Downsizing your home is a major life decision that many homeowners consider for a variety of reasons. Whether it’s to release equity for retirement, simplify your lifestyle, reduce household costs, or move to a location closer to family or amenities, downsizing can be a smart financial and personal choice. However, it’s crucial to understand that selling one property and purchasing a smaller one comes with potential financial implications, particularly around taxation. In 2026, the property market continues to evolve, and tax rules can impact the net proceeds of a sale and the overall cost of buying a new property.
Many homeowners underestimate the significance of taxes when downsizing. While the upfront focus is often on sale price or mortgage costs, taxes such as Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT), and Inheritance Tax (IHT) can substantially affect your finances if not carefully planned. Additionally, other associated costs like legal fees, estate agent commissions, and potential home improvements can influence your final budget. Understanding each of these taxes, how they are calculated, and the reliefs or exemptions available can help you make informed decisions, plan your finances effectively, and avoid unexpected surprises.
This guide explores the key taxes relevant to downsizing in 2026, breaking down how they apply, examples of potential costs, and practical advice for homeowners. In this first part, we focus on the most immediate tax implication when buying a new property—Stamp Duty Land Tax (SDLT)—and the considerations every downsizing homeowner should know.
Part 1: Stamp Duty Land Tax (SDLT) When Downsizing
Stamp Duty Land Tax (SDLT) is a tax imposed on property purchases in England and Northern Ireland, and it is calculated as a percentage of the property’s purchase price. Even when downsizing to a smaller home, SDLT can still represent a notable expense depending on the value of the property you are buying.
Understanding SDLT in 2026
As of 2026, the SDLT rates for residential property purchases are structured as follows:
- 0% on properties up to £250,000
- 5% on the portion from £250,001 to £925,000
- 10% on the portion from £925,001 to £1.5 million
- 12% on the portion above £1.5 million
These rates apply to the portion of the property price that falls within each band. For example, if you are purchasing a downsized home for £350,000, you will pay 0% on the first £250,000 and 5% on the remaining £100,000, which equates to £5,000 in SDLT.
How Downsizing Can Affect SDLT
Many people assume that downsizing automatically reduces SDLT costs because they are buying a smaller, lower-priced property. While this is often true, the reality depends on the exact purchase price relative to SDLT thresholds.
- Buying Below the SDLT Threshold: If the purchase price is below £250,000, no SDLT is due. This is often the case for retirees or homeowners moving to smaller properties in lower-cost areas.
- Buying Above Thresholds: Even when downsizing, properties in popular areas may still exceed the lower SDLT thresholds. In such cases, SDLT can still be a significant cost.
It’s important to calculate SDLT carefully, as this can impact the overall budget for your downsizing plans and influence your decisions about how much equity to release from your current property.
First-Time Buyer Considerations and Inherited Properties
If you are a first-time buyer or have inherited a property, SDLT rules may differ. For example, first-time buyers may be eligible for relief on properties up to certain values, while inherited properties can have specific implications if they are sold before purchasing a new home. Consulting a qualified tax advisor or solicitor ensures that you take advantage of all available reliefs and calculate SDLT correctly.
Planning Ahead
When downsizing, it is prudent to:
- Estimate SDLT in advance: Use official SDLT calculators or professional advice to understand the tax implications of different purchase prices.
- Incorporate SDLT into your budget: Factor it into your overall downsizing plan alongside legal fees, moving costs, and home improvements.
- Consider timing: In some cases, purchasing below certain thresholds or using exemptions can reduce SDLT.
By understanding SDLT thoroughly, you can plan your downsizing strategy more effectively and avoid any unexpected tax costs when completing your property purchase.
Part 2: Capital Gains Tax (CGT) Considerations When Downsizing
When selling a property as part of a downsizing plan, one of the most common questions homeowners ask is: “Will I need to pay Capital Gains Tax (CGT)?” Understanding CGT is crucial because it can significantly impact the net proceeds you receive from the sale of your home, particularly if the property you are selling is not your main residence or has been used for other purposes.
1. What Is Capital Gains Tax?
Capital Gains Tax is a tax on the profit, or “gain,” you make when you sell an asset, such as property, shares, or other valuable possessions. For property sales, the gain is calculated as:
Sale Price – Purchase Price – Allowable Costs = Taxable Gain
Allowable costs can include:
- The original purchase price of the property
- Costs of buying and selling, such as legal fees, estate agent fees, and stamp duty previously paid
- Capital improvements, like extensions or significant renovations
CGT is only payable on properties that do not qualify for relief, such as your main residence.
2. Principal Private Residence Relief
The good news for most homeowners downsizing in 2026 is that Principal Private Residence Relief (PPRR) generally exempts your main home from CGT. This relief ensures that you are not taxed on the sale of the property where you primarily live.
Key points to remember:
- The property must have been your main residence for the entire ownership period.
- If you have rented out part of your property or used it for business purposes, only a portion of the gain may qualify for relief.
- Any periods when the property was unoccupied or used for other purposes may reduce the relief.
For example, if you owned your home for 10 years and lived there for 8 of those years while renting out a small annex for 2 years, only the gain attributable to the 2 rental years may be subject to CGT.
3. Selling a Second Property or Buy-to-Let
If the property you are downsizing from is a second home or an investment property, CGT will likely apply. In 2026, the rates for residential property gains are:
- 18% for basic-rate taxpayers
- 28% for higher-rate taxpayers
Example Calculation
Suppose you sell a second home for £400,000 that you originally bought for £250,000. After deducting allowable costs, your gain is £140,000.
- If you are a higher-rate taxpayer, your CGT liability would be 28% of £140,000, which equals £39,200.
This example illustrates how CGT can substantially reduce the amount of cash released from downsizing if your property is not your main residence.
4. Using the Annual CGT Allowance
In 2026, individuals are entitled to an annual CGT allowance, meaning you can make gains up to a certain amount without paying tax. This allowance can help reduce your liability:
- For example, if the annual allowance is £12,300, this amount is deducted from your taxable gain.
- Married couples or civil partners can combine allowances, potentially doubling the tax-free amount.
Planning the timing of the sale to maximise the allowance or spreading gains across tax years can help reduce your tax burden.
5. Strategies to Minimise CGT When Downsizing
Proactive planning is key to managing CGT liabilities effectively:
- Sell Your Main Residence First: Ensure the property qualifies for Principal Private Residence Relief.
- Offset Gains Against Allowances: Use annual CGT exemptions strategically.
- Document All Improvements: Keep receipts for renovations and capital improvements to reduce the taxable gain.
- Consider Timing: Spreading sales across tax years or waiting for beneficial tax thresholds can reduce liabilities.
- Consult a Tax Professional: Complex situations, such as inherited properties, mixed-use properties, or partially rented homes, require expert advice.
6. Why CGT Matters for Downsizing
For homeowners downsizing, understanding CGT ensures that:
- You can accurately forecast the net proceeds available for your next property.
- You avoid unexpected tax bills that could compromise your downsizing plans.
- You can make informed financial decisions about timing, property choice, and planning renovations or improvements.
Even when downsizing to a smaller home, overlooking CGT could significantly affect your finances, especially if the property sold is a second home or has been used for business purposes.
Part 3: Inheritance Tax, Additional Costs, and Strategies When Downsizing
While Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT) are often the primary concerns when downsizing, homeowners in 2026 also need to consider Inheritance Tax (IHT), other related costs, and strategies to minimise overall taxation. Planning ahead ensures that downsizing is financially advantageous and avoids surprises.
1. Inheritance Tax (IHT) Considerations
Inheritance Tax is a tax on estates above a certain threshold, which includes property and other assets. In 2026, the standard IHT threshold is £325,000, with an additional Residence Nil Rate Band of £175,000 if your main home is passed to children or grandchildren.
Downsizing Relief
If you sell your home to downsize, downsizing relief can preserve your entitlement to the Residence Nil Rate Band. Key points include:
- The relief applies when the proceeds of the sale are used to purchase a smaller property.
- The new property must be passed on to direct descendants to retain the nil rate band.
- Downsizing does not automatically reduce your IHT allowance if structured correctly.
By planning your downsizing carefully, you can reduce future IHT liabilities while releasing equity for other financial goals.
2. Additional Costs to Budget For
Downsizing involves more than taxes. Even after SDLT, CGT, and potential IHT considerations, other costs can significantly impact your overall budget. These include:
- Estate Agent Fees: Typically 1–3% of the sale price.
- Legal Fees: Conveyancing and related legal costs when selling and buying property.
- Removal Costs: Depending on distance and amount of belongings, moving can be expensive.
- Home Improvements: Even a smaller property may require renovations or updates before moving in.
- Mortgage Fees: Early repayment charges on an existing mortgage or arrangement fees on a new one.
Factoring in these costs alongside taxes ensures a realistic assessment of available equity.
3. Strategies to Minimise Taxes and Maximise Equity
To make downsizing financially efficient in 2026, homeowners can adopt several strategies:
a. Plan the Timing of Sales
- Timing your property sale can influence CGT and SDLT liabilities.
- Consider using your annual CGT allowance strategically or completing purchases below SDLT thresholds to reduce costs.
b. Maximise Reliefs and Allowances
- Ensure your main residence qualifies for Principal Private Residence Relief.
- Make use of the Residence Nil Rate Band for IHT.
- Document all renovations and improvements to reduce taxable gains on secondary properties.
c. Keep Funds Separate
- Avoid using marital or joint funds to fund new property purchases if downsizing from a second property, as this can complicate CGT calculations.
d. Seek Professional Advice
- Tax rules for downsizing can be complex, particularly when involving multiple properties, inheritance, or mixed-use scenarios.
- A tax advisor or solicitor can ensure you maximise reliefs and comply with all legal obligations, reducing risk and stress.
4. Key Takeaways for Homeowners Downsizing in 2026
- SDLT: Even when moving to a smaller property, always calculate SDLT in advance to budget effectively.
- CGT: Principal Private Residence Relief usually exempts your main home, but secondary properties may be subject to tax.
- IHT: Downsizing relief and Residence Nil Rate Band can protect family inheritance while releasing equity.
- Additional Costs: Legal fees, estate agent fees, removal costs, and home improvements can add up—budget carefully.
- Planning Is Critical: Careful financial and tax planning maximises equity and ensures downsizing is beneficial.
Conclusion
Downsizing your home in 2026 can be a rewarding financial and lifestyle decision, but understanding the full spectrum of taxes and costs is essential. By accounting for SDLT, CGT, IHT, and associated fees—and by leveraging available reliefs—you can release equity efficiently and make the transition as smooth as possible.
With careful planning, professional guidance, and awareness of tax implications, downsizing can provide a simplified lifestyle, financial flexibility, and peace of mind for the years ahead.
