Risky pension strategy for those who can't resist an open door

Risky pension strategy for those who can't resist an open door

Don't be tempted. That's the message from some of the UK's leading tax experts on the issue of whether individuals can invest in residential property through a personal pension.

Most people who are vaguely interested in this field will remember how Gordon Brown opened the door for such investments only to bang it shut last year. What is not so well known, however, is that the door is still slightly ajar. So it will be possible - in very limited circumstances - to have some of the assets of your Self-Invested Personal Pension (Sipp, the type of personal pension most suitable for this activity) invested in residential bricks and mortar.

The door is ajar to investors who club together in syndicates of 10 people or more and who together invest at least £1m; hold at least three properties between them; do not have any one property accounting for more than 40 per cent of the total syndicate value; and fulfil various other detailed regulations.

'I don't think this is going to happen,' says Adam Katten, head of Chiltern Financial Management. 'It's too much hassle.' Fergus Lyons of AJ Bell, a firm that specialises in advising on Sipps, says: 'There's much talk about this, but we've not seen much demand. It's a theoretical exercise. The Chancellor has, in fact, well and truly closed the door.'

Both Katten and Lyons believe that the detailed nature of the rules make the syndicate option off-putting and potentially dangerous. If, for instance,.....continued below

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a syndicate found that it had breached the rules, its members could find themselves paying tax at 55 per cent, rather than at the zero rate they expected under our UK pensions system. 'The repercussions are so severe that it really does not bear thinking about,' says Lyons.

However, having raised the possibility of investing in property, the Chancellor has whetted the appetite of some people who prefer it, as an investment class, to stocks and shares. On the back of this, other kinds of property investment will bloom. Since commercial property is an acceptable asset, under UK tax rules, for Sipps, more schemes will be marketed offering investment in residential property that is actually classified as commercial property.

For instance, the company Pierre & Vacances lets out 3,000 residential properties all around France and structures the deals in a way such that UK investors can be seen as investing in commercial property. It is going to increase its marketing efforts in Britain soon. 'We expect the more sophisticated investors will do this,' says a spokesman.

There are also Reits, real estate investment trusts, which are due to be launched next month. These are new vehicles for investing in both commercial and residential properties. Several big property companies are lining up to convert to Reits in order to get their attractive tax advantages. Reits themselves pay virtually no tax if they distribute most of their profits to investors. Investors would pay tax - unless, of course, they held the Reit investment in a Sipp.

If you are at all cautious, you will be reading this article and ruling out all the options mentioned above. But if you like a bit of a gamble and have money to burn, you might go down this route.

Guardian Unlimited © Guardian News and Media Limited 2006