable return, if you do the right research.

London homes can rent in days or even hours. You need to consider the type of rental income you will get in an area, as well as the overall return you will get on the property. Looking in areas that have a high percentage of young professionals with good transport into central London will equate to strong rental demand for properties.

You should ask a solicitor to check the term of the lease to ensure you will not have to pay the Freeholder for a lease extension during your ownership, check the Lease does not contain a prohibition from letting the flat and also, that there are no surprises with the service charge - any major works planned for the building would substantially increase the service charge payments and keep a lid on your yields.

In the last 5 years there have been a number of changes and additions to the responsibilities and legal obligations landlords face whether they have one property or multiple properties. A basic understanding of these factors is crucial to ensure that you do not face action against you and have penalties imposed.

Some of the most important areas include keeping your rented property safe and free from health hazards, making sure all gas and electrical equipment you supply is safely installed and maintained, following fire safety regulations, providing an Energy Performance Certificate for the property and protecting your tenant’s deposit in a government-approved scheme.

There is also the cost and inconvenience that comes with managing a rental property - which can eat into your personal time and income especially if you are planning on renting further afield from home as it would be harder to keep an eye on it. If you do not wish to, or are unable to take on this responsibility, you may want to consider using an agent to manage the property for you. If you employ the services of a managing agent the landlord’s responsibilities and obligations remain with the landlord and do not transfer to the agent, so choose your agent carefully!

Tax is another financial responsibility to be aware of. Rental income is added to any other income you earn during the year so you may have to pay income tax on your rental income, minus your day-to-day running expenses. When you come to sell a property that is not your main home - including a rental property - it’s likely that you will have to pay Capital Gains Tax on any gain.