Sudden scrapping of tax break for houses in personal pensions

Sudden scrapping of tax break for houses in personal pensions

A £3bn property tax giveaway that has sparked frenzied investment in buy-to-let and holiday homes was yesterday halted in its tracks after an 11th-hour ban by the chancellor.

The controversial tax break, which would, from April next year, have allowed the well-off to put their properties into a Self-Invested Personal Pension (Sipp) effectively tax-free, was yesterday closed after the government said it was being abused by the tax-avoidance industry.

The U-turn stunned financial advisers and property developers. The Royal Institution of Chartered Surveyors had estimated that 50,000 properties, worth around £24bn, would be switched into Sipps over the next few years. At the last Property Investor Show in London scores of exhibitors were promoting buy-to-let Sipp schemes promising "40% off" the cost of property, while Abbey, which owns the UK's largest Sipp provider, called it "the hottest topic of conversation at middle-class dinner parties".

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But yesterday a bewildered Standard Life, which has seen more than £1bn pour into its special Sipp fund, called the withdrawal of the tax relief "outrageous".

In yesterday's pre-budget speech, the chancellor only briefly mentioned Sipps, saying that action would be taken to prevent "misuse". But a detailed note after the speech said: "Sipps will be prohibited from obtaining tax advantages when investing in residential property and certain other assets such as fine wines, from 6 April 2006."

Ros Altmann, a former pensions adviser to No 10, said the move was a huge climbdown. "It is a victory for common sense. But what a shambles the whole affair has been. From the moment the Treasury said its simplification rules would allow investments in anything from residential property to fine wine and stamps we said it was crazy. Ministers wouldn't listen. They denied that there was a problem. It is a worry that it was ever mooted and so vociferously defended by ministers before they eventually caved in."

As recently as November 10, Ivan Lewis, the economic secretary to the Treasury rebuffed media reports predicting a Sipp property tax bonanza.

But yesterday the Treasury said the scale of abuse has become too large to ignore. A spokesman said: "Clearly we had become alerted to the abuse of the rules by a number of providers, which were offering plans such as tax-free holiday homes on the Algarve. We always said that were we to become aware of abuse, obviously we would take action."

But Standard Life said that it had warned the Inland Revenue on several occasions about the potential shape and scale of Sipp tax relief and had been given an informal go-ahead. "We have talked about this with the Revenue for two years. It was their idea to grant it. It's outrageous they think they can treat people like this just four months before the new regime is coming into force. They've killed the best thing about pensions in the last two years"

Last night financial advisers and accountants were hurriedly attempting to untangle detailed pension plans put together for their wealthiest clients.

Jerome Melcer, actuarial director of BDO Stoy Hayward, said: "Gordon Brown has made an enormous U-turn on Sipps that has wasted thousands of hours of professional time. An entire industry has been set up to deal with property-based Sipps and now it's all been canned."

However, the Revenue said yesterday there will be a modicum of protection for people who have already committed to buy off-plan residential property with their Sipp.

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